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Spark Capital: Glenmark Pharmaceuticals - FY13 annual report analysis




Spark Capital Advisors(India) Private Limited


11 Jul 2013





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Following are the key takeaways from our analysis of Glenmark Pharmaceuticals’ FY13 annual report: Capital expenditures: Tangible capex of Rs. 3.4bn for the year includes Rs. 1.3bn for setting up a plant for manufacturing crofelemer. Intangible fixed asset addition for the year was Rs. 1.3bn with Rs. 1.2bn incurred for in-licensing products/brands. The company has incurred intangible capex of Rs. 4.4bn over the past 3 years. Intangible assets (including goodwill) of Rs. 12.7bn account for ~20% of the company’s total assets (~46% of net worth) Buy-back of minority interest in Glenmark Generics Ltd (GGL): During the year, the company increased its stake in GGL to 98.5% (from 98% in FY12) by buying back shares from GGL employees. The cash outflow on account of this was Rs. 480mn (charged directly to reserves). We estimate ~Rs. 1.5bn of cash outflow over FY14-16 for buying back the remaining minority stake in GGL (refer page 2 for details) Loss on translation of foreign operations of Rs. 1.5bn was charged to reserves (total reduction in net worth by Rs. 3.4bn over FY11-FY13 on account of translation losses). The loss was on account of yoy rupee depreciation and total net liability position at overseas subsidiaries Working capital: Working capital cycle improved to 103 days (120 days in FY12, 163 days in FY11). Debtor days at ~120 remained unchanged yoy. ~17% of receivables were of more than 6 months maturity Tax rate: The lower effective tax rate of 15.1% (tax expense of Rs. 1.1bn) for FY13 was on account of MAT credits. Cash tax paid was higher at Rs. 1.7bn. MAT credit entitlements on balance sheet increased from Rs. 1.6bn to Rs. 3bn R&D expense increased from Rs. 2.9bn (7.7% of sales) in FY12 to Rs. 4.1bn (8.3% of sales). For FY14, company has guided for R&D expense at 8.5% of sales Cash flows: Operating cash flows for FY13 was Rs. 6.5bn (Rs. 8bn in FY12, benefited from greater working capital reduction and licensing income). Free cash flows were further impacted by higher intangible capex, investment in crofelemer plant and buyback of GGL stake. Net debt increased Rs. 2.4bn during the year, partially due to MTM loss on foreign-currency debt (foreign currency loans accounts for ~90% of total debt) Other: Market share in India improved from 1.69% to 1.82%. Telma, Telma-H and Candid-B were ranked 62, 90 and 136 in the domestic market. OTC business unit was launched in Russia. Company made 6 filings and received 3 approvals in Brazil. C&E Europe business in-licensed 12 products for various geographies. Industry-wide slowdown (-3% yoy decline) led to muted performance in the region. In FY13, 3 oncology injectable ANDA filings were submitted. 53 ANDA filings are pending approval. Glenmark expects sole FTF status for its filing for generic Finacea (OB-listed patent expires in Nov 2018). EU formulations business in-licensed 5 products. API facility at Ankleshwar received approval from Japanese regulator and filed for 3 new products. Data points for 3 NCE programs - GBR 500, GRC 15300 and mpges-1 inhibitor program - are expected in FY14 We revise our estimates marginally. Our SOTP-based target price of Rs. 611 is 16x FY15E EPS of Rs. 35.8 plus Rs. 27 per share for crofelemer and Rs. 10 per share for other NCE molecules. Given the run-up in stock price since our previous update, we lower our rating to ‘Add’

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