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Spark Capital: Glenmark Pharmaceuticals – Q3 FY14 results review – Limited near-term triggers; maintain ‘Add’




Spark Capital Advisors(India) Private Limited


27 Jan 2014





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Limited near-term triggers; maintain ‘Add’ Glenmark reported 19% topline growth (adjusted for licensing income) in Q3FY14 on the back of higher-than-expected sales from Europe and APIs. Domestic formulations growth continued to normalize from the high levels in recent quarters, while US sales declined sequentially. EBITDA margin (adjusted for one-offs and R&D), increased 40bps sequentially, continuing the recent improving trend. In spite of Glenmark’s recent efforts to improve the quality of its ANDA pipeline, visibility on near-term opportunities in the US remains low. Further, free cash generation has not improved meaningfully in recent quarters (net debt remains flat qoq at ~Rs. 25.6bn). Ex-NCE value, the stock trades at 21x and 17x our FY14 and FY15 earnings estimates. Our target price of Rs. 580 is 15x FY16E EPS of Rs. 37.4 plus Rs. 20 per share for the two NCEs out-licensed to Sanofi Aventis. Maintain ‘Add’ rating on the stock Takeaways from post-results conference call: US sales declined sequentially to $85mn. Management attributed the weakness to declining montelukast sales. During the quarter, Glenmark filed 3 ANDAs with the FDA taking the total for the year to 12. The company plans to file ~10 applications in the next quarter. During the quarter, Glenmark was granted a tentative approval for desmopressin tablets. Glenmark has 59 applications pending with the FDA API sales increased 48% yoy to Rs. 1.5bn. Sales from crofelemer API supplies to Salix contributed ~Rs. 60mn. The company expects to launch crofelemer in a few emerging markets in FY2015 Glenmark’s subsidiaries in Mexico and Philippines received approvals for generic Seretide. Going forward, the company expects approval for generic Seretide in other emerging markets. According to management MDI (metered-dose inhalers) constitute a larger market than DPIs (dry powder inhalers) in emerging markets. After reporting a 11% yoy decline in Q2FY14, Glenmark’s RoW segment returned to growth (+15% yoy) during the quarter Net debt at the end of the quarter is at Rs. 25.6bn (Rs. 25.8bn at the end of Q2FY14). Working capital cycle is at 117 days (119 days in Sep 2013, 106 days in Mar 2013). R&D expense for the quarter was Rs. 1.4bn (8.5% of sales). Tax rate for FY14 was guided at 22-23%. YTD capex of ~Rs. 3bn includes Rs. 800mn of intangible additions. Capex for FY14 was maintained at Rs. ~Rs. 4.2bn

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