Glenmark Pharmaceuticals Limited - Transitioning into a largecap; Novel research a potential boom - Buy - Antique

Over the past 12 months, the Glenmark Pharmaceuticals' stock has traded at a valuation between 16x and 20x one-year forward earnings as compared to a 14-18x range for 24 months prior to that period. The re-rating has been justified given the consistent growth reported across all business segments and improvement in the balance sheet. The company has also shown excellent management of its novel research pipeline. Among companies under our coverage, Glenmark has the highest credibility attached to its novel research pipeline. A focused management, well entrenched promoters, strategy based on moving up the pharmaceutical value chain, and effective management of novel R&D investments make it our top midcap pharmaceutical pick.

Business highlights

Branded generics: We are excited about the product strategy that Glenmark has exhibited in the domestic formulations space. Its lead in Telmisartan in India is an example of proactive planning and flawless execution. Moreover, the launch of Sitagliptin has brought a new dimension to its business strategy. In the foreseeable future, we expect the company to maintain its domestic growth rate higher than the broader market. Notwithstanding the recent underperformance in the RoW branded business, growth is likely to pick-up from 2HFY14 onwards as approval timelines and new product launches gain speed.

Generics: Apart from benefiting from new launches like Campral, the US business also gained from price hikes in certain products in 2QFY14. In our assessment, there remains the possibility of approval/launch of impact products (annual revenue potential of USD10-20m) with limited competition. We expect the company to launch 10-15 products annually in the US from here on and earn incremental sales of USD60-70m annually for FY14-16e. In Europe, the company has in-licensed products, which are expected to fuel growth.

Differentiated products: Six out of eight products in Glenmark's novel research target pain as a therapy area. The company has taken multiple shots at the pain goalpost. Pain is a USD20bn therapy area worldwide. We value the initiative at 6x expected licensing income: 40% of expected R&D spends.

Valuation and risks

Glenmark currently trades at ~16x one-year forward EPS. We value the company at 16x one-year forward EPS (blended FY15e and FY16e EPS) of INR37, which gives us a value of INR592 per share. We have added INR47 per share for novel research (discounting the expected out-licensing income set at 40% of consolidated R&D spends in FY14e for perpetuity at 15%) and INR12 per share for the Zetia opportunity in Dec-16 but subtracted potential Tarka liability of USD20m. This gives us a 12-month price target of INR650 per share, an upside of 24% from current levels. The key risks to our Buy call are delay in approvals in the US and other emerging markets and regulatory risks.

Source : Equity Bulls

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