Investment in Glenmark, which has unique products and a promising R&D programme will yield handsome returns for the long-term investor.
A robust research pipeline, niche therapeutic focus and geographical expansion should help Glenmark Pharmaceuticals continue to post steady revenue growth and healthy margins over the next few years.
A highly successful strategy of monetising its research pipeline coupled with a focus on the global markets and value added branded generics has helped the company grow at an annual rate of nearly 50 per cent over the last eight years and touch revenues of about half a billion dollars in FY2008.
The company is likely to continue its strategy of out-licensing its molecules to other innovator companies while expanding its geographical footprint for its portfolio of branded generics.
Money machine
The company has a strong R&D portfolio of 13 molecules in various stages of development with five in the clinical stages, which is a precursor to a commercial launch.
THE MONEY PIPE Molecule* (Received^) /Next stage Est. Launch
(year) Sales**
$ billionOglemilast (243) (41), Phase IIb ongoing 2011 3 Meloglipitin (250)# (31), Phase III by Oct, 2009 2012 >1 GRC 6211 (350) (45), Phase IIb ongoing 2012 3 GRC 4039 Phase II by Q3, FY09 2012 >3 GRC 10693 Phase II by end of FY09 2013 >2 GRC 9332 Phase I by Q3, FY09 2013 >1 GRC 17173 Phase I by Q3, FY09 2013 >3 GBR 500 Phase I by Q2, FY09 2014 >1 GBR 600 Phase I by Q4, FY09 2014 >1 * Outlicensed molecules and value in $million
** Estimated peak sales in $billion
^ Upfront fees and milestone payments received in $million
# Molecule returned by Merck KGaA
The likely candidate, though, to come out of the laboratory and hit the market first (Oglemilast, for asthma and lung disease) is at least three years away. However, the company will get milestone payments as the molecule moves into advanced stages, and royalty once it is commercially launched.
While the rights for the North American and Japanese markets for this molecule have been out-licensed, the company is in talks with European players to develop and market the product in Europe.
So far, the out-licensing strategy has yielded good results for the company with out-licensing revenue of over Rs 240 crore (12 per cent of revenues) in FY08 and Rs 139 crore (11.6 per cent of revenues) in FY07.
The company is eyeing at least two licensing deals in FY09 and has projected out-licensing revenues of $69 million (Rs 290 crore or 10.8 per cent of FY09 revenue estimates). While innovative drugs under development have been a money spinner for the company, its generics business with sales predominantly to the US has also helped boost revenues over the last couple of years.
The generics push
Driven by a generic portfolio of 33 products in the US market, sales in the June quarter were up 131 per cent year-on-year (y-o-y) to Rs 190 crore.
Revenues from the US product basket, which addresses markets of controlled substances, hormones, oncology, modified release and dermatology, contributed over 40 per cent to the first quarter revenues of Rs 466 crore.
Glenn Saldanha, CEO and managing director, Glenmark Pharmaceuticals believes that the company’s strategy of picking the right segments to enter and good execution were responsible for the high growth rates.
The areas identified by the company have high entry barriers in the form of development costs (dermatology), license requirements (controlled substances), unique technologies (modified release) and need for dedicated facilities (oncology, hormones).
In addition to the current portfolio, the company also has a pipeline of over 35 ANDAs undergoing US FDA approval process and three potential first-to-file Para IV applications (under litigation currently), which might give it a 180-day exclusivity.
While the company filed four ANDAs in the June quarter with the US FDA and intends to file at least eight ANDAs in Q2 FY09, it hopes to take the number of new ANDAs filed in FY09 to 30.
In addition to the US business, the generics segment for the company also includes oncology portfolio (FY08 revenues of Rs 33 crore) acquired from Argentinian marketing company, Servycal, and active pharmaceutical ingredients (API) business, which had revenues of Rs 201 crore in FY08.
While the company wants to expand its API portfolio by filing drug master files in respective countries, it is looking at making its Argentinian operations as a hub for its oncology business.
Specialty or branded generics
The Specialty segment which comprises the R&D division (described earlier) and the finished dosage formulations with revenues of Rs 978 crore accounted for 48 per cent of the company’s turnover in FY08.
While Glenmark has a presence across geographies, its revenue drivers would be India, Central and Eastern Europe, Latin America and Russia and therapeutic focus on inflammation, metabolic disorders and dermatology segments.
At Rs 550 crore, India contributes more than half of the segment turnover. The company has a market share of about 1.3 per cent of the fragmented Indian pharmaceuticals market with top ten brands such as Ascoril (expectorant), Candid B (anti fungal) and Telma (hypertension) contributing nearly 60 per cent of the revenues.
On the back of an increased product portfolio, (it launched 30 products in FY08 and 12 products in Q1 FY09) the company estimates that revenues will touch about Rs 640 crore in the current fiscal and Rs 735 crore in FY10 from sales in the Indian formulations business.
Investment rationale
A combination of niche products and sound strategy has helped the company grow at rapid clip over the last four years and improve its margins. While sales have improved from Rs 676 crore in FY06 to Rs 1,978 crore in FY08, operating and net profit margins have improved from 20.3 per cent to 40.6 per cent and 13 per cent to 31.9 per cent, respectively in the same period.
| BOOSTER DOSE | |||
| Rs crore | FY08 | FY09E | FY10E |
| Net sales | 1,978.30 | 2,670.70 | 3,605.50 |
| Operating profit | 803.10 | 1,068.30 | 1,261.90 |
| Net profit | 631.00 | 827.90 | 1,081.60 |
| EPS (Rs) | 24.90 | 32.70 | 42.70 |
| P/E (x) | 26.50 | 20.20 | 15.40 |
| E: Estimates | |||
While there are no near-term triggers (the company has deferred the listing of its generic subsidiary Glenmark Generics) if it maintains its current level of growth, its revenues should reach Rs 3,600 crore with net profit of about Rs 1,000 crore in FY10.
At Rs 654, the stock discounts its FY10 estimated EPS by 15.3 times (one year forward P/E band at 10-22) and should fetch about 18 per cent over the next one year.
