February 12, 2018 ICICI Securities Ltd | Retail Equity Research Result Update Margin contraction intensifies on US pricing Revenues declined 13% YoY to | 2204 crore (I-direct estimate: | 2224 crore). The 40% YoY de-growth in the US to | 736 crore (I-direct estimate: | 719 crore) was mainly due to high gZetia exclusivity base in Q3FY17. India business grew 12% YoY to | 579 crore (I-direct estimate: | 672 crore) and 15% YoY growth in Europe to | 225 crore (I-direct estimate: | 235 crore) EBITDA margins fell 1554 bps YoY to 14.6% (I-direct estimate: 19%) due to lower gross margins (64.5% in Q3FY18 vs. 76.4% in Q3FY17). EBITDA fell 58% YoY to | 323 crore (I-direct estimate: | 423 crore) Adjusted net profit declined 78% YoY to | 105 crore on a weak operational performance and lower other income US growth now mainly dependant on new launches US generics comprise ~44% of total revenues and have grown at a CAGR of ~17% in FY13-17. Total USFDA filings as on date are 188. So far, the company has received approvals for 130. Out of the 58 pending ANDAs, ~26 are Para IV applications. Key therapies in the US, going forward, will be oncology, dermatology and respiratory. The company expects to file 20-25 ANDAs. We expect US sales to remain subdued in FY17-20E to | 2907 (CAGR -8%), mainly due to higher base, delay in product launches and acute pricing pressure in base business. Targeting specific therapies in IPM Glenmark is ranked fourteenth in domestic formulations with market share of 2.3%. It is a market leader in dermatology and improving its presence in therapies like respiratory, CVS, anti-infectives and even anti- diabetics. It has defied industry growth consistently for the last 60 months by continuous churning of the portfolio. In FY17, Glenmark’s growth was 14% vis-à-vis IPM growth of 9% as per IMS MAT. We expect India sales to grow at 12% CAGR in FY17-20E to | 3201 crore. Clear roadmap but headwinds in US unlikely to subside anytime soon The R&D setback in 2008-10 has actually benefited the company as the focus shifted to more productive segments like the US generics, India and Europe. The changed focus has improved the leverage situation as the debt/EBITDA has improved from a high of 4.6x in FY09 to 1.8x in FY17. With a 10-year roadmap, the company has a well thought out strategy in place encompassing only three core therapy areas oncology, dermatology and respiratory across geographies and covering both specialty and generics. However, continued subdued growth in the US and volatile growth in ex-India/US geographies is likely to impact near term free cash flows. US pricing pressure, gearing to keep sentiments subdued Glenmark’s management still expects ~13% US base business price erosion for the next four to five quarters despite hints of some easing up in the pricing scenario by larger peers. Similarly, from the 61 pending approvals in the US, we do not expect any meaningful launches for the company in the near term. Ex-US, the company has guided for 15%+ growth mainly due to new launches and stabilization of currency in emerging markets. However, historically, ex-US growth is always volatile. There is little solace on the gearings front (1.1x of D/E in FY17) as well. These are some of the main concerns that are likely to weigh on the sentiments for some time. We arrive at our new target price of | 535 based on 14x FY20E EPS of | 38.2. Rating matrix Rating : Hold Target : | 535 Target Period : 12-15 months Potential Upside : -1% What’s Changed? Target Changed from | 730 to | 535 EPS FY18E Changed from | 36.8 to | 33.4 EPS FY19E Changed from | 36.9 to | 31.5 EPS FY20E Changed from | 41.9 to | 38.2 Rating Unchanged Quarterly Performance Q3FY18 Q3FY17 YoY (%) Q2FY18 QoQ (%) Revenue 2,203.7 2,535.0 -13.1 2,256.6 -2.3 EBITDA 322.7 765.0 -57.8 388.4 -16.9 EBITDA (%) 14.6 30.2 -1,553.5 17.2 -256.8 Adj. Net Profit 104.7 477.0 -78.0 214.1 -51.1 Key Financials (| Crore) FY17 FY18E FY19E FY20E Revenues 9185.7 9161.0 9497.9 10343.2 EBITDA 2036.7 1824.0 1709.6 1965.2 Adjusted PAT 1189.8 941.8 887.5 1075.7 EPS (|) 42.2 33.4 31.5 38.2 Valuation summary FY17 FY18E FY19E FY20E PE (x) 13.7 16.1 17.1 14.1 Target PE (x) 12.7 16.0 17.0 14.0 EV to EBITDA (x) 9.2 10.1 10.6 9.1 Price to book (x) 3.4 2.8 2.4 2.1 RoNW (%) 26.5 17.5 14.3 14.9 RoCE (%) 19.5 16.2 14.3 15.5 Stock data Particular Market Capitalisation Debt (FY17) Cash (FY17) EV 52 week H/L (|) 968/524 Equity capital Face value | 1 | 18855 crore Amount | 15188 crore | 4724 crore | 1056 crore | 28.2 crore Price performance (%) 1M 3M 6M 1Y Glenmark Pharma -8.6 -17.4 -13.3 -9.8 Divi's Labs -5.9 1.2 66.0 38.8 Cadila Healthcare -9.2 -5.3 10.5 -24.8 Glenmark Pharmaceuticals (GLEPHA) | 539 Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Harshal Mehta [email protected]
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Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Reuters, Company, ICICIdirect.com Research
Key events
Aug-09 Forest & Glenmark Pharma announce Phase IIb results for Oglemilast. The molecule did not show satisfactory results compare to its Placebo.
Oct-09 Launches four products in the UK market through its subsidiary Glenmark Generics Europe.
Mar-10 Receives USFDA approval for its new drug application for Oxycodone Hydrochloride capsules and liquid solutions filed as an NDA with USFDA under 505b2 route.
May-10 Enters into an agreement with Sanofi to out-license its GRC 15300 molecule. Receives US$ 20 million as an upfront payment.
Jan-11 Sanofi & Abbott win patent litigation case of generic Tarka. A Federal jury asks Glenmark to pay US$ 16 million as damages for launching at risk in the US market.
Apr-11 Enters into an exclusive agreement with a Canadian base company ImmanenceIntegrale Dermo Correction (IDC) to market high end dermatology products in eight
countries including India & Brazil.
May-11 Out-licenses monoclonal antibody GBR 500 to Sanofi. Receives US$ 50 million as upfront payment.
Aug-12 The International Center for Dispute resolution rules in favor of Glenmark on the arbitration claim it filed against Napo Pharma. Glenmark will have rights to develop,
commercialise and distribute Crofelemer in 140 emerging markets.
Jul-13 Confirms filing of ANDA for Lacosamide tablets and oral solutions with the USFDA under Para IV certification.
Mar-14 Provided | 213 crore for Tarka liability
Jan-15 Receives shareholders' approval to raise up to $300 million (around | 1,890 crore) through issue of securities
Oct-15 Sanofi calls off its deal with Glenmark related to the development of Vatelizumab drug (GBR 500), a monoclonal antibody (MaB) for multiple sclerosis.The drug is in
Phase II clinical trials
Dec-16 Launched gZetia (CVS) in the US under exclusivity
Dec-16 Goa formulation facility receives four form 483 observations from the USFDA
Mar-17 Announces positive phase-III clinical trials result for GSP 301 (nasal spray) conducted in the US
Mar-17 USFDA clears investigational new drug (IND) application to begin a Phase II study of GSP 304 (tiotropium bromide; COPD)
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern
Rank Investor Name Latest Filing Date % O/S PositionPosition Change
ICICI Securities Ltd | Retail Equity Research Page 15
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