Glenmark Pharmaceuticals

Transcription

1 Mupirocin: Glenmark to monopoly post FDA s WL to GSK July 22, 2016 Surajit Pal surajitpal@plindia.com Rating BUY Price Rs865 Target Price Rs1,186 Implied Upside 37.1% Sensex 27,803 Nifty 8,541 (Prices as on July 22, 2016) Trading data Market Cap. (Rs bn) Shares o/s (m) M Avg. Daily value (Rs m) Major shareholders Promoters 45.00% Foreign 20.81% Domestic Inst % Public & Other 13.23% Stock Performance (%) 1M 6M 12M Absolute (18.2) Relative (15.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC: GLEN.BO, BB: GNP IN) The Event: FDA posted its Warning Letter (WL) to GSK s Worthing (UK) plant on its website on Tuesday (19 th July, 2016). The plant manufacture Bactroban (Mupirocin Calcium) line of products, including nasal and topical drugs in cream and ointment forms. The WL is related to GSK s inadequate address to the FDA s findings during its visit of Worthing, UK plant in July The regulator cited issues remain unresolved which are related to Penicillin cross contamination and microbial contamination. The Issue: FDA s inspection in July 2015 identified issues of a) Laxness in following practices to prevent cross contamination from Penicillin area to nondedicated area, and b) failure to conduct root cause analysis for key deviations and implement CAPA. To address the issues of CGMP compliance, US FDA offered two options: a) dedicate the facility to penicillin production only, or b) solely produce non Penicillin API with comprehensive de contamination plan. With inadequate progress in the remediation measure, FDA issued WL in June 2016 with hints of import alert as it suggested that failure of successful remediation may lead to withholding of new approvals and also refuse entry of products manufactured in the Worthing plant into USA. Contd...2 Key financials (Y/e March) E 2018E Revenues (Rs m) 65,953 75,909 97, ,387 Growth (%) EBITDA (Rs m) 11,751 13,741 22,558 28,267 PAT (Rs m) 4,753 7,021 13,794 18,189 EPS (Rs) Growth (%) (12.4) Net DPS (Rs) Event Update (Rs) 1,400 1,200 1, Jul 15 Sep 15 Nov 15 Jan 16 Mar 16 May 16 Jul 16 Profitability & Valuation E 2018E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Bloomberg Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 The implication: With consequence of fatal drug reaction from possible cross contamination, GSK voluntary recalled (class II recall) 425,000 Bactroban tubes of antibiotic cream and nasal ointment in September 2015 post FDA inspection. Though no adverse reaction was reported, the recall was for more than quarter of million tubes of antibiotic cream that might have been contaminated. GSK shut down the API production facility post FDA observations in July 2015 and implemented several CAPA measures. The facility however failed to comply with the required CGMP practices and received WL with strong hint of import alert. Link of Warning Letter: 38.htm PL view: Glenmark may have an opportunity to do a Taro in Mupirocin Cream in US Given the gravity of the complications regarding cross contamination, we believe that GSK may require more than months in achieving a resolution for the Worthing plant. With the past experience of longer time period for resolution, we believe it requires arduous effort for GSK to convince FDA on compliance in non contamination of APIs where both Penicillin and non betalactam products are produced. This has been quite clear with FDA s statement in the WL: It is profoundly difficult to completely decontaminate a facility of beta lactam residues. Aurobindo s WL on Unit 6 in CY11 12 is a case in point where the company used to produce oral and sterile cephalosporin drugs for US market. While Aurobindo achieved resolution in oral segment at an early date, it experienced strong hurdle to achieve the similar resolution in sterile injectable segment. Finally, Aurobindo decided to abandon the sterile unit for US market and decided to shut down the injectable unit to achieve overall resolution. Similar demanding scenario in sterile/injectable/ophthalmic units were also observed in non compliance issues of Wockhardt, DRL and Sun Pharma. With no visibility of pending ANDA in Mupirocin cream, we believe Glenmark has similar opportunity as Taro to gain from price rise in absence of patentowner GSK and no other generics. GSK s shut down of API plant which impacted its formulation supply in market in July 2015 and recalled large quantity in September This has resulted in increase in Glenmark s Rx share from 43% in April 2015 to 71% in July 2015 and to 94% in September July 22,

3 Exhibit 1: Mupirocin Cream TRx: Glenmark Rx Share crosses 99% June 2016 Glenmark Prasco GSK 120% 100% 80% 60% 40% 20% 0% 2 Jan 15 2 Feb 15 2 Mar 15 2 Apr 15 2 May 15 2 Jun 15 2 Jul 15 2 Aug 15 2 Sep 15 2 Oct 15 2 Nov 15 2 Dec 15 2 Jan 16 2 Feb 16 2 Mar 16 2 Apr 16 2 May 16 2 Jun 16 2 Jul 16 Source: Company Data, PL Research With current Rx share of more than 99% and medium term visibility of Glenmark remain to be sole supplier of the drug, we expect Glenmark will have several opportunities to gain from value expansion of the drug in years to come as it occurred in Taro in many dermatology products in US. The Rx share of cream in comparison to nasal ointment has also increased to more than 99% post discontinuation of GSK s supply as absence of generics in nasal ointment shifted patients to cream topical. Exhibit 2: Mupirocin Calcium TRx: Cream Topical vs. Ointment Nasal TRX Count Cream (%) Nasal (%) 120% 100% 80% 60% 40% 20% 0% 2 Jan 15 2 Feb 15 2 Mar 15 2 Apr 15 2 May 15 2 Jun 15 2 Jul 15 2 Aug 15 2 Sep 15 2 Oct 15 2 Nov 15 2 Dec 15 2 Jan 16 2 Feb 16 2 Mar 16 2 Apr 16 2 May 16 2 Jun 16 2 Jul 16 Source: Company Data, PL Research Glenmark s revenues from Mupirocin cream were US$45m in FY16 and US$15m in Q4FY16. With expanded market size of Mupirocin cream, we expect quarterly revenues from US generic will reach US$110m from Q2FY17E onwards. We estimate revenues from Mupirocin to be US$70m and US$90m in FY17E and FY18E respectively. July 22,

4 Exhibit 3: Mupirocin Unit price: Stepped up price rise over 18 months TRX Unit Price Glenmark Prasco Glaxo Jan 15 2 Feb 15 2 Mar 15 2 Apr 15 2 May 15 2 Jun 15 2 Jul 15 2 Aug 15 2 Sep 15 2 Oct 15 2 Nov 15 2 Dec 15 2 Jan 16 2 Feb 16 2 Mar 16 2 Apr 16 2 May 16 2 Jun 16 2 Jul 16 Source: Company Data, PL Research Our estimate of Glenmark s US revenues of US$437m and US$500m in FY17E and FY18E has adequately factored opportunity from Mupirocin. The stock currently trades at PE 17.7x and 13.4x of FY17E and FY18E, respectively. We maintain Buy and retain TP at Rs1,186. July 22,

5 Income Statement (Rs m) Net Revenue 65,953 75,909 97, ,387 Raw Material Expenses 19,344 23,614 26,708 32,967 Gross Profit 46,608 52,296 70,830 82,420 Employee Cost 12,024 13,782 16,300 19,262 Other Expenses 22,833 24,773 31,972 34,891 EBITDA 11,751 13,741 22,558 28,267 Depr. & Amortization 2,600 2,691 3,116 3,421 Net Interest 1,902 1,789 1,862 1,429 Other Income Profit before Tax 7,814 10,047 18,392 24,253 Total Tax 1,190 3,028 4,598 6,063 Profit after Tax 6,623 7,019 13,794 18,189 Ex Od items / Min. Int. (1,870) 2 Adj. PAT 4,753 7,021 13,794 18,189 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) C/F from Operations 3,641 7,711 (7,703) 15,135 C/F from Investing (639) (7,725) (7,044) (7,050) C/F from Financing 3,178 13,884 (6,256) (7,851) Inc. / Dec. in Cash 6,180 13,871 (21,004) 234 Opening Cash 8,145 14,325 28,195 7,192 Closing Cash 14,325 28,195 7,192 7,426 FCFF (4,627) (4,132) ,024 FCFE 5,553 (2,250) (6,874) 1,368 Key Financial Metrics Growth Revenue (%) EBITDA (%) (10.8) PAT (%) (12.3) EPS (%) (12.4) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) (8) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) FCFE / PAT (32.0) (49.8) 7.5 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 30,003 42,703 61,980 79,075 Total Debt 42,849 44,731 37,238 28,582 Other Liabilities (1,533) (2,711) (2,688) (2,664) Total Liabilities 71,320 84,723 96, ,992 Net Fixed Assets 32,704 39,075 42,959 46,538 Goodwill Investments 4,810 6,130 6,130 6,130 Net Current Assets 33,225 38,943 46,809 51,629 Cash & Equivalents 7,681 8,618 7,192 7,426 Other Current Assets 45,551 50,485 49,273 55,235 Current Liabilities 20,007 20,160 9,656 11,032 Other Assets Total Assets 71,320 84,723 96, ,992 Quarterly Financials (Rs m) Y/e March Q2FY16 Q3FY16 Q4FY16 Q1FY17E Net Revenue 18,952 17,643 22,891 18,484 EBITDA 3,876 3,557 2,840 3,592 % of revenue Depr. & Amortization Net Interest Other Income Profit before Tax 2,906 2,624 1,878 2,579 Total Tax Profit after Tax 1,978 1,703 1,430 1,934 Adj. PAT 1,978 1,703 1,430 1,934 Key Operating Metrics (Rs m) Generics 29,096 34,320 48,364 59,424 US Formulations 20,398 24,203 37,056 46,822 EU Formulations 2,646 2,940 3,442 3,958 LatAm Formulations APIs 6,053 6,683 7,348 8,083 Branded 37,052 41,357 48,057 54,599 India Formulations 17,490 21,093 25,100 28,614 ROW Formulations 8,123 9,033 9,936 10,929 LatAm Formulations 7,640 7,001 8,196 9,507 EU Formulations 3,800 4,231 4,824 5,548 Source: Company Data, PL Research. July 22,

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