Emkay Your success is our success

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1 Emkay Your success is our success January 31, 2013 Rating Previous Reco Buy Buy CMP Target Price Rs497 Rs587 EPS Chg FY13E/FY14E (%) 9 Target Price change (%) 18 Nifty 6,056 Sensex 20,005 Price Performance (%) 1M 3M 6M 12M Absolute Rel. to Nifty Source: Bloomberg Relative price chart 550 Rs % Glenmark Pharma Stellar performance continue Maintain Buy ICON CAPITAL Q3FY13 Results - Revenues at Rs13.8bn (up 38%YoY) b) Adj. EBITDA at Rs2.7bn (up 50% YoY) and c) APAT at Rs1.6bn (up 42% YoY) India business grew 30% led by market share gains in derma, respiratory & CVS portfolio. US grew 29% in $ terms to USD80mn on back of ramp-up in OC portfolio Adjusted EBITDA margins improved by 236 bps to 20.3% in spite of higher R&D expense at 8% of sales On back of strong growth in India & US, we upgraded our estimates for FY14 by 9% and maintain the Buy rating with a revised TP of Rs587 (20x FY14 EPS of Rs27+ NPV of Rs47) Result Update Feb-12 Apr-12 Jun-12 Jul-12 Sep-12 Nov-12 Jan-13 Source: Bloomberg Stock Details Sector Bloomberg Glenmark Pharma (LHS) Rel to Nifty (RHS) Pharmaceuticals GNP IB Equity Capital (Rs mn) 271 Face Value(Rs) 1 No of shares o/s (mn) Week H/L 552/ 285 Market Cap (Rs bn/usd mn) 135/ 2,523 Daily Avg Volume (No of sh) 665,524 Daily Avg Turnover (US$mn) 6.0 Q3FY13 performance led by India & US business India revenues (contributed 27%) grew 30% YoY to Rs3.3bn led by market share gains in derma, respiratory, CVS, AI and Pain portfolio. Volume growth was 17%, Price led growth was 2% and the rest was from new introductions US business (contr. 34%) grew 29% in $ terms to USD80mn and 37% YoY in INR terms due to launch of generic SIngulair last quarter and market share gains for OC products. The company had launched 5 new OCs in Q1FY13. Gross margins were up 150bps YoY to 65% and adjusted EBITDA margins were up 236bps YoY to 20.3% in spite of higher R&D expenses at 8% of sales vs. ~7% of sales last year. Adjusted for licensing income of Rs493mn this quarter, APAT grew by 42% YoY to Rs1.64bn Shareholding Pattern (%) Dec'12 Sep'12 Jun'12 Promoters FII/NRI Institutions Private Corp Public Source: Bloomberg Financial Snapshot (Consolidated) (Rsmn) YE- Net EBITDA EPS EPS RoE EV/ Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV FY11A 29,474 5, , FY12A 40,217 8, , FY13E 49,899 9, , FY14E 57,215 11, , This report is distributed by Icon Capital Limited in association with Emkay Global Financial Services Limited. This report is classified as being a marketing communication for the purposes of the rules and guidance (FSA Rules) issued by the Financial Services Authority (FSA). This is principally because Icon Capital Limited cannot verify that this report has been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Deepak Malik deepak.malik@emkayglobal.com This report has been prepared by the research division of Emkay Global Financial Services Limited and has been reviewed by Icon Capital Limited, but no material changes have been made as a result. Emkay Global Financial Services Limited is a member of the Bombay Stock Exchange and The National Stock Exchange of India and is registered with the Securities and Exchange Board of India. Icon Capital Limited is a member of the London Stock Exchange and is authorised and regulated by the FSA. Emkay Global Financial Services Ltd. 1

2 Going forward India & US will lead the growth Guidance Top-line is expected to grow by 22-25% with gross margins to remain at 65% clocking an EBITDA of Rs9-9.5bn in FY13. R&D expenses to remain high at 8% for FY13/14. US biz will continue to show strong performance led by launch of Cutivate & 12 products in the OC portfolio. OC sales expected to peak out in next two years. Management has guided for 20% growth in US in FY13 and FY14. Currently the company has 46 ANDAs pending approval, of which 18 are P-IV s India business is expected to grow above industry rates at 18-20% led by market share gains in key therapies of Derma, Respiratory, CVS, Pain and Anti-infective Valuation We expect base business to report 31% revenue growth in FY13E and 16% in FY14E. Base EBIDTA margins are expected to improve from 19.5% in FY12 to 20.5% in FY14E. Base earnings will grow by 23% CAGR over FY12-14E. We upgraded our estimates for FY14 by 9% and maintain the Buy rating with a revised TP of Rs587 (20x FY14 EPS of Rs27+ NPV of Rs47). At CMP, the stock is trading at 18x FY14E earnings. Emkay Research January 31,

3 Exhibit 1: Quarterly Financials Rs mn Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13E YoY % QoQ % 9MFY13 9MFY12 YoY % Net Sales Other operating income Total Sales One-time licensing Income Base Sales Raw material cost % to Base Sales 36.8% 38.5% 35.2% 35.2% 35.1% % 34.6% 2 Gross Contribution 63.2% 61.5% 64.8% 64.8% 64.8% % 65.4% -1 Staff cost % to Base Sales 17.2% 15.3% 15.9% 16.1% 15.9% Other expenses % to Base Sales 38.2% 25.4% 33.0% 27.1% 28.6% Total Expenditure % to Base Sales 92.2% 79.2% 84.1% 78.4% 79.7% EBITDA Adj. EBITDA Other income Interest Depreciation Exceptional Item PBT Tax PAT Exceptional Item Licensing Income Forex loss/ (gain) Adj PAT R EPS Adj. EPS Margins bps bps bps EBITDA % Adj EBITDA % PAT % Adj PAT % Tax Rate % Exhibit 2: Revenue and Margins trend Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Revenues (Rs mn) EBIDTA % PAT % Emkay Research January 31,

4 Exhibit 3: Revenue breakup in Rs. Million Rs mn Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 YoY % QoQ % 9MFY13 9MFY12 YoY % US Europe Latin America (Argentina) API Total Generics Biz [A] Latin America ( Brazil) Semi Regulated Markets [SRM] Europe India Speciality Formulation [1] Recurring Revenues Out-licensing Revenues [2] ,535 Speciality Business (B= 1+2) Others Consolidated Revenues Exhibit 4: Revenue Breakup in USD Million Revenue - Breakup (USD mn) Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13E YoY % QoQ % 9MFY13 9MFY12 YoY % Generics Business US (USD Million) Europe Latin America (Argentina) API Total Generics Business [1] Speciality Business Latin America ( Brazil & Others) Semi Regulated Markets Europe Speciality Formulation [2] Core [A] = [1] +[ 2] Out-licensing Revenues [B] Others Revenues [A + B] Exchange Rate Total Sales (Excl. India), Rs mn India, Rs mn Total Sales, Rs mn Emkay Research January 31,

5 Business Highlights US (contributes 34%, grew 29% YoY in $ terms to USD80mn) US business (contr. 34%) grew 29% in $ terms to USD80mn and 37% YoY in INR terms due to launch of generic SIngulair last quarter and market share gains for OC products. The company had launched 5 new OCs in Q1FY13 In the third quarter of fiscal year 2013, Glenmark was granted approval of two ANDAs, comprised of one final, and one tentative approval. Final approval was granted for Rizatriptan Benzoate; tentative approval was granted for Telmisartan tablets. The Company filed 5 ANDA s with the U.S. FDA in this quarter. The total ANDAs filed for the first nine months are 9. As on date there are 83 generic products authorized for distribution in the U.S. market. The Company currently has 46 ANDAs pending for approval with the US FDA, of which 18 are Paragraph IV applications. Going ahead, US biz will continue to show strong performance led by launch of Cutivate & 12 products in the OC portfolio. OC sales expected to peak out in next two years. Management has guided for 20% growth in US in FY13. We expect US business to clock 24% CGAR over FY12-14E to USD370mn. India (contributes 27%, grew 35% YoY to Rs3.44bn) India revenues grew 35% YoY to Rs3.3bn led by market share gains in CVS and Derma portfolio. Volume growth was 17%, Price led growth was 7% and the rest was from new introductions. As per IMS MAT Dec 12 data Glenmark recorded growth of 26 % vis-a-vis industry growth of 11.4 %. Going ahead, we expect India business to clock revenue CAGR of 19% over FY12-14E led by market share gains in key therapies of Derma, Respiratory, CVS, Pain and Anti-infective SRM (contributes 15%, grew 67% YoY to Rs2.6bn) SRM market consists of Russia, CIS, Africa/Middle East, South Africa, Kenya, Egypt, Nigeria, Vietnam and Myanmar Russia The secondary sales growth for the Russian subsidiary continued to show good growth in excess of 43 % this quarter. The dermatology segment continues to record strong growth rates and Glenmark has emerged among the top 15 dermatalogy companies in Russia. CIS In the CIS markets, Ukraine, Kazakhstan and Uzbekistan are continuing to show positive trends in secondary sales. In Ukraine, Elovera IMF cream and lotion have been launched to strengthen the position in the dermatology market. Overall, Glenmark Ukraine has shown good growth in secondary sales of 104% this quarter, driven primarily by the focus brands. Africa/Middle East This region posted healthy secondary sales growth of 23 % this quarter due to significant contributions from the power brands. South Africa, Kenya, Egypt, Nigeria and Sudan were significant contributors to the strong growth achieved by the region. Last quarter company launched Flexilor(Lornoxicam) for the first time in Nigeria and Telma in Tanzania. Asia The Asia region recorded good secondary sales growth of 20% this quarter led by Vietnam and Myanmar which performed well this quarter. Going ahead, we expect SRM markets to grow at 27% CAGR over FY12-14E to Rs9.6bn led by new launches in focused therapies such as dermatology, respiratory and pain segments. Emkay Research January 31,

6 Latam (contributes 7%, grew 17% YoY to Rs963mn) Latam region consists of countries like Brazil, Venezuela, Mexico, Caribbean and Peru. During the quarter, the Mexico subsidiary received one derma product approval thus making it five dermatology product approvals in first nine months. Going ahead, we expect Latam region to grow at 24% CAGR over FY12-14E to Rs4.4bn. Research & Development Glenmark currently has 5 NCE and NBE molecules in clinical trials including Crofelemer The company has increased the pace of filing with the USFDA as a result of which R&D expenses have gone up to 8% of the sales in Q3FY13 to Rs1.07bn. For the full year. R&D expenses are expected to remain at 8% of sales. The company has guided for ANDA filings every year with the USFDA. Emkay Research January 31,

7 Glenmark Pharma Domestic Metrics (MAT Dec 12) Exhibit 5: Therapeutic Growth Therapies % Contribution MAT Dec'12 MAT Dec'11 YoY Derma 26% % CVS 21% % Anti-infective 16% % Respiratory 14% % Pain 5% % Anti-Diabetic 5% % Gastro 2% % Gynaec 5% % Ophthalmology 2% % Others 3% % Acute 71% % Chronic 29% % Total Sales 100% % Source: IMS, Emkay Research Gr. % Exhibit 6: Field force productivity FY07 FY08 FY09 FY10 FY11 Field force Productivity Source: IMS, Emkay Research Exhibit 7: Growth drivers - Volume/ Price/ New launches Total Gr. 26% Total Gr. 11.4% Glenmark Industry New launches Price Gr. Vol Gr. Source: IMS, Emkay Research Exhibit 8: Top 10 brand performance Rs Cr Therapy MAT Dec'12 MAT Dec'11 YoY Gr. TELMA CVS % TELMA-H CVS % ASCORIL + Respiratory % CANDID-B Derma % CANDID Derma % TELMA-AM CVS % ALEX PLUS COUGH Respiratory % LIZOLID Anti-Infective % MILIXIM Anti-Infective % ALTACEF Anti-Infective % Total Source: IMS, Emkay Research % Emkay Research January 31,

8 Glenmark s strong NCE/ NBE pipeline lends credibility to its research capabilities Glenmark currently has a pipe-line of 5 NCE and NBE molecules which are under various stages of clinical development. This includes Crofelemer, which has been in-licensed by Glenmark. Glenmark has been successful in monetizing part of its NCE pipeline. While it has suffered a few setbacks in the past, we believe that overall, Glenmark s ability to derive value from the NCE pipeline has been credible. Exhibit 9: R&D Pipeline Compound Indication Current Status Comment Crofelemer (in-licensed from Napo Pharma) GRC 4039 (Revamilast) GRC (out-license to Sanofi) GRC GBR 500 (out-licensed to Sanofi) Anti-diarrheal Asthma, COPD, Osteoarthritis pain, Neuropathic pain Neuropathic pain, Respiratory disorders Crohn's Disease, Multiple Sclerosis, Inflammatory Disorders Phase III trials complete Obtained approval for Phase IIb trials in UK & India. Looking for an out-licensing partner Phase I trials completed in UK Completed Phase I study in Netherlands. Obtained approval for PhII for Pain Indication in UK Phase I studies completed in GBR 401 Lymphomas, Leukemias Pre-clinical trials GRC 600 GBR 900 (In-licensed from Line Genomics) Thrombocytopenic purpura Pain US Pre-clinical testing done In Pre-clinical Phase PDUFA date for Salix is Jan 13. Glenmark expects to launch Crofelemer in some countries in H2 14 Dropped the development for Rheumatoid Arthritis. Phase IIB trial data for Asthma is expected in Q2 Ph-IIa proof of concept study in Europe started in Q1 13 is ongoing Got approval for Ph II proof of concept study in pain in UK & Germany. Awaiting approval in India. Initiated Ph I/IIa study for respiratory in UK A PhII proof of concept study in ulcerative colitis has been initiated in Q2 13 and is currently ongoing. GNP file for Phase I trials in Q4FY12 Phase I studies to commence in UK Ph 1 enabling toxicity studies have been initiated. Plans to file for a Ph I study in Q1 14. Pre- Clinical P-I P-II P-III Exhibit 10: Out-licensing Deals Indication Out-licensed Upfront Payment received (US$ mn) Year Total Potential (US$ mn) GBR 500 Crohn's Disease, Multiple Sceloris, Inflammatory disorders Sanofi Aventis 50 FY GRC Osteoarthritis/ Neuro pain Sanofi Aventis 30 FY Specialty topical products For acne vulgaris, Osteoarthritis pain, Dental pain, Incontinence Medicis Pharma 5 FY10 NA GRC 6211 DPPIV Inhibitor for Type II diabetes Eli Lilly 45 FY GRC 3886 Asthma, COPD Tejin Pharma 31 FY GRC 3886 Asthma, COPD Forest Labs 15 FY GRC 3886 Asthma, COPD Forest Labs 35 FY Emkay Research January 31,

9 Valuation We expect base business to report 31% revenue growth in FY13E and 16% in FY14E. Base EBIDTA margins are expected to improve from 19.5% in FY12 to 20.5% in FY14E. Base earnings will grow by 23% CAGR over FY12-14E. We upgraded our estimates for FY14 by 9% and maintain the Buy rating with a revised TP of Rs587 (20x FY14 EPS of Rs27+ NPV of Rs47). At CMP, the stock is trading at 18x FY14E earnings. We have revised our FY14 earnings upwards by 8.6% due to better than expected topline growth in India, SRM and US market. We have also raised our margins assumption by 50 bps for FY14 to 20.5% on back of 12% margins assumption for Latin America market which has done breakeven in the current year and breakeven margins for Europe market in FY14. Exhibit 11: Revised Financials Rs mn Old Financials New Financials % Change FY13E FY14E FY13E FY14E FY13E FY14E Sales , EBITDA 9,302 10,991 9,437 11, PAT 5,445 6,749 5,535 7, EPS Rating Buy Buy Exhibit 12: Valuations Target Price Calculation EPS ( FY 14 ) 27.0 Target P/E 20.0x Core business value 540 Exclusive opportunity Zetia FTF 9.1 Settled with Merck / Partner Par Vanos Cream (Fluocinonide) 1.2 Product specific Opportunity 10.3 NCE Valuation GRC Out licensed to Sanofi (Received US$30mn payment till date) Crofelemer 9 In licensed for RoW & API supply for Western mkts (Received US$15mn till date) GBR Out licensed to Sanofi (Received US$50mn till date) NCE Value 39 Less: Tarka Litigation 2 Target Price 587 Emkay Research January 31,

10 Conference Call Highlights Guidance Company expects to grow by 20-25% over next year and margins should improve by bps India market growth rate to come down from 30% but continue to outperform the market. Expects to improve operating margin over next 3 years, which will come from US, Latam and CIS. Latam to reach to 15% margins in next 3 yrs from current breakeven. Europe to do breakeven next year. Domestic Company expects slow down in growth of 30% during the FY14, however for company expects to outperform the market growth Current Sales force stands at 2700 MRs and there is no plan to increase in FY13 US Company launched Singular in the last quarter and 5 OC products launched during the first quarter. Company has increased its filling rate from to ANDAs Other Geographies Latam region Growth was led by Maxico, Veninzula and Carribean. Brazil was weak. SRM Markets Company expects to grow at the rate of ~30% CAGR in next 3 years Innovative R&D Revamilast GRC4039: Company dropped the development of this molecule for Rheumatoid Arthritis, however it will continue to develop for Asthma. Crofelemer: Got the US FDA approval Financial Highlights EBITDA margins expanded by 236bps YoY to 20.3% in the current quarter due to strong growth in US and India R&D expenditure for the quarter was Rs mn i.e. 8% of the sales and it was Rs mn i.e. 8.5% of the sales in Q2 and it was Rs.830mn i.e. 8% of net sales in Q1 FY13. Company has guided for 8% of sales as R&D expenditure for FY13 Net Working days cycle for the quarter was at 116 days compared to 106 in last quarter. This was on back very strong growth in SRM markets Tax rate for full year guided at 18% Net debt increased by Rs. 420mn to Rs21bn as on date on back of increase in working capital. Emkay Research January 31,

11 Exhibit 13: Financial Snapshot (Rs mn) FY11 YoY % FY12 YoY % FY13E YoY % FY14E YoY % US Base Business % % % % Europe % % % % Latin America (Argentina) % % % % API % % % % 1. Total Generics Business % % % % 2869 Latin America ( Brazil & Others) % % % % Semi Regulated Markets % % % % Europe % % % % India % % % % 2. Speciality Business % % % % Recurring Revenues ( ) % % % % 3. Out-licensing Revenues Medicis Pharma GRC (Sanofi) GBR 500 (Sanofi) Forest Income 493 Consolidated Revenues ( ) % % % % Reported EBITDA 5,906-5% 8,471 43% 9,930 17% 11,729 18% EBITDA margins % 20.0% 21.1% 19.9% 20.5% EBITDA - Licensing Income EBITDA - Base business % % % % EBITDA % - Base Business 18.2% 19.5% 19.1% 20.5% Reported PAT 4,517 37% 4,603 2% 5,940 29% 7,332 23% PAT margins % PAT - Base business % % % % PAT % - Base Business 13.6% 12.9% 11.2% 12.8% EPS % % % % - Base business % % % % CMP PE - base Emkay Research January 31,

12 Key Financials (Consolidated) Income Statement Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E Net Sales 29,474 40,217 49,899 57,215 Growth (%) Expenditure 23,568 31,746 39,969 45,486 Raw Materials 13,755 16,623 21,955 25,118 Employee Cost 5,103 6,289 7,784 8,926 Other Exp 1,400 2,562 3,493 4,291 EBITDA 5,906 8,471 9,930 11,729 Growth (%) EBITDA margin (%) Depreciation ,351 1,461 EBIT 4,959 7,492 8,579 10,268 EBIT margin (%) Other Income 1, Interest expenses 1,564 1,466 1,663 1,688 PBT 4,754 6,197 7,244 8,941 Tax ,304 1,609 Effective tax rate (%) Adjusted PAT 4,517 5,959 5,940 7,332 Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adj. PAT After JVs/Ass/MI 4,517 5,959 5,940 7,332 E/O items 0-1, Reported PAT 4,517 4,603 5,940 7,332 PAT after MI 4,517 5,959 5,940 7,332 Growth (%) Cash Flow Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E PBT (Ex-Other income) 3,395 6,026 6,916 8,581 Depreciation ,351 1,461 Interest Provided 1,564 1,466 1,663 1,688 Other Non-Cash items Chg in working cap ,887-3,034 Tax paid Operating Cashflow 5,817 7,498 6,043 8,695 Capital expenditure 811-3,712-2,500-2,500 Free Cash Flow 6,628 3,786 3,543 6,195 Other income 1, Investments Investing Cashflow 2,033-3,573-2,172-2,139 Equity Capital Raised Loans Taken / (Repaid) 2,391 1, Interest Paid -1,564-1,466-1,663-1,688 Dividend paid (incl tax) Income from investments Others -7, ,933 1,734 Financing Cashflow -5, Net chg in cash 1,949 3,201 3,240 5,703 Opening cash position 1,070 1,949 3,201 2,934 Closing cash position 1,949 3,201 3,240 5,703 Balance Sheet Y/E Mar (Rsmn) FY11A FY12A FY13E FY14E Equity share capital Reserves & surplus 20,369 23,996 29,665 36,726 Net worth 20,640 24,266 29,935 36,997 Minority Interest Secured Loans 14,802 6,875 6,375 5,875 Unsecured Loans 6,282 15,570 15,170 14,770 Loan Funds 21,085 22,445 21,545 20,645 Net deferred tax liability -1,081-2,674-2,674-2,674 Total Liabilities 40,643 44,037 48,807 54,968 Gross Block 26,952 28,993 31,493 33,993 Less: Depreciation 4,829 4,137 5,488 6,949 Net block 22,123 24,856 26,005 27,044 Capital work in progress Investment Current Assets 25,978 29,455 35,831 42,639 Inventories 8,070 7,879 9,986 11,346 Sundry debtors 11,308 12,436 15,427 17,689 Cash & bank balance 1,949 3,201 2,934 5,022 Loans & advances Other current assets 4,651 5,940 7,485 8,582 Current lia & Prov 7,777 10,623 13,379 15,065 Current liabilities 6,574 7,888 9,986 11,346 Provisions 1,203 2,734 3,393 3,719 Net current assets 18,201 18,832 22,453 27,575 Misc. exp Total Assets 40,643 44,039 48,808 54,970 Key Ratios Y/E Mar FY11A FY12A FY13E FY14E Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) Emkay Research January 31,

13 Emkay Rating Distribution BUY ACCUMULATE HOLD REDUCE SELL Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next months. Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next months. Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next months. Expected total return (%) (stock price depreciation) of upto (-)10% within the next months. The stock is believed to under perform the broad market indices or its related universe within the next months. Emkay Global Financial Services Ltd. 7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai India Tel: Fax: Web: DISCLAIMER: Emkay Global Financial Services Limited and its affiliates are a full-service, brokerage, investment banking, investment management, and financing group. We along with our affiliates are participants in virtually all securities trading markets in India. 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