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Glenmark Pharmaceuticals 3QFY13 results update

Contributed by Nirmal Bang

Posting above 30% growth in 3QFY13, for the seventh consecutive quarter, Glenmark Pharmaceuticals’ (GPL) performance beat our/consensus earnings estimates by 7%28%, respectively. We expect the growth momentum to sustain led by limited competition for its products like Crofemeler (US launch in FY14 likely) and Mupirocin Cream (launched recently). Positive news flow on research and development or R&D (not valued) may lead to further upside. We have introduced FY15 estimates with an EPS estimate of Rs35 and rolled forward our multiple to 16xFY15E EPS to arrive at a target price of Rs556. However, following the steep 16% run-up in the stock price over the past three months, we have downgraded our rating on GPL to Hold from Buy.

Emerging markets drive 3QFY13 performance: GPL’s results were above our/consensus estimates led by strong growth in rest-of-the-world markets (up 67%YoY), domestic formulations business (up 30%YoY) and the US market (up 37% YoY; maintained quarterly run-rate of US$78mn-US$80mn). Margins stood at 23.2%, marginally below our estimate of 24% (missed on account of higher R&D costs) but above consensus estimate of 21.2%. Adjusted for forex gains (Rs40mn) and milestone income from Forest Laboratories (Rs493mn), the margin stood at 20%, in line with estimates. PAT, consequently, was up at Rs2.1bn against our expectation of Rs2.0bn and consensus estimate of Rs1.7bn.

Revamilast failure may dampen near-term performance: Revamilast, GPL’s PDE4 inhibitor, which recently completed Phase IIB studies for rheumatoid arthritis (RA), has failed to meet the primary end-point. While currently GPL’s R&D pipeline has not been ascribed any value (as most molecules are in initial stages), we believe the recent run-up in the stock price was partly on account of likely positive news flow on R&D, and thus in the near term, the stock may pare some of its gains. However, with another five data points expected in FY14E, including the outcome of revamilast studies for asthma by April 2013, we expect the stock to regain its momentum in the medium term.

Key conference-call highlights: 1) GPL transferred a part of its foreign debt (~US$365mn) to its Swiss subsidiary while retaining US$85mn as a result of which forex losses are expected to decline going forward, 2) Net debt stands at Rs22bn, 3)Working capital cycle increased marginally to 116 days.

Our earnings estimates revised, target multiple rolled forward to FY15: We have adjusted our FY13E earnings in line with 9MFY13 performance and accordingly our EPS estimate stands revised downwards by 7% (we knocked off expected Salix milestone income of US$4mn from our estimates) even as our FY14E EPS has been revised upwards by 4%. We have also introduced FY15 estimates with EPS of Rs35 and rolled forward our multiple to 16xFY15E EPS to arrive at a target price of Rs556..