Broking house, Brics PCG is bullish on Glenmark Pharma. It has recommended buy rating on the stock with a target price of Rs 530.

The Brics PCG report on Glenmark Pharma:

Core business on track

"We believe Glenmark’s core business is back on track after the dismal first quarter results. Our belief stems from the following points:

• Faster-than-expected ramp up in US generic sales
• Out-performance in the Latin American markets
• Good performance on the API front
• Robust growth in the domestic market.”

Accelerated ramp up in US generic sales

“Glenmark’s generic sales in the US have increased by a whopping 463% in Q2FY07 to Rs 338 million as against Rs 60 million in Q2FY06. The company launched three products, viz, Meloxicam, Codeine Phosphate and Gabapentin in Q2 and now has ten products in the US. Subsequently, in October the company launched Morphine Sulphate, an additional control substance. Glenmark Pharma, GPI, its US subsidiary, also received tentative approval from the US FDA towards the end of the quarter for its ANDA for Ondansetron Hydrochloride tablets.”

18-22 ANDAs on the market by fiscal-end

“Glenmark plans to launch between two and five products in Q3FY07, subject to approvals, and expects to end the year with 18-22 ANDAs on the market. GPI and its partners have 25 products pending FDA approval. GPI has filed 7 ANDAs till October on its own, bringing the total number of ANDAs filed to 32. The company plans to file 4 more ANDAs in Q3 and expects to meet its target of 15-20 own filings. We expect the company to ramp up sales in the US generics market to about Rs 3.1 billion by FY08 following the launches.”

Better-than-expected performance in Latin America

“Glenmark’s revenues from its Latin American operations were at Rs 268.3 million in Q2FY07 against Rs 102.2 million for the same period in the previous year, registering a growth of 162.5%. As the company consolidates its Servycal acquisition and increases its product registrations in Latin America, we expect revenues in these markets to grow at a compounded rate of 60% till FY08 to about Rs 1.9 billion. Glenmark filed 13 new dossiers with ANVISA and received approval to market 4 products during the quarter. The company plans to file 10 more dossiers in markets across Latin America and have an equal number of product launches in Brazil in the following quarter.”

Good performance on the API front

“Revenues from the sale of APIs to regulated and semi-regulated markets globally were Rs 139.9 million in Q2FY07 against Rs 106.3 million for the previous year, recording an increase of 31.6%. Revenues from the domestic API and co-marketing business amounted to Rs 177.4 million in Q2FY07 as against Rs 151.6 million in Q2FY06, a growth of 17%. Glenmark has refurbished one of the plants at its Ankleshwar facility, which is expected to be commissioned in November or December ’06. The company has also commenced exporting to three new markets in North Africa, viz, Morocco, Tunisia and Algeria and has filed 4 DMFs in the US in Q2FY07. It intends to file 4 more in Q3FY07 and 12-14 DMFs in FY07. We expect Glenmark to grow its API revenues to about Rs 1.7 billion in FY08, a compounded growth of about 30%.”

Domestic market sees good growth

“The domestic formulations market growth in FY07 has picked up to about 15%, backed by 13-14% volume growth and a 2% pricing increase. Glenmark’s domestic portfolio too has grown by 32% to Rs 1.1 billion in Q2FY07 as against Rs 838 million in Q2FY06 backed by strong growth in its base portfolio as well as new launches in the domestic market which include Dubagest (Natural Micronised Progesterone Injection), Milixim LX (Cefixime + Cloxacillin + Lactic acid bacillus), Epithra (Epirubicin) and Taxuba (Docetaxel).”

“Epithra and Taxuba are part of the newly launched oncology division, Onkos, while Milixim (from the division, Milieus) crossed the Rs 10mn sales-in-a-month-mark (as per ORG July 2006) within 12 months of its launch. We expect the domestic formulation sales to grow at a CAGR of 13% to Rs 5 billion by FY08.”

Revision in estimates

“We are revising our sales and net profit estimates for FY07 and FY08 following the better-than-expected half yearly results and an improved management guidance for these two years. Though we have left the topline for FY07 unchanged, we have cut the net profit numbers for FY07 due to a reduction in our estimates of the outlicensing revenues to be received by Glenmark for FY07 from USD 35 million to USD 30 million.”

GRC 8200 out-licensing deal to Merck KGA adds option value

“Merck KGaA and Glenmark Pharmaceuticals have entered into an agreement for Glenmark’s DPPIV inhibitor GRC 8200, a treatment for type-2 diabetes, which is in Phase II of clinical development. Under the agreement, Merck KGaA will develop, register and commercialise GRC 8200 for markets in North America, Europe and Japan, while Glenmark will retain commercialisation rights for India. The partners will share commercialisation rights for other markets in the remainder of the world. Merck KGaA will bear the cost of all ongoing studies and will be responsible for planning, managing and sponsoring all development activities in the future.”

We value the deal at Rs 80 per share

“The value of all payments to Glenmark could total up to €190 million, including a €25 million upfront payment and various milestone payments upon successful development and launch of mono-therapy and combination products based on GRC 8200. Upon commercial launch, Glenmark will supply the active ingredient to Merck and will receive royalties on net sales of the product.”

“We have valued this deal at Rs 80 per share considering peak sales of USD 1.7 billion in FY2016 for the molecule on commercialisation. The value of this deal would increase to Rs 170 once the molecule enters phase III.”

Oglemilast value decreased to Rs 125 per share

“We have reduced the value of the Oglemilast deal from Rs 151 per share to Rs 125 based on the delay in payments from Forrest Laboratories even after the completion of the phase-1 trials in March ’06. Besides this, we believe this molecule carries a higher risk now.”

Valuation

“We have valued the stock using a sum-of-parts valuation, valuing the core business at Rs 325 which is 20x FY08E EPS and the R&D at Rs 205 per share using the discounted cash flow (DCF) approach. We thus arrive at a value of Rs 530 for the stock. Buy.”