Glenmark Pharmaceuticals (Glenmark)’ Q1FY2010 results reflects the company’s strategy to shift its focus from achieving aggressive growth to strengthening its presence through market penetration, new product launches and tight cost-control measures.
Also, as the economic pressures are starting to ease out, the performance in the semi-regulated markets has shown some improvement.
Besides, the slowdown in the US Food and Drug Administration (USFDA) approvals and the continuous erosion in the price of exclusive Trileptal led to a decline in the US generic revenues in the first quarter.
The company’s consolidated revenues grew by 18% year-on-year (y-o-y) to Rs543.7 crore (against our estimate of Rs567 crore). The revenues grew on account of the robust performance of the specialty business (up 36.9%).
However, the generic business reported flat revenue, in line with our estimate, as the US revenue declined by 9.9% during the quarter.
The US revenue declined since the sales of Trileptal suffered due to a sharp price erosion and the broad-based slowdown in growth across markets in the USA.
The active pharmaceutical ingredient (API) business grew by 38.8% to Rs55.7 crore, in line with our estimate.
Research and Development
Glenmark has reported an operating profit of Rs121.4 crore for the quarter and the same is marginally ahead of our estimate of Rs115.3 crore due to the lower than expected other expenses, and low research and development (R&D) expenditure in the quarter.
The company incurred a foreign exchange (forex) loss of Rs34 crore due to asset devaluation which led to the declining margins.
Consequently, the operating profit margin (OPM) grew by 22.3%. However, adjusting the margin for the forex loss, the OPM stood at 28.6%, which was higher than our estimate.
The company reported a net profit of Rs53.5 crore for Q1FY2010 and the same is in line with our estimate of a net profit of Rs55 crore.
The profit growth was restricted by the spike in the interest cost to Rs43.8 crore (due to an increase in borrowings by Rs100 crore for settling liabilities in Q1FY2010). However, a deferred tax write-back of Rs8 crore boosted the bottom line.
Based on Glenmark’s $180-million sales guidance for its US business and Rs300-400-crore net profit guidance for its base business (ie excluding the new chemical entity [NCE] income) for FY2010, we have marginally tweaked our estimates.
We have done so because we believe that in order to achieve the higher end of its profit guidance Glenmark would essentially require an outlicencing deal.
Our revised earnings per share (EPS) estimates for FY2010 and FY2011 stand at Rs13 and Rs17.6 respectively.
The outlicencing deals for Melogliptin and the other molecules will also create positive sentiment for the stock. As more and more molecules progress through the pipeline, we expect Glenmark’s share price to respond more to research-related news flow and less to generic business developments.
Further, we expect an improvement in the base business’ profitability in view of the restructuring of operations through tight cost-control measures and efficiency in operations.
At Rs258, the stock trades at 19.8x FY2010 earnings and at 14.7x FY2011 earnings. We maintain our BUY recommendation on the stock with sum-of-the-parts (SOTP)-based price target of Rs270 (10x FY2011 core earnings for the base business plus Rs90.5 per share for the R&D pipeline).