Glenmark Pharmaceuticals (Glenmark) has proved itself as one of the best plays in research-led innovation. Of its pipeline of 13 molecules, five molecules are undergoing clinical trials.
It has managed to clinch four out-licensing deals for its developmental molecules collectively worth $734 million and has already received $117 million in initial milestone payments for the same.
The company has recently decided to restructure its business into two separate entities: GPL and GGL. GGL would be a 100% subsidiary of GPL and would be listed on the Indian bourses.
Its core business comprising generics in the USA and branded formulations in Latin America, the other semi-regulated markets and in India has seen stupendous success, due to its focus on niche specialties and brand building.
We expect the core business to grow at a 34% CAGR over FY2008-10, driven by a CAGR of 40% in the generic segment and a 29% CAGR in the branded formulation business.
Going forward, we expect Glenmark’s consolidated revenues to grow at a 31% CAGR over FY2008-10 to Rs3,377.7 crore, driven by a 34% CAGR in the core business and a $60-million milestone income in each of the two years.
A robust growth in the top line would lead to a 26% CAGR in the consolidated profits over FY2008-10 to Rs994.8 crore. We expect the core net profit to expand at a higher rate of 37% over the same period to Rs774.0 crore in FY2010.
We have used the sum-of-the-parts methodology to value Glenmark’s core business and discovery R&D business. Assigning a PE multiple of 18x to Glenmark’s fully diluted core earnings of Rs30.6 per share in FY2010E, the core business is valued at at Rs550 per share.
Using a probability-based DCF approach, three lead molecules are valued at Rs204 per share, which takes our total fair value for the company to Rs754. We assign a BUY rating.