Investors with a low-risk appetite can avoid taking fresh exposures in the stock of Glenmark Pharmaceuticals at the current levels (Rs 630), given its rich valuations. Glenmark, an integrated pharma major with capabilities in drug discovery and manufacture of finished medicine dosages, has grown its revenues by over 40 per cent and profits by over 70 per cent compounded annually in the last five years.
Partly due to this robust performance and the fancy for 'drug discovery plays', a lot of interest has been built into the stock — it trades at around 21 times its estimated 2008-09 earnings per share — making it highly valued, when seen in comparison with other large-cap pharma companies as well as the benchmark Sensex.
Why hold
Though the outlook on the company is positive, there are two concerns. First, on how the distribution of benefits from the reorganisation of Glenmark's businesses, are going to take shape. The company plans to have two separate companies focussing on speciality and generics. The specialty business will include the discovery and branded business (under Glenmark) while the generics business (housed under Glenmark Generics) will comprise bulk drugs, generic business in the EU and the US, Argentina oncology business as well as a research-based division focused on API and formulation development. Glenmark has already got approval to transfer these businesses for not less than Rs 698 crore to its subsidiary Glenmark Generics, where Glenmark holds 90 per cent and the balance is held by another wholly owned subsidiary. It remains to be seen how Glenmark will utilise the money, as and when it receives the full consideration. Shareholders may benefit from the proposed IPO (of Glenmark Generics), likely to occur later this year, as Glenmark dilutes its holding.
However, they are unlikely to receive any shares as witnessed in de-mergers of companies in the pharma space. While this reorganisation may give both the companies better valuations, on a standalone basis Glenmark will have to make up for the 30 per cent revenue, which are going into Glenmark Generics.
Secondly, even though Glenmark has broadened its drug discovery portfolio (13 in discovery pipeline) and its base business has witnessed major traction in the US and Latin America, Glenmark currently is not a straight-forward investment decision. The sheer presence of the element of drug discovery adds a threat, as does the failure of any molecule, affecting future milestone payments (over $700 million). Plus, compared to generic players of similar size, Glenmark's front-ended presence is weak and efforts to build its own (Glenmark Generics will have to build capabilities also) could weigh on earnings. Execution will remain a key, especially in regulated markets.
Business profile
Glenmark's business does present quite a few positives. Its businesses — specialty/proprietary as well as generics — makes it an end-to-end specialty company and integrated generic formulation maker.
Glenmark has also delivered strongly on earnings as well as guidance. Its 2007-08 core revenues grew by 62 per cent, driving profits by over 100 per cent on a year-on-year basis. The US generic business was a key driver (enjoying exclusive products and limited competition). Operating margins expanded by 7.5 per cent to 40 per cent. The outlook is strong with management now guiding sales growth of over 35 per cent for both 2008-09 and 2009-10.
In the 12-15 month horizon, the Glenmark stock could see potential triggers from out-licensing deals, 'value unlocking' from Glenmark Generics listing and acquisitions in the EU and the US. However, there continue to be certain areas that may pose challenges.
Glenmark's US business, which focusses on niche segments, may not find ramping up drug filings that easy over the next two years (currently has 61 approvals). Drug filings translate to approvals needed for selling drugs in the US.
The company's target to file 25 filings this year, if achieved, would swell the R&D spend, thereby putting pressure on margins. As stated earlier, Glenmark's R&D capabilities appear to be its key attraction. Having forged four deals, plans to bring eight molecules to the lab by next fiscal and targeting different therapeutic areas — every molecule, including the ones already under work — look promising.
This said, world over most molecules fail to make it to commercialisation in the later stages and in this context, uncertainties associated with research should be assessed.
While early-stage development-linked milestone payments (around $110 million till now) will be retained in an event of a failure, a few more instances reputation could however take a beating.
via BL
Partly due to this robust performance and the fancy for 'drug discovery plays', a lot of interest has been built into the stock — it trades at around 21 times its estimated 2008-09 earnings per share — making it highly valued, when seen in comparison with other large-cap pharma companies as well as the benchmark Sensex.
Why hold
Though the outlook on the company is positive, there are two concerns. First, on how the distribution of benefits from the reorganisation of Glenmark's businesses, are going to take shape. The company plans to have two separate companies focussing on speciality and generics. The specialty business will include the discovery and branded business (under Glenmark) while the generics business (housed under Glenmark Generics) will comprise bulk drugs, generic business in the EU and the US, Argentina oncology business as well as a research-based division focused on API and formulation development. Glenmark has already got approval to transfer these businesses for not less than Rs 698 crore to its subsidiary Glenmark Generics, where Glenmark holds 90 per cent and the balance is held by another wholly owned subsidiary. It remains to be seen how Glenmark will utilise the money, as and when it receives the full consideration. Shareholders may benefit from the proposed IPO (of Glenmark Generics), likely to occur later this year, as Glenmark dilutes its holding.
However, they are unlikely to receive any shares as witnessed in de-mergers of companies in the pharma space. While this reorganisation may give both the companies better valuations, on a standalone basis Glenmark will have to make up for the 30 per cent revenue, which are going into Glenmark Generics.
Secondly, even though Glenmark has broadened its drug discovery portfolio (13 in discovery pipeline) and its base business has witnessed major traction in the US and Latin America, Glenmark currently is not a straight-forward investment decision. The sheer presence of the element of drug discovery adds a threat, as does the failure of any molecule, affecting future milestone payments (over $700 million). Plus, compared to generic players of similar size, Glenmark's front-ended presence is weak and efforts to build its own (Glenmark Generics will have to build capabilities also) could weigh on earnings. Execution will remain a key, especially in regulated markets.
Business profile
Glenmark's business does present quite a few positives. Its businesses — specialty/proprietary as well as generics — makes it an end-to-end specialty company and integrated generic formulation maker.
Glenmark has also delivered strongly on earnings as well as guidance. Its 2007-08 core revenues grew by 62 per cent, driving profits by over 100 per cent on a year-on-year basis. The US generic business was a key driver (enjoying exclusive products and limited competition). Operating margins expanded by 7.5 per cent to 40 per cent. The outlook is strong with management now guiding sales growth of over 35 per cent for both 2008-09 and 2009-10.
In the 12-15 month horizon, the Glenmark stock could see potential triggers from out-licensing deals, 'value unlocking' from Glenmark Generics listing and acquisitions in the EU and the US. However, there continue to be certain areas that may pose challenges.
Glenmark's US business, which focusses on niche segments, may not find ramping up drug filings that easy over the next two years (currently has 61 approvals). Drug filings translate to approvals needed for selling drugs in the US.
The company's target to file 25 filings this year, if achieved, would swell the R&D spend, thereby putting pressure on margins. As stated earlier, Glenmark's R&D capabilities appear to be its key attraction. Having forged four deals, plans to bring eight molecules to the lab by next fiscal and targeting different therapeutic areas — every molecule, including the ones already under work — look promising.
This said, world over most molecules fail to make it to commercialisation in the later stages and in this context, uncertainties associated with research should be assessed.
While early-stage development-linked milestone payments (around $110 million till now) will be retained in an event of a failure, a few more instances reputation could however take a beating.
via BL
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