Glenmark Pharma, BUY

Glenmark Pharmaceuticals Ltd, BUY

Price Rs 449 Target Price Rs 608

Setting new benchmarks

Strong and productive R&D, increasing presence in the US generic markets and consistent out performance in the domestic formulations market have made Glenmark Pharma a cut above the rest. In order to further hone its focus, Glenmark recently announced a re-alignment of its business into two separate entities- Glenmark Pharma and Glenmark Generic. Glenmark Pharma is a play on innovative R&D, strong core business and potential value unlocking by re-organising the generic business and listing it separately. Well armed with 11 molecules in a short span of 6 years, Glenmark has surpassed its larger Indian peers in terms of delivery. Core revenues and PAT (excluding R&D income) grew by 43% and 88% over FY04-07 on the back of robust performance of its international formulation business. We expect Glenmark to report a 30% CAGR in revenues and 38.5% CAGR in earnings, driven by 31.3% CAGR in its core business (excluding R&D income). We initiate coverage on Glenmark with a BUY rating and a price target of Rs608, an upside of 35%.

Valuation

We have valued the core business (excluding R&D business) on PE multiple, in view of it’s healthy earning growth. At 17xFY10E EPS of Rs26.1, we value the core business at Rs444/share. We have used probability adjusted DCF method to value its three outlicensing molecules, as we believe that this is the best way to capture the increasing probability of success of the molecules as they progress. NPV of these three molecules works out to Rs164/ share, assuming 30-40% success rate. This takes the total valuation of the company to Rs608/share.

MK. 17 March 2008