Stock Pick From The Pharma Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a star performer in the pharma sector and an active player in exports.

Here Is Why:

• It is an outperformer in the domestic pharma market.
• The company has a strong pipeline of generic drugs.
• Expected future revenue visibility from its innovative products is USD 800 million (Rs 4400 crore)

The ongoing patent expiry in the US pharma market has been highly beneficial for Indian pharma companies. Many of them have witnessed multifold growth in their topline and bottomline after they started investing in R&D. Mumbai-based Glenmark Pharmaceuticals (GPL) is one such star performer in the sector, which is witnessing strong growth in its business. The strong pipeline of innovative products as well as the focus on low competition niche products are some factors that go in favour of the scrip.

GPL’s business is mainly categorised into two segments, i.e. specialty and generics. Specialty is the main business driver, constituting 58 per cent of its topline, while the remaining 42 per cent comes from the generics segment. In the specialty business, the company manufactures and sells products from high growth therapeutic segments such as respiratory, diabetes, oncology, etc. In the generics segment, it manufactures and sells generics of branded formulations.

Besides its operations in the domestic markets, GPL is also an active player in exports, which form 71 per cent of its total revenues. The company has operations in major regions including USA, Latin America, Japan, Europe, etc., with double-digit growth rates in most of them. Even in the domestic market, the company has outperformed by clocking a growth rate of 19 per cent in FY12 against 16 per cent by the pharma market. The addition of marketing professionals in the domestic market in FY12 has started giving results in the first half of this fiscal, where the company achieved 30 per cent growth in revenues.

The company has a good generic product pipeline assuring strong revenues ahead. In Russia, it has four product approvals in the dermatology segment. In USA, it has 10 approvals for oral contraceptives (OCs) and 19 approvals for derma products. It has monetised some OCs this year, which will rake in revenues going forward. GPL has also entered the Japanese pharma market, from where we expect a consistent revenue stream in the next few years. The company is also making strong footprints in other markets. This will drive its revenues post the US-patent expiries, which are expected to wane from 2015 onwards.

The most compelling factor for the company is its innovative product pipeline. It currently has two products in Phase III clinical trial, progressing towards approval stage. It has another seven products in various stages of clinical trials, which will yield hefty revenues in the future. The company also out-licenses its R&D products, which yield valuable milestone payments every year. Last year, it out-licensed its monoclonal antibody to Sanofi for USD 500 million (Rs 2750 crore). The total revenue visibility from these out-licensed products is USD 800 million (about Rs 4400 crore), which is more than its FY12 annual revenues.

On the financial front, its topline and bottomline have witnessed CAGR of 15 per cent and 24 per cent respectively for the last three-year period. For H1FY13, GPL’s revenues have grown by 27 per cent in the specialty segment and by 50 per cent in generics. The normalised revenues, excluding out- icensed income, grew by 36 per cent to Rs 2295 crore while the net profit grew by 21 per cent to Rs 235 crore.

On the valuations front, the stock is trading at a PE of 25.6x its FY12 earning and 20x its FY13E EPS of Rs 21.70. We expect the scrip to touch a price of Rs 510, giving returns of 17 per cent within one year.