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High value launches to drive growth ahead… Glenmark Pharmaceuticals (Glenmark) is an India-based pharmaceutical company with commercial presence in more than 60 countries across the globe. The company derives 63% of total revenue from export formulations and 28% from Indian formulations.

Revenue to grow at a CAGR of 16.6% over FY16-18E led by increased FDA approval rate in US, exclusivity on certain drugs coupled with the launch of high margin products in Europe

ANDAs approval rate from USFDA has picked up from 5 in FY15 to 24 (including 5 tentative approvals) in FY16.

Domestic business to register modest growth over FY16-18E despite a ban on fixed-dose combination (FDC) products & price regulations.

EBITDA and PAT margins to improve by 190bps & 210bps respectively over FY16-18E.

We initiate Glenmark with a “BUY” rating valuing the stock at 19x FY18E EPS arriving at a target price of Rs935.

15th July, 2016

Potential launches to drive US growth The current product portfolio of the company‟s US business (32% of the total revenues) consists of 176 products (113 approved products and 63 ANDAs

(Abbreviated New Drug Application) pending for approval with the USFDA). Importantly, 26 ANDAs are Para IV ANDAs (first applicant to submit a completed ANDA will get marketing exclusivity for 180 days) with an addressable market size of USD19bn. Further, Glenmark plans to launch several

high value products in US in FY17E with an addressable market size of USD11bn.

Additionally, the company expects 10-12 approvals in FY17E with higher share of approvals for specialty drugs.

Indian business to witness modest growth due to price regulations During FY16, Glenmark witnessed increase in market share across various therapeutic segments in the domestic business. While market share in Cardiac segment increased from 3.72% in FY15 to 3.97% in FY16, Respiratory segment witnessed improvement from 3.8% to 4.12%. Similarly, the market share in Anti-diabetic & Derma segment rose from 2.03% to 2.19% & 7.92% to 8.59% respectively. Importantly in FY16, it successfully launched Teneligliptin (for the treatment of type 2 diabetes) for the first time in India and has already garnered sales of more than Rs100cr. While the domestic business has grown at a healthy pace of ~20% over FY11-16, we expect it to witness a modest growth of 14%

CAGR over FY16-18E on the backdrop of FDC ban and price regulations imposed on certain medicines.

gSeretide launch to drive Europe revenues

Glenmark has entered into a strategic development & licensing agreement (for 10 years) with Celon Pharma to develop and market generic version of Seretide (market size of ~USD800mn in Europe) across 15 European nations. It has already filed this product in 7 countries and will file in the remaining ones during FY17E.

Valuations - We expect revenue and PAT to grow at a CAGR of 16.6% and

27.0% respectively over FY16-18E. Further, EBITDA margin is expected to improve by 190bps to 22.7% on account of new product launches & shift in portfolio mix towards high-margin niche products. Hence, we initiate Glenmark with a BUY rating with a TP of Rs935 at 19x FY18E EPS.

RETAIL EQUITY RESEARCH

Glenmark Pharmaceuticals Ltd. Rating as per Largecap 12months investment period Pharmaceuticals

BSE CODE:532296 NSE CODE: GLENMARK CMP Rs848 TARGET Rs935 RETURN 10%

Bloomberg CODE: GNP:IN SENSEX: 27,942

Company Data

Market Cap (cr) 23,926

Enterprise Value (cr) 27,052

Outstanding Shares (cr) 28.2

Free Float 50%

Dividend Yield (%) 0.3

52 week high 1,262

52 week low 672

6m average volume („000) 713

Beta 1.0

Face value 1.0

Shareholding % Q2FY16 Q3FY16 Q4FY16

Promoters 46.5 46.5 46.5

Public 53.5 53.5 53.5

Others - - -

Total 100.0 100.0 100.0

Price Performance 3mth 6mth 1Year

Absolute Return 8.3 (2.9) (18.7)

Absolute Sensex 8.5 11.9 (0.5)

Relative Return* (0.2) (14.8) (18.2)

*over or under performance to benchmark index

Y.E Mar (Rs cr) FY16 FY17E FY18E

Sales 7,650 9,046 10,398

Growth (%) 15.4 18.3 14.9

EBITDA 1,592 2,036 2,357

EBITDA Margins% 20.8 22.5 22.7

PAT Adj. 861 1,174 1,389

Growth (%) 23.6 36.3 18.3

Adj. EPS 30.5 41.6 49.2

Growth (%) 18.9 36.3 18.3

P/E 27.8 20.4 17.2

P/B 5.6 4.5 3.6

EV/EBITDA 17.0 13.2 11.1

ROE (%) 23.7 24.4 23.2

D/E 0.9 0.7 0.6

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Glenmark Sensex (Rebased)

COMPANY INITIATING

REPORT

GEOJIT BNP PARIBAS

Research

GEOJIT BNP PARIBAS Research COMPANY INITIATING REPORT

BUY

Valuations Currently, Glenmark is trading at 20.4x FY17E & 17.2x FY18E earnings, which is in line with its historical average (last 5yr Avg. 1yr Fwd. P/E 20.2x). Pharmaceutical sector upheld rich valuations as a defensive sector over the last few years. The company has enjoyed premium valuations on account of focus on out-licensing of novel molecules, strong domestic growth over last few years and anticipation of margins improvement. However, overall sector valuations corrected in FY16 on account of USFDA issues (Form-483 observations and warning letters), pricing pressure in US on account of channel consolidation and price regulations in the domestic market. We initiate Glenmark with a BUY rating with a TP of Rs935 based on 19x FY18E EPS.

P/E one year forward

Source: Company, Geojit BNP Paribas Research; *SD-Standard Deviation

Financial Analysis Revenue to grow at CAGR of 16.6% over FY16-18E Glenmark‟s revenue grew at a CAGR of 17.4% over FY12-16 primarily driven by the US, India and LATAM markets. The company‟s strategic shift to focus on niche therapies such as Respiratory, Dermatology, and Oral Contraceptives has worked well in the last few years as witnessed by strong traction in the US and domestic business. In FY12, company‟s revenue was driven largely by out licensing deal (Monoclonal antibody to Sanofi) for which it received USD50mn as an upfront payment. FY13 and FY14 continued to witness strong growth from all geographies. However, FY15 revenue growth was impacted by significant depreciation of currencies coupled with weak demand across emerging markets (especially due to currency related issues in Russia). Additionally, slowdown in USFDA approvals impacted the growth. In FY16, although the numbers ANDA approvals picked up, revenues got impacted by price

erosion and adverse currency movements in emerging markets. We expect company‟s revenue to grow at a CAGR of 16.6% driven by key launches in the US, continued market share gains in the domestic market and gSeretide launch in Europe.

Revenue to grow at 16.6% CAGR during FY16-18E

Source: Company, Geojit BNP Paribas Research

EBITDA Margins to improve by 190bps…. In FY16, EBITDA margin stood at 20.8%, an

improvement of 200bps YoY. This was on account of

price increase taken for one of its drug viz. Mupirocin

(Calcium cream used for treating skin diseases)

coupled with lower selling and administrative

expenses. We have adjusted the EBITDA margins to

account for one-offs including a) product litigation

charges related to TARKA in FY14 (Rs217cr) b) Rs65cr

for amalgamation of Glenmark Generics Ltd. (U.S.

subsidiary) in FY15 c) legal costs of Rs65cr in FY16

(related to Sitagliptin).

Going ahead, we expect EBITDA margin to expand by

190bps over FY16-18E on account of a) exclusivity (up

to 180 days) on certain product launches b) shifting of

portfolio mix towards high-margin niche products.

EBITDA margins to improve by 190bps


PAT margins to improve by 210bps In FY16, Adj. PAT stood at Rs861cr, reporting a growth of 16.7% CAGR over FY12-16. PAT margin improved by 80bps to 11.3% in FY16. However, reported PAT stood at Rs702cr on account of Forex loss of Rs.94cr in FY16. We expect Adj. PAT to grow at a CAGR of 27.0% with 210bps improvement in PAT margin over FY16-18E. PAT margin to expand by 210bps during FY16-18E


Deleveraging its balance sheet The company is expected to deleverage its balance sheet on account of free cash flow generation to the tune of Rs1,420cr over FY17-18E. This will reduce the D/E ratio from 0.9x in FY16 to 0.6x in FY18E. Working capital cycle stood at 129 days in FY16 (124 days in FY15) with receivables at 119 days (138 in FY15), inventory at 130 days (124 in FY15) and payables at 120 days (139 days in FY15). While ROCE is projected to improve by 350bps to 20.5% during FY16-18E on account of margin improvement, ROE is expected to ease on account of lower leverage.

Return ratios trend


Investment Rationale… US- a key market for Glenmark US is the most important market for the company as it contributes 32% to total revenues. In the US, company has achieved meaningful scale by launching products in niche therapies like Harmones, Controlled substances and Dermatology (Glenmark spends 11% of its total sales on R&D). Thus, the US business has grown at a CAGR of 24% over FY11-16. On the generics front, Glenmark is continuously filing products in the area of dermatology and injectables. Likewise, on the discovery front, the pipeline is progressing well with six molecules in clinical and one molecule in preclinical development phase.

…With healthy pipeline of drugs The current portfolio consists of 113 products and 63 ANDAs pending for approval (market size of ~USD36bn). Importantly 26 ANDAs are Para IV filings (first applicant to submit a completed ANDA will get marketing exclusivity for 180 days) with market potential of USD19bn and are focused Oral solids and Dermatology. Further, some of these products have the potential to generate sales in excess of USD10mn on a sustained basis.

US to grow at a CAGR of 19.3% over FY16-18E During FY16, USFDA approvals for Glenmark have picked up on account of GDUFA guidelines (Generic Drug User Fee Amendment of 2012 to review and act on 90% of the ANDA backlogs by September 2017). While, Glenmark filed for 12 ANDAs, it received 24 approvals in FY16 (5 approvals in FY15). Of late, the company has received 4 approvals (market size USD840mn) including Frovatriptan Succinate (limited competition product with market size of USD88mn). Besides, it has also received approval for its first injectable Bendamustine Hydrochloride (therapeutic equivalent to Treanda with market size of USD93mn) & the company plans to launch it in Nov 2019 (first ANDA applicant to submit complete ANDA with Para IV certification). Hence, it may be eligible for 180 days of marketing exclusivity. The company expects to file 20 ANDAs and receive 10-12 approvals in FY17. Going ahead, we expect the US growth to improve led by gZetia launch in H2FY17 with exclusivity for 180 days (market size of USD2.5bn). With a number of high value and niche launches (Crestor, Renvela, Welchol with market size of USD8.5bn) including limited competition products in Dermatology, we estimate US revenues to grow at a robust CAGR of 19.3% over FY16-18E.

US generics pipeline

Source: Company, Geojit BNP Paribas Research Note: As on 2 December, 2015

US revenue to grow at 19.3% CAGR over FY16-18E


Novel drugs pipeline


Glenmark‟s has been developing 7 novel molecules for inflammation, autoimmune diseases, pain and oncology (consists Monoclonal Anti Bodies). The company spends USD50mn on novel R&D every year. As per the management, monetization of the current novel pipeline will start from FY18.

1,689 2,027 2,040 2,420 3,034 3,444

39.1%

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18.7%

25.4%

13.5%

0%

10%

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3,000

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FY13 FY14 FY15 FY16 FY17E FY18E

Rs.

Cro

res

Revenue Growth yoy

Primary Category

Pending Approval Approved

Total Filings

Market Size in

USDbn

Oral solids 28 49 77 26.2

Dermatology 12 25 37 2.7

Hormones 8 17 25 2.5

Injectables 8 0 8 2.7

Others 6 13 19 2.1

Total 62 104 166 36.2

Para IV filings

26 0 26 19.0

Domestic business: On strong footing The Indian formulations business contributed 28% to total revenues in FY16 and grew at a CAGR of 20% over FY11-16. In FY16, domestic business reported 21% growth vs. Indian pharmaceutical market (IPM) growth of 14%. Glenmark presently has 9 products which feature among the top 300 products in IPM. Sartans, Gliptins, cough & cold preparations and derma constitute two-thirds of the domestic sales. During FY16, the domestic business gained market share across various therapeutic segments. While market share in Cardiac segment increased from 3.72% in FY15 to 3.97% in FY16, Respiratory segment witnessed improvement from 3.8% to 4.12%. Similarly, the market share in Anti-diabetic & Derma segment rose from 2.03% to 2.19% & 7.92% to 8.59% respectively.

Domestic business to witness modest CAGR of 14% over FY16-18E In FY16, the company launched Teneligliptin (for the treatment of type 2 diabetes) for the first time in India under the brand names Ziten and Zita Plus and garnered sales of more than Rs100cr. This is one of the most successful launches in India over the last few years. We believe domestic business will continue to gain traction as company focuses on chronic therapy segments such as cardiac, dermatology & respiratory, which are growing at a faster pace than industry. However, we expect domestic revenues to grow at a modest CAGR of 14% over FY16-18E on account of two factors: 1) ban on FDC products and 2) impact of NLEM (National List of Essential Medicines), which entails regulated pricing on certain products.

Revenue to grow at CAGR of 14% during FY16-18E


Europe: gSeretide to drive the growth Europe contributed 9% to total revenues in FY16 and grew at a CAGR of 28% over FY11-16. The formulation business of Western Europe continues to expand through product sales and licensing income. Besides, it has enhanced its presence through distribution partners in the European countries. Glenmark entered into a Strategic Development & Licensing Agreement with Celon Pharma S.A. (Celon) to develop and market a generic version of GlaxoSmithKline‟s Seretide (dry powder Inhaler used to prevent asthma). This is a limited competition product with market size of ~USD800mn in Europe. Being a complex product, it enjoys higher margin. As per the terms of the agreement, Glenmark has obtained semi-exclusive marketing & distribution rights of the product across 15 European countries including Great Britain, Germany, Belgium, Netherlands, Italy, Sweden, Norway and Romania among others. We expect Europe business to grow at a CAGR of 21% over FY16-18E on account of gSeretide launch.

Europe’s sales to grow at 21% CAGR over FY16-18E


Asian markets to aid RoW growth: RoW (Rest of the World) accounts for 12% of total revenue. In the RoW markets, Asian business is expected to do well on account of secondary sales growth and new launches in Malaysia, Sri Lanka, Philippines & Cambodia. Glenmark is continuously investing in product pipeline in Asia, primarily in the areas of dermatology, respiratory and oncology. Thus, we expect RoW growth to pick-up in next two years & hence estimate CAGR of 16% over FY16-18E.

RoW markets to grow at 16% CAGR over FY17-18E


LATAM markets to stabilise going forward LATAM business contributed to 10% of the revenue in FY16. Latin American currencies (especially Brazilian Real) rebounded in Q4FY16 which helped drive growth during the quarter. While Venezuela accounts for nearly one third of LATAM revenues, Brazil & Mexico account for the rest. Since November, 2015, Glenmark has discontinued supplies to Venezuela (selling out of inventory) owing to the weak economic position of the country and uncertainty surrounding repatriation of sale proceeds (USD45mn). In FY16, Venezuela business reported revenue of Rs320cr EBITDA of Rs127cr and PAT of Rs27cr. Management expects the macroeconomic situation of LATAM (ex. Venezuela) markets to improve going forward and has guided for 10-15% revenue growth in FY17. Hence, we estimate LATAM business to grow at a CAGR of 14% over FY16-18E.

LATAM markets to post 14% CAGR over FY16-18E


APIs to sustain the growth momentum APIs accounted for 9% of overall revenues and reported a growth of 13.2% in FY16. The two API plants in Gujarat, India i.e. Ankleshwar and Dahej completed successful inspections from USFDA in FY15. The company recently filed three new products in US and one each in Japan & Europe. The sales of APIs have been driven by leadership position in Lercanidipine, Amiodarone and Perindopril.

APIs to grow at a CAGR of 13.5% over FY16-18E


Glenmark Pharmaceuticals Ltd: Business overview

Glenmark is an India-based pharmaceutical company with commercial presence in more than 60 countries across the globe. It manufactures and markets generic formulation products & active pharmaceutical ingredients (API). The company derives more than 60% of its revenues from international operations. Further, it owns a network of 18 manufacturing facilities (12 formulations plants in five countries, 5 API plants in India & 1 biologics manufacturing site in Switzerland). Glenmark is a leading player in the discovery of new molecules for both NCEs and NBEs category. The company has fully recovered the amount (USD200mn) spent on innovative R&D in the last nine years. The company has been focusing on areas such as inflammation (asthma/COPD, rheumatoid arthritis etc.) and pain (neuropathic pain and inflammatory pain).

Revenue breakup (FY16)


Business break-up (FY16)


Key Risks: USFDA scrutiny against company‟s

manufacturing plants regarding CGMP (Current Good Manufacturing Practices) and delay in product approvals.

Price erosion in the US business due to channel consolidation and new players.

Adverse currency volatility in Emerging markets.

Consolidated Financials Profit & Loss Account

Y.E March (Rs cr.)

FY14

FY15

FY16

FY17E

FY18E

Sales 6,005 6,630 7,650 9,046 10,398

% change 19.8 10.4 15.4 18.3 14.9

EBITDA 1,318 1,244 1,592 2,036 2,357

% change 25.7 (5.6) 28.0 27.9 15.7

Depreciation 217 260 269 330 359

EBIT 874 763 1,164 1,706 1,998

Interest 182 189 179 184 170

Other Income 5 20 20 22 24

PBT 924 816 1,164 1,545 1,852

% change 19.7 (11.7) 42.7 32.7 19.9

Tax 151 119 303 371 463

Tax Rate (%) 16.4 14.6 26.0 24.0 25.0

Reported PAT 542 475 702 1,174 1,389

Adj. 227 221 159 - -

Adj. PAT 769 697 861 1,174 1,389

% change 16.4 (9.5) 23.6 36.3 18.3

No. of shares (cr.) 27 27 28 28 28

Adj EPS (Rs) 28.4 25.7 30.5 41.6 49.2

% change 16.2 (9.5) 18.9 36.3 18.3

DPS (Rs) 2.0 2.0 2.0 3.0 4.0

Cash flow

Y.E March (Rs cr.)

FY14

FY15

FY16

FY17E

FY18E

Pre-tax profit. 697 594 1,164 1,545 1,852

Depreciation 217 260 269 330 359

Changes in W.C (290) (267) (728) (557) (482)

Others 493 213 159 162 146

Tax paid (263) (318) (303) (371) (463)

C.F.O 854 482 561 1,109 1,412

Capital exp. (377) (544) (906) (600) (500)

Change in inv. - - (0) - -

Other invest.CF (189) (168) 20 22 24

C.F - investing (566) (712) (886) (578) (476)

Issue of equity 13 2 945 - -

Issue/repay debt 205 481 188 13 (300)

Dividends paid (63) (63) (56) (85) (113)

Other finance.CF (252) (220) (179) (184) (170)

C.F - Financing (98) 199 898 (256) (583)

Chg. in cash 190 (31) 573 275 353

Closing cash 803 768 862 1,137 1,489

Balance Sheet

Y.E March (Rs cr.)

FY14

FY15

FY16

FY17E

FY18E

Cash 803 768 862 1,137 1,489

Accounts Receivable 2,156 2,512 2,493 3,015 3,466

Inventories 933 1,269 1,568 1,676 1,913

Other Cur. Assets 873 774 987 1,153 1,313

Investments 0 17 17 17 17

Gross Fixed Assets 3,779 4,202 5,108 5,708 6,208

Net Fixed Assets 3,036 3,270 3,908 4,177 4,319

CWIP 0 0 0 0 0

Intangible Assets 60 58 57 57 57

Def. Tax (Net) 514 275 348 348 348

Other Assets 52 464 596 614 632

Total Assets 8,426 9,408 10,836 12,195 13,555

Current Liabilities 2,111 2,486 2,501 2,754 3,134

Provisions - - - - -

Debt Funds 3,267 3,800 3,988 4,001 3,701

Other Liabilities 52 122 77 81 85

Equity Capital 27 27 28 28 28

Reserves & Surplus 2,956 2,973 4,242 5,331 6,607

Shareholder‟s Fund 2,983 3,000 4,270 5,360 6,636

Minority Interest 13 (0) (0) (0) (0)

Total Liabilities 8,426 9,408 10,836 12,195 13,555

BVPS (Rs) 110.0 110.6 151.3 189.9 235.2

Ratios

Y.E March

FY14

FY15

FY16

FY17E

FY18E

Profitab. & Return

EBITDA margin (%) 21.9 18.8 20.8 22.5 22.7

EBIT margin (%) 18.3 14.8 17.3 18.9 19.2

Net profit mgn.(%) 12.8 10.5 11.3 13.0 13.4

ROE (%) 26.8 23.3 23.7 24.4 23.2

ROCE (%) 18.7 15.4 17.8 19.6 20.5

W.C & Liquidity

Receivables (days) 131.1 138.3 118.9 121.7 121.7

Inventory (days) 100.1 124.4 130.1 125.3 123.8

Payables (days) 106.1 138.6 120.9 116.0 116.9

Current ratio (x) 2.3 2.1 2.4 2.6 2.7

Quick ratio (x) 1.8 1.6 1.7 2.0 2.1

Turnover &Levg.

Gross asset T.O (x) 1.7 1.7 1.6 1.7 1.7

Total asset T.O (x) 0.8 0.7 0.8 0.8 0.8

Int. covge. ratio (x) 6.1 5.2 7.4 9.3 11.8

Adj. debt/equity (x) 1.1 1.3 0.9 0.7 0.6

Valuation ratios

EV/Sales (x) 4.2 3.9 3.5 3.0 2.5

EV/EBITDA (x) 19.3 20.9 17.0 13.2 11.1

P/E (x) 29.9 33.0 27.8 20.4 17.2

P/BV (x) 7.7 7.7 5.6 4.5 3.6

Recommendation Summary (last 3 years)


Large Cap Stocks; Mid Cap and Small Cap;

Buy - Upside is 10% or more. Hold - Upside or downside is less than 10%. Reduce - Downside is 10% or more.

Buy - Upside is 15% or more. Accumulate* - Upside between 10% - 15%. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute „Accumulate‟ as Buy and „Reduce‟ as Sell.

The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL.

Geojit BNP Paribas Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant

disclosures are available hereunder. However, Geojit BNP Paribas's research desk have reviewed this report for any untrue statement of material fact or any

false or misleading information.

General Disclosures and Disclaimers

CERTIFICATION

I, Abhishek Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views

expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities.

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Geojit BNP Paribas Financial Services Limited has outsourced the assignment of preparation of this report to Dion.

Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the

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Dates Rating Target 15-July-16 BUY 886

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