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Glenmark Pharmaceuticals
Is NCE franchise worth (-)ve value?
Event
ƒ We think the market currently is ascribing GNP’s R&D initiative a negative
market cap of ~US$250m (~15% of current market cap). Expense of Rs1bn
goes through the P&L but no value attaches to its innovation pipeline. We do
not imply that de-merging the NCE business is the strategy to pursue, but
such an analysis in our view does aid better understanding.
ƒ We try to evaluate the core business value for Glenmark by excluding the
NCE R&D expense from its P&L. Major peers (SUNP IN, RBXY IN) have demerged the NCE business in the past, resulting in expansion of core business
margins. GNP remains our top pick with a target price of Rs465.
Impact
ƒ SPARC a case study: SPARC has generated ~US$35m in income from
operations vs. total expense of ~US$50m over last five years post de-merger
from SUN and has a market cap of ~ US$400m. SPARC currently spends
~Rs700m on research annually that is not expensed through SUN’s P&L,
contributing to a hypothetical market cap release of ~US$200m for SUN
adjusting for the tax credits. The total valuation boost is ~US$600m for longterm SUN shareholders of SUN. (Please refer to Fig 2, Page 3)
ƒ GNP NCE research largely self funded over the last decade: GNP has
generated ~US$ 200m in out-licensing income from six deals with large
partners to-date (vs. total spend of ~US$125m for the last seven years), which
is unmatched by any of its peers. Because of a few setbacks in the past, we
think the market is not assigning any upside to GNP’s innovation franchise.
While this is counterintuitive to us, even being conservative we believe given the
track record it would be a reasonable assumption that GNP is not destroying
value through its NCE research program.
ƒ Core business ex-NCE R&D expense largely explains our TP, innovation
remains a free option: If we adjust our FY12 estimates for the NCE R&D
expense (Rs600m adjusted for tax credit), the EBITDA margin is boosted by
300bps and earnings by 11%. At our target multiple, this implies core business
value (ex-NCE R&D) of Rs 445, 50% upside potential.
Earnings and target price revision
ƒ No change.
Price catalyst
ƒ 12-month price target: Rs465.00 based on a Sum of Parts methodology.
ƒ Catalyst: 1) Malarone Launch (2QFY12) 2) Crofelemer approval and launch
Action and recommendation
ƒ Outlicensing of novel TRPV3 (in 2010) and GBR 500 (2011) to SNY reinforces
our confidence in GNP’s ability to discover and outlicense promising lead
compounds. Valuations look attractive in our view, with GNP trading at a PER
of 12x FY12E earnings, adjusted for exclusivity and NCE value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Glenmark Pharmaceuticals
Is NCE franchise worth (-)ve value?
Event
ƒ We think the market currently is ascribing GNP’s R&D initiative a negative
market cap of ~US$250m (~15% of current market cap). Expense of Rs1bn
goes through the P&L but no value attaches to its innovation pipeline. We do
not imply that de-merging the NCE business is the strategy to pursue, but
such an analysis in our view does aid better understanding.
ƒ We try to evaluate the core business value for Glenmark by excluding the
NCE R&D expense from its P&L. Major peers (SUNP IN, RBXY IN) have demerged the NCE business in the past, resulting in expansion of core business
margins. GNP remains our top pick with a target price of Rs465.
Impact
ƒ SPARC a case study: SPARC has generated ~US$35m in income from
operations vs. total expense of ~US$50m over last five years post de-merger
from SUN and has a market cap of ~ US$400m. SPARC currently spends
~Rs700m on research annually that is not expensed through SUN’s P&L,
contributing to a hypothetical market cap release of ~US$200m for SUN
adjusting for the tax credits. The total valuation boost is ~US$600m for longterm SUN shareholders of SUN. (Please refer to Fig 2, Page 3)
ƒ GNP NCE research largely self funded over the last decade: GNP has
generated ~US$ 200m in out-licensing income from six deals with large
partners to-date (vs. total spend of ~US$125m for the last seven years), which
is unmatched by any of its peers. Because of a few setbacks in the past, we
think the market is not assigning any upside to GNP’s innovation franchise.
While this is counterintuitive to us, even being conservative we believe given the
track record it would be a reasonable assumption that GNP is not destroying
value through its NCE research program.
ƒ Core business ex-NCE R&D expense largely explains our TP, innovation
remains a free option: If we adjust our FY12 estimates for the NCE R&D
expense (Rs600m adjusted for tax credit), the EBITDA margin is boosted by
300bps and earnings by 11%. At our target multiple, this implies core business
value (ex-NCE R&D) of Rs 445, 50% upside potential.
Earnings and target price revision
ƒ No change.
Price catalyst
ƒ 12-month price target: Rs465.00 based on a Sum of Parts methodology.
ƒ Catalyst: 1) Malarone Launch (2QFY12) 2) Crofelemer approval and launch
Action and recommendation
ƒ Outlicensing of novel TRPV3 (in 2010) and GBR 500 (2011) to SNY reinforces
our confidence in GNP’s ability to discover and outlicense promising lead
compounds. Valuations look attractive in our view, with GNP trading at a PER
of 12x FY12E earnings, adjusted for exclusivity and NCE value.
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