>GLENMARK PHARMACEUTICALS (ICICI DIRECT)

Down but not out…
Glenmark Pharma (GPL) is one of the best twin plays in the Indian pharma space. Monetisation of the discovery pipeline has been one of the key drivers of valuation in the past but lack of visibility on it has kept valuations under pressure. We believe current valuations only discount the generics business, as things are getting better on the base business front. On the DDR front, GPL has a robust discovery pipeline, monetisation of which may fetch significant upsides. We initiate coverage on GPL with an OUTPERFORMER rating and a target price of Rs 288.

■ Specialty business appears major growth driver while India holds the key The specialty business will likely lead GPL’s base business growth in the short-term with India remaining the key to specialty business growth. We estimate the specialty business (ex-India) will grow at ~17% while India will grow at ~18% CAGR over FY09-11E.

■ Things appear to be getting better now
Given the smart specialty business QoQ growth in Q1FY10, we believe the worst is behind us and visibility is getting better. Better credit conditions and stable currencies are driving the performance.

■ Speedy approval holds the key in US markets Speedy approval of key ANDAs will likely be the mainstay for US revenue growth. GPL has a robust pipeline of 45 ANDAs pending approval, most of which are for differentiated and controlled substances that generate better margins and have longer lifecycles.

■ Out-licensing from strong discovery R&D pipeline cannot be ruled out GPL earned ~$110 mn (highest among peers) from discovery R&D till date and has a strong pipeline of 13 molecules, 8 of which are in clinics. Given such a strong pipeline, licensing deals can’t be ruled out.

Valuations
We believe lower visibility on R&D income kept GPL under pressure. We believe although the global appetite for drug-compound licensing is still low, given GPL’s strong R&D pipeline, monetisation of its key drugcompound cannot be ruled out. On the base business, things are getting better. At 13.3x FY11E EPS, the current valuation discounts the generics business only, which is at a discount to its peers even after considering GPL’s high leverage. We remain confident on GPL’s DDR capability and initiate coverage with an OUTPERFORMER rating. We value GPL at Rs 288, 16x FY11E EPS. We have not attributed any value to the DDR pipeline.

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