Glenmark Pharmaceuticals Cluster: Apple Green Recommendation: Buy Price target: Rs285 Current market price: Rs259
Settlement on Ezetimibe with Merck would be a positive
As per media reports, Glenmark Pharmaceuticals (Glenmark) may reach a settlement with Merck/Schering Plough Pharmaceuticals Llc (Merck) regarding the patent litigation related to the $1.4-billion anti-hypertension drug, Ezetimibe, in the USA.
The slowdown in product approvals from the US Food and Drug Administration (USFDA) and the intensifying generic competition have affected Glenmark?s US generics business. In addition, the pending litigations increase the cost and the risk of launching a product on schedule (ie ahead of the competitors). Thus, we remain sanguine on settlement deals as the same work in favour of both the innovator and the generic company. Since Glenmark is likely to go on a settlement path (as it did with Medicis Pharmaceuticals) we believe that it?s strengthening its base in the USA for its generics business. Further, we remain confident of the potential of the niche product strategy adopted by Glenmark in the USA in relation to both the scaled-up potential of its core generic and branded formulation businesses, and its ability to monetise and extract value out of its research and development (R&D) assets.
We believe that the risk-reward ratio is favourable for the stock at the current levels, given the improving macro-economic outlook, which may see growth rebound in the emerging markets and improve the working capital cycle. The balance sheet concerns are partially taken care of with debt reduction through a qualified institutional placement and the proposed initial public offering of Glenmark Generics. The conclusion of an outlicencing deal would reaffirm the strength of its NCE pipeline and could thus spring a positive surprise.
In view of the expectations of a healthy business performance and the favourable risk-reward ratio, we maintain our Buy recommendation on the stock with a price target of Rs285 (14x FY2011E core earnings for the base business plus Rs43 per share for the R&D pipeline). At the current market price of Rs259, the stock trades at 15.2x FY2011E earnings.
SECTOR UPDATE
Tea
Production shortfall continues
Key points
We have had a bullish stance on tea plantation companies over the past one-year (see sector update ?Brewing hot? dated August 20, 2009) on a strong belief that these companies would gain from production shortfall in domestic as well as international markets. The theme has played out perfectly with the companies like Mcleod Russel and Jayshree Tea reporting hefty profit growth and sharp run-up in their stock price. Mcleod Russel?s stock has gained by 63.3% since our recommendation of trading Buy on August 20, 2009, while Jayshree Tea?s scrip has gained by 59.4% over the same period.
While the fundamentals of the tea plantation sector still remain strong on no signs of easing of production shortfall, we take a stock of the prevailing situation in the sector in this report.
CY2009 is expected to end with a production shortfall of 5-10 million kg in the domestic market and 75-80 million kg in international markets. Further, tea prices are expected to remain firm in the domestic and international markets in the coming months on no signs of easing of the deficit situation globally.
Thus, on high domestic and export realisation, we expect tea plantation companies such as Mcleod Russel and Jayshree Tea to continue to maintain higher profitability in the coming quarters. With stock prices of these two companies having corrected by ~10-15% from their recent highs, the current weakness in tea stocks and overall sedate market environment offers an entry point to those investors who have completely missed the rally in tea stocks earlier.
No comments:
Post a Comment