Stock Fundamentals

Glenmark Pharmaceuticals: Back on its feet

Dhuraivel Gunasekaran | Updated on April 28, 2019 Published on April 28, 2019

Despite corrections in 2017, the stock has bounced back over the last one year

Select pharma companies with a strong domestic presence — apart from a growing US business — and a focus on complex generics and low-competition specialities are likely to deliver better performance in the medium to long run.

Glenmark Pharmaceuticals is one such company. Its healthy geographical mix, growing US pipeline — especially in select specialities and complex generics — and strong position in high-growth therapeutic areas, including dermatology, respiratory and cardiology, are positives.

The stock of Glenmark Pharma corrected significantly in 2017 — it had halved in this period — due to acute pricing pressure in key products and also lower-than-expected sales from its blockbuster generic drug, Zetia, in the US market. Concerns over narrowing margins due to higher R&D spends and no meaningful launches also impacted the market sentiment. However, the stock has bounced back in the last one year — rose 27 per cent from its 52-week low — thanks to improving financials due to increased market share from recently-launched drugs in the US and traction in the domestic business.

While near-term risks to earnings persist, Glenmark’s growth prospects look robust over the long run.

At the current price of ₹636, the stock trades at about 15 times its estimated 2020-21 earnings. This PE multiple is lower than the valuations that large-cap peers such as Lupin, Sun Pharmaceutical Industries, Dr Reddy’s Laboratories and Cipla enjoy (18-20 times), but higher than Aurobindo Pharma’s 14 times.

In the nine months ended 2018-19, Glenmark’s consolidated revenue grew 7 per cent (year-on-year) to ₹7,179 crore and the net profit was up 17 per cent to ₹763 crore. The company’s operating margin stood at 22 per cent during the period, a significant improvement over the previous period.



Prudent geographical mix

The product portfolio of Glenmark caters to the oncology, dermatology and respiratory therapeutic segments. The US and India are the primary markets for the company, constituting 32 and 30 per cent of total sales respectively (as of December 2018). It also generates sizeable business form Europe and Latin America.

Glenmark’s US business has been contracting in the past few years due to price erosion in its base business caused by channel consolidation and increased competition. Glenmark’s US formulations business is likely to remain under pressure in the near term due to the tough pricing environment and lack of meaningful high-value launches. The management expects price erosion in its base business to be 8-10 per cent for FY20.

The company’s US formulations business is expected to grow in the medium to long term on the back of new launches, including first-to-file (FTF) opportunities. As of December 2018, the company’s US portfolio consists of 148 generic products. It has 54 applications pending in various stages of the approval process with the drug regulator USFDA, of which 28 are Paragraph IV applications (exclusivity) in key therapies — dermatology, oncology and respiratory. With niche generic launches of drugs such as Welchol, Tacrolimus, Vagifem and Renagel, the business volume in the US market is expected to increase in the coming quarters.

The company has guided for 15-20 ANDA (new generic drugs) filings in FY20 with 12-15 launches in the US (4-5 meaningful launches). On the speciality side, the company acquired seven branded dermatology products from Exeltis USA in the third quarter of FY19.

The firm’s domestic formulation business is expected to maintain healthy double-digit growth. Glenmark holds a leading position in dermatology and is improving its presence in the respiratory, CVS (cardiovascular system), anti-infectives and even anti-diabetics segments. The company has also forayed into the consumer health segment focussing on Rx-OTC switch products (transfer of proven prescription drugs (Rx) to non-prescription, OTC (over-the-counter) status).

The company is also gradually gaining scale in emerging markets such as Brazil, Mexico, Russia and Eastern European countries. It is also looking to launch differentiated products with limited competition in these markets.

R&D-driven business model

Glenmark is a leading player in the discovery of new molecules — both NCEs (new chemical entities) and NBEs (new biological entities). It has several molecules in various stages of clinical development, and is focussed on oncology, immunology and pain.

The company recently spun off its innovation business into a new company in the US. The management believes this move will enhance focus on the innovation business and help accelerate the pipeline towards commercialisation. The business would be better off as a US company as it would help benchmarking with biotech companies in the US.

The management also indicated that value-unlocking opportunities through fund-raising or strategic tie-ups in the future will also help the company to lower its capital allocation to such high-cost R&D businesses. However, these are expected to pay off only in the medium to long run.

Debt reduction

Glenmark has piled up huge debt, given its R&D-driven business model. The company’s net debt stood at ₹3,430 crore in December 2018. But the net debt-to-equity ratio is reasonable at around 0.6 times. The company has taken steps to reduce the debt by divestment of stakes in some of its non-core assets such as the API (active pharmaceutical ingredient) business and the orthopaedic India portfolio.

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