At a time when the bellwether indices Sensex and Nifty are scaling new highs, the pharma sector, which was believed to be recession-proof and the market darling until a year back, is down in the dumps.

While the Sensex has gained over 16 per cent in the past year, the BSE Healthcare index has shed nearly 10 per cent during the same period. In the past year, pharma stocks listed on the bourses have been on a downward spiral, plagued by slowdown in growth from the key market — the US. Regulatory woes due to stringent action by the US drug regulator FDA (Food and Drug Administration), intense competition in the US and subsequent price correction have had an adverse impact on the revenue from this geography.

While the concerns in the case of some pharma companies may be temporary, it is not so with all. For instance, the stock of Glenmark Pharma has shed over 25 per cent in the past month following weak performance in the March 2017 quarter.

The steep fall has certainly made the stock attractive from a valuation perspective. At the current price, the stock trades at about 14 times its estimated 2018-19 estimated earnings, compared with the 16-18 times it traded at in the past three years.

While the correction presents an interesting buying opportunity, concerns exist. Investors can continue to hold the stock given the steep fall in the stock price and wait for further correction to buy into the stock.

One, the company’s performance in the US has been unimpressive in the March 2017 quarter. In December 2016, Glenmark commenced sale of the first generic version of cholesterol lowering drug Zetia as part of the agreement with its innovator Par Pharmaceuticals.

Glenmark’s sales of generic Zetia were below expectation and this led to a sequential (versus December 2016 quarter) decline in this market. The company has also reduced its revenue guidance from this product to under $200 million for the six-month period between December 2016 and June 2017.

The company’s revenue from the US market slipped to ₹1,000 crore in the March quarter, implying a sequential decline of 19 per cent. Besides lower sales of generic Zetia, price erosion on its existing products due to competition, to the tune of 15 per cent on an average, also led to a sharp slide in the US revenue.

The other reason for the weakness in this market has been the delay in new product approvals. In the last two quarters, Glenmark had received approval for just one product.

However, the company is expecting the pace of new approvals to pick up in the current year and is anticipating launch of at least 3-4 products which will have limited competition in the current fiscal. This includes products such as Colesevelam, Sevelamer and Azelaic acid.

Investing in research

Even as the performance in its key market US has been under pressure, the company is continuing to invest in research and development, particularly in novel research.

In 2017-18, the company has spent 11.9 per cent of its revenue on research. The spend was much higher at 14.8 per cent for the March 2017 quarter. During the year, Glenmark filed 20 Abrreviated New Drug Applications (ANDA) with the FDA of which nine were dermatological products, three were hormonal products, one was oncology injectable and seven were oral solids, majority of which were complex or niche products. A large part of the research spend has also been on the two innovative chemical and five biologic products that are in various stages of development.

Glenmark is hoping to out-license 3-4 of these novel molecules in the current year, so as to reduce the burden on the company’s cash flow. This will be critical for the company, given the slow growth in its key market, the US.

Two, the company’s debt position has not improved in 2016-17, much against expectation. The poor show in the US due to Zetia’s under-performance and weak base business had a negative rub-off on the company’s debt position.

This is because the incremental cash flow from Zetia, which was expected to be used to retire its long-term debt, was instead used for cash write-offs in the Venezuela market which was struggling due to restrictions imposed on currency conversion by the local Government.

As a result, the company continues to have substantial debt on its books. As of March 2017, Glenmark has net debt of ₹3,667 crore, translating into net debt to equity of over 0.7 times. The management does not expect any material change in its net debt position in the current fiscal. The research spend is also expected to remain around 12 per cent of its total revenue.

The management has pruned its revenue guidance for the current fiscal to 12-15 per cent from the earlier 15-20 per cent in the light of lower generic Zetia sales and price erosion in the US.

However, Glenmark is banking on improved performance in India in the current quarter after a weak show in the March 2017 quarter. The company took a deliberate decision to keep channel inventory low due to changes in the tax structure, post migration to the Goods and Services Tax (GST) regime. The company is also expecting a pick-up in performance in the European market in the current fiscal.

Glenmark’s facility at Goa and Baddi (Himachal Pradesh) were inspected by the US FDA over the last four months. While there were no observations at Baddi, there have been four observations in Form 483 for the Goa facility. The management, however, believes that these are minor and has responded to the same. There aren’t any pending issues with the regulator.

comment COMMENT NOW