Glenmark Pharma: Recent approvals to help scale up FY18 growth

Upfront payments from out licensing deals could be the other trigger

Glenmark Pharmaceuticals has gained about 7 per cent since its lows this month on brokerage upgrades, which highlight the upside from US product launches and potential of out licensing deals. Prior to the recent upgrades, the stock was under pressure, given price erosion estimates to the tune of 10-15 per cent in FY18 and falling contribution from generic version of Zetia, a drug used in bringing down cholesterol levels.

The six-month sales under exclusivity for this drug came to an end in the June quarter and generated about $175 million in revenues. In fact, one of the reasons for the company’s overall revenues growing at 20 per cent year on year and operating profit rising 42 per cent in FY17 was due to the sales of Zetia.

Barring Zetia and India business, performance in the June quarter was nothing to write home about. What had compounded matters was the currency depreciation in Latin American market and discontinuing sales in Venezuela, resulting in a 31 per cent decline in revenues in that geography. At 10 per cent of overall revenues, Latin America was the third largest revenue contributor for Glenmark in FY16. Its share, however, fell to half that number in FY17.

The slew of recent approvals as well as out licensing deals, is expected to boost the company’s revenues, according to analysts at Nomura. The key opportunities in the current fiscal are Nitrostat (controls chest pain), Welchol (lowers cholesterol), Volatren (anti-inflammatory) and Emend (nausea). These launches, according to them, can add an incremental $50 million to the company’s revenues in FY19 and with an earnings per share impact of Rs 9 per share. As of June 2017, the company has 66 abbreviated new drug applications pending with the US FDA with total sales of $32 billion. The other trigger is out licensing, which can generate upfront payments to the tune of $100 million. 

On the India revenue front, the company has been outperforming the overall pharma market sales with a growth of 10.5 per cent for the trailing twelve months ended August led by new product introductions as compared to the Indian pharma market growth of 7.3 per cent. New product introduction accounted for nearly 7 per cent of the growth for the company.  In August, the company grew at double the rate of overall sector growth and the trend of higher growth led by new products is expected to continue going ahead. 

At the current price, the stock is trading at 16 times its FY19 earnings estimate and is at a discount to peers. However, given higher debt (Rs 4,500 crore, net debt to equity at 0.8 times) relative to the sector and pressure on cash flows, investors should await traction in the US revenues before considering investment in the stock.