Glenmark bets big on innovation

The company expects R&D costs to be 11% of sales, plans nine drug applications and biologic entities

Even as the Street’s confidence in Glenmark Pharmaceuticals remains strong, the company has unveiled growth plans for the next 10 years. This stresses innovation, complex generics and the speciality segment.
 
Dermatology has been its core area of competence and it has named the oncology and respiratory segments as additional areas of focus. Glenmark believes about 30 per cent of its overall revenue by 2025 will be from the speciality and innovative segments.
 
All these are steps in the right direction. Basic generics are already seeing competitive pressure in the US and companies are struggling to maintain their growth momentum. It is here that differentiated and complex products, as well as innovation, will prove helpful.
 
In this regard, increased filings in niche segments bode well. The company aims to raise he share of complex filings (topicals, oncology, injectables, control substances and respiratory) from 39 per cent in FY16 to 70 per cent by FY21. It also plans another nine new drug applications and biologic entities over the 10 years starting from 2019.
 
All this will mean increased spending and costs in research and development (R&D). It expects R&D costs to be 11 per cent of sales (excluding licensing income). It also expects to strike out-licensing deals for its innovative products pipeline every 12-18 months, allowing it to generate additional cash, to be put into R&D. Thus, successful implementation of the R&D plans and the ability to monetise its innovative pipeline are needed to achieve the goals.
 
The Street is aware of this. Analysts at Nomura say they like the company’s attempt to focus on differentiated products and innovation but this (R&D) entails higher risk and a drag on cash flows in the near term. While the move is in the right direction and can help Glenmark step into the league of pharma majors, investors will have to keep in mind that the benefits will accrue over a period of time. The company has seen compounded annual revenue growth (CAGR) of 19 per cent over FY12-16 (19-21 per cent for its branded, generics and Active Pharma Ingredient portfolio). With the management’s annual sales growth forecast of 15-20 per cent over the next five years, they will have to adjust to the slightly lower growth (if it comes at the lower end of the expectation).
 
India, the US and APIs will contribute at least 80 per cent to revenue. The good part is that the company expects profitability (margins) to increase from 20 per cent in FY16 to 22-23 per cent in 2020 and 25 per cent in 2025, which should mean strong earnings growth.
 
Analysts say achieving a 22-23 per cent margin by FY18 is positive. The company had reported 19.8 per cent operating profit margin in the first half of FY17. The second half is likely to be better, with the launch of anti-cholesterol drug Zetia on an exclusivity basis. Zetia is likely to contribute $200-250 million during the exclusivity period and help the company reduce debt (net debt of 0.5 times, compared to 0.8 times before the launch).
 
Other opportunities such as cholesterol lowering drug Welchol and a few more, along with the dermatology range, are keeping analysts upbeat. Those at IIFL expect the company’s US revenue (excluding Zetia) to grow 17 per cent over FY16-18. The India business has already seen better-than-industry growth and the momentum is likely to continue. Analysts’ one-year target prices range from Rs 1,020 to 1,154, a range of eight to 22 per cent higher than the present stock price of Rs 942.