Glenmark: Revenue growth in recovery mode

With approvals picking up in the US, sales growth and margins will improve

Glenmark Pharma’s revenue growth estimate of 18-20 per cent, with a 200-basis point margin expansion (excluding licensing income) for FY16 seems to have been received well by the Street. After opening below its Monday closing price (a reaction to disappointment over the company’s earnings), the stock gained ground on Tuesday, closing at Rs 861.

For the company, growth in revenue is expected to be driven by its US operations, likely to grow about 20 per cent. Growth of only 7.1 per cent in the US market in the March quarter, as well as one-offs and cross-currency headwinds, had led to lower than expected numbers.

Analysts at HSBC believe the FY16 estimate is realistic; they maintain a ‘buy’ rating on the stock, with a revised target price of Rs 925. Other brokerage firms such as Reliance Securities, Antique Stock Broking, IDFC Securities and Prabhudas Lilladher have higher target prices — up to Rs 1,186.

The company posted almost flat (0.63 per cent) growth in US sales, which contributed about 30 per cent to its overall sales in FY15. This was due to slower approvals for new launches, even as its existing portfolio faced more competition. With six drug approvals in the past three months and more approvals expected, growth in FY16 is expected to be higher. Recent launches will have a substantial impact only in the second quarter of FY16, says Hitesh Mahida of Antique Stock Broking. Glenmark is expected to announce launches in specialty segments, particularly dermatology, which could help further, says Mahida.

Glenmark filed 18 abbreviated new drug applications in FY15. Of the 95 product launches in the US, 70 are pending approvals (including 33 Para IV). Analysts at Reliance Securities foresee a smart recovery (26 per cent compounded annual growth over FY15-17) in the US, led by a pick-up in approvals and launches. The potential launches of dermatology product Azelaic acid (size $95 million), ortho ($450 million), cholesterol-lowering drug Welchol ($420 million) and Zetia ($1.7 billion) paint a healthy outlook in the US in the medium term, say analysts. The Company will launch Zetia and Azelaic acid on an exclusivity basis and analysts expect at least one of the two to be launched by December 2016. Besides, the company’s focus on complex injectables (six pending approvals), oral-contraceptives (13) and dermatology (eight) is a positive.

Glenmark’s India sales (about 25 per cent of overall sales) growth of 15 per cent in the March quarter and about 16 per cent in FY15 is ahead of the sector’s growth of 12 per cent. Domestic sales will continue to grow 17-20 per cent, despite issues surrounding diabetes drug Sitagliptin (a legal dispute with Merck), as the management believes it has a strategy in place to increase diabetes franchises in India, says Mahida.

The company is growing well in Europe and Latin America (combined contribution about 24 per cent to revenue). In the March quarter, these growth figures stood at 26 per cent and 75 per cent, respectively. Rest-of-the-world sales (12-13 per cent of revenue), however, fell — 36 per cent in the March quarter and 18 per cent in FY15. Primarily, this was because Russia was hit by a weak currency and subdued business environment. Nevertheless, new products have been lined up for this market, too.

Analysts at IDFC Securities say with multiple data points expected from six ‘first in class’ clinical candidates through the next 18 months, Glenmark could generate significant licensing revenue. Successful progression of even one of these could put it in a higher growth orbit in the medium term. The company plans to utilise proceeds from the Temasek stake sale ($152 million) to reduce debt. The company’s net debt stands at $484 million.

Mahida expects further improvement on this front, with Zetia’s launch-on-exclusivity, which is expected to lead to cash flow of about $150 million.