Recent approvals to help Glenmark Pharma scale up FY18 growth

The Glenmark Pharmaceuticals stock has gained over five per cent since its lows this month on brokerage upgrades, which highlight the upside from product launches in the US and the potential of out-licensing deals.

Prior to the upgrades, the stock was under pressure, given the expectations of a drug price erosion of 10-15 per cent in FY18 and a falling contribution from the generic version of Zetia, a drug used to reduce cholesterol levels.

The six-month sales under exclusivity for this drug ended in the June quarter and generated $175-million revenue. 

Sales of Zetia were one of the reasons for overall revenue growing at 20 per cent year-on-year (y-o-y) and operating profit rising 42 per cent in FY17.

Barring Zetia and the India business, the June quarter performance was nothing to write home about. What had compounded matters was the currency depreciation in the Latin American market and discontinuing sales in Venezuela, resulting in a 31 per cent decline in revenue in that geography. 

At 10 per cent of overall top line, Latin America was the third-largest revenue contributor for Glenmark in FY16. Its share, however, halved during FY17.

A slew of recent approvals and the out-licensing deals are expected to boost its revenue, according to analysts at Nomura. The key opportunities in the current financial year 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 Glenmark’s revenue in FY19 and Rs 9 per share to earnings. 

As of June 2017, the company has 66 Abbreviated New Drug Applications (ANDAs) pending with the US Food and Drug Administration (US FDA), with a total market size of $32 billion. The other trigger is out-licensing, which can generate upfront payments worth $100 million.

On the India revenue front, Glenmark has been outperforming the pharma market sales (up 7.3 per cent), with a growth of 10.5 per cent for the trailing 12 months ended August, led by new product introductions. 

New product introductions accounted for seven per cent of the company’s growth. In August, the company grew at double the rate of overall sector’s growth. The trend of higher growth, led by new products, is expected to continue.

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 the pressure on cash flows, investors should await traction in the US revenue before considering the stock.