Risk-reward favourable for Glenmark

Growth momentum to continue in FY18 as firm beats peers in Q1, out-licensing deal a trigger

Glenmark Pharmaceuticals’ June quarter performance, announced last week, was in stark contrast to that of larger peers such as Lupin and Dr Reddy’s. Analysts expect the trend to continue and the Glenmark stock to deliver decent returns among pharma companies.

The company’s domestic sales (contributing a fourth to sales) grew 15 per cent year-on-year in contrast to Dr Reddy’s and Lupin’s decline of 10 and 1.8 per cent, respectively, during the quarter. While the company had offered discounts to distributors to maintain growth momentum in the June quarter, its niche product range also helped.

Glenmark’s US revenues (contributing 44 per cent to consolidated sales), too, grew almost 50 per cent year-on-year even if it was driven by exclusivity contribution from cholesterol drug, Zetia generics. Zetia’s sales came at $55 million (up $5 million sequentially), but the base business also grew by $10 million sequentially to $107 million. Management expects the US base business to grow further to $125 million in September quarter (Q2), and new approvals to reflect in Q3 and Q4. Though Zetia exclusivity is behind, analysts at Motilal Oswal Securities expect US sales to inch up in the September quarter, on the back of a ramp up of attention-deficit hyperactivity disorder drug, Strattera generic.  

The impact of the rupee appreciation, however, will be seen in the year ahead on Glenmark’s US revenues. The company, hence, has cut its sales growth guidance to 8-10 per cent from 12-15 per cent due to currency fluctuation. Additionally, there may be some reduction in operating margins, compared with earlier expectations. The overall outlook still remains strong, say analyst. Domestic sales momentum remains strong and the company’s niche dermatology, oncology respiratory-focused range also supports margins, while good growth in other geographies supports Glenmark’s prospects, says Ranveer Singh at Systematix Shares.

Analysts at Reliance Securities expect Glenmark to witness 9 and 11 per cent compound growth in sales and net profit, respectively, over FY17-19 led by new launches in the US, steady growth in India and strong R&D pipeline in the US. They say risk-reward is favourable and current valuation (PE multiple of 16.2x FY18 and 13.5x FY19 EPS) offers an attractive entry point. The stock valuation for comparable peers is at over 20-25 times FY19 earnings, indicating that Glenmark at Rs 689 trades at a yawning discount to peers.

Importantly, the company’s out-licensing deal for its molecules in research pipeline can provide additional triggers. The management, in its call to analysts after results, had highlighted that it was in active discussions for four molecules and expected at least one deal to close by the year end. After results, the company reported positive data in a Phase-2 study of GBR 830, a molecule for the treatment of atopic dermatitis. Analysts at Motilal Oswal Securities had already said positive data would mean high probability of an out-licensing deal. Those at HDFC Securities have said a lucrative out-licensing deal would be a significant trigger for the stock.