US price erosion: Pressure on Glenmark's business to continue

Company expects 10-12 per cent price erosion to continue in America

Glenmark is exploring if it should spin off its consumer health and Active Pharmaceutical Ingredients (API) businesses, the drug maker indicated after its March quarter results. The consumer health business, with sales of Rs 1.5 billion in FY18, is about six per cent of domestic sales and growing at a robust rate.

“Glenmark has appointed a committee to assess the feasibility of housing the API and consumer care businesses into separate subsidiaries. The rationale for evaluating this is to give better focus to these businesses, which we believe have good growth potential, and for a better structure and financial efficiencies for the company,” Glenmark said in an e-mail response to a query.

The move comes when the US business is underperforming. This was the main reason for the 17.5 per cent decline in net profit over the year-before quarter, to Rs 1.5 billion. Sales in the US, a third of overall revenue, fell 30 per cent over the year-ago period, due to price erosion and a high base. The company expects 10-12 per cent price erosion to continue there.

This and the weak March quarter show led to the stock hitting a 52-week low on Wednesday. The company is, however, confident of achieving 10-15 per cent revenue growth in 2018-19, on the back of  product launches, beside large opportunities in the API and consumer health businesses. “Although pricing pressure in the US is likely to persist, we are positive about growth (there), excluding generic Zetia (cholesterol drug), as we recently got a couple of interesting product approvals and expect to get 10-12 approvals in FY19, including some differentiated and limited competition products. This will help offset the price erosion to some extent,” the company added.

The Street, however, is sceptical. It will await indications for achieving this, as there is no significant growth visibility in the US business, given the pricing pressures. Recent approvals for generics of cholesterol treatment drug Welchol and immunosuppressant Tacrolimus are a positive and analysts expect additional contribution of $10-12 million per quarter. Even so, they believe these will only just be able to take care of price erosion in the base business. 

Glenmark had $108.8 million in US sales during the March quarter.

Ranvir Singh at Systematix Shares is currently factoring in growth of less than 10 per cent for FY19; he awaits more triggers for any revising of their estimates. What could improve the revenue is an out-licensing deal. 

The company has completed a Phase 2A study for its leading dermatology asset, GBR 830. Clinical studies for the company’s oncology assets, GBR 1302 and GBR 1342, are progressing well. Any out-licencing income thereby should boost FY19 revenue and needs to be watched for.

The API business is largely export-led and grew 8.5 per cent to Rs 8.8 billion in FY18. The US Food and Drug Administration’s clearance to its API and intermediate manufacturing facility at Mohol (Maharashtra) and the Chinese government's regulatory actions on units in that country are seen as positive triggers. Glenmark said its net debt had reduced by Rs 2.63 billion in FY 18, in line with earlier forecasts. 

It expects to reduce debt further through operating cash flow and out-licensing deals for novel drugs.