Glenmark: Street awaiting fresh triggers

New approvals to launch drugs in US, rebound in growth, reduction in debt are key for upgrades

After Glenmark reported a much better than expected operating performance for December quarter, its stock price too firmed up. However, it has since given up most of the gains. Experts say, for market sentiment to improve further, approvals to launch new drugs in the US, rebound in domestic growth and reduction in debt are crucial.

Glenmark’s strong US performance in December quarter was led by launch of cholesterol reducing drug Zetia on exclusivity, which also led to higher than estimated margin. In fact, there are only a few pharma companies which have beaten street expectations on profitability in December quarter; peers such as Dr Reddy’s, Sun Pharma, etc disappointed due to competitive pressure in US base business.

On the other hand, Glenmark has seen revenues, EBITDA and net profit grow 41 per cent, 106 per cent and 143 per cent year-on-year, respectively as US sales doubled in December quarter with the geography contributing 48 per cent to revenue. The trend is likely to continue driven by exclusivity sales of Zetia till competition sets in by June quarter end. However, thereafter, as the high base in US business post Zetia launch sets in, timely approval and launch of other new products are necessary for US sales growth momentum to continue.

In FY17, the company has seen a good approval run rate and a good pipeline. Currently, niche launches pending approvals include Zyvox (anti-bacterial drug), Welchol (cholesterol drug) and, Renvela/ Renagel (kidney treatment drugs). Analysts at HDFC Securities have built in about 15 per cent growth (on high base of FY17), on assumption of good contribution from several derma launches over FY18-19. This is visibly lower than recent trends.

What’s more, domestic sales, after growing in high double-digits in past quarters, grew by just 6.25 per cent in December quarter. Accounting for a fifth of revenue, a rebound in growth is also essential to lift overall earnings.

Expectations of debt reduction post launch of Zetia also haven’t materialised in December quarter; net debt was flat sequentially. Glenmark has said that debt reduction will start from March 2017 quarter, so the street will be keeping an eye on the progress.

Thus, even as analysts remain positive on Glenmark, they are tracking events before making changes to their earnings estimates. Analysts at HDFC Securities have a neutral rating with price objective of Rs 960 for now. Those at Elara Capital, who have a target price of Rs 1,041, have upgraded FY18 earnings by 3.4 per cent to factor in higher Zetia generic sales but have reduced FY19 earnings by 6 per cent on higher other expenses. Analysts at Edelweiss have a much lower target price of Rs 820, but say that any out-licensing deals over next 12-18 months could lend some upside.