More drug licensing deals will play a big part in paring Glenmark's debt

Glenmark Pharmaceuticals’ exclusive licensing arrangement with Hikma for commercialising allergic Rhinitis spray in the US is a step in the right direction for the domestic drug marker. While Glenmark will receive some upfront and milestone payments (which it hasn’t disclosed) till the drug is approved, Hikma will be responsible for the drug’s sales in the US. Such deals are important as the upfront and milestone payments will help Glenmark lower its debt as well as product development expenses, while boosting its future growth prospects.
 

The approval for the said product, however, is anticipated by H2CY20 as the company has received a Complete Response Letter (CRL) from the US FDA. Hence, further developments on this front will be closely watched by the Street, given its implications for Glenmark’s US sales.

The company’s US sales growth has remained subdued due to intense competition for its dermatology range. The US FDA’s Warning Letter for its Baddi facility too has been a dampener. Likewise, high debt has also added to concerns. It is due to these reasons, the stock price has more than halved in less than a year.

To improve profitability, the company is planning to control costs. Yet, analysts feel that with trials for various molecules leading to high R&D spends (at 8 per cent of sales), cost reduction may be difficult till more partnerships/agreements are achieved. Amongst key molecules, Glenmark is conducting trials for GBR 830 (for auto-immune disease), GRC 17536 (in diabetic neuropathy), oncology trials for GBR1302 and GBR 1342, inhaled respiratory compound GRC 39815 and a biosimilar for which the company is said to be in active discussions with potential partners, say analysts. So, developments on this front too will be closely tracked by investors.

Positively, the company’s domestic growth remains on a strong trajectory. Domestic sales in December quarter (Q3) were up by 18 per cent year-on-year propelled by launch of a diabetes product, as compared to 13-15 per cent during the first two quarters of FY20.

Hence, a recovery in US growth and debt reduction could be a booster for the stock. Net debt stood at Rs 3,650 crore at end of Q3. With no major investments, the company expects debt to reduce moving forward.

Even as a thin US drug pipeline and regulatory issues have weighed on Glenmark’s growth in the world’s largest healthcare market, analysts at Emkay Global say that valuation is fairly comfortable at 10 times FY21 estimated earnings, and any palpable signs of debt reduction can drive stock re-rating.