New launches near-term triggers for Glenmark

Risk-reward remains favourable as current tepid growth is factored in

Glenmark may have reported a benign performance for the September quarter (Q2), but it was anticipated, as the six months’ exclusivity of Zetia generic, the cholesterol-control drug, ended in the June quarter. With revenues growing at 1.5 per cent in Q2, operating and net profits declined 13.5 per cent and 4.2 per cent, respectively, compared to the year-ago period. But the worst hit seems to be the stock price.

The company’s US sales (about a third of its revenues) fell two per cent year-on-year (y-o-y) and 30 per cent sequentially, in constant currency terms, to $113 million. India, which contributed about a third of sales, grew five per cent y-o-y (eight per cent adjusted for goods and services tax impact). The domestic market, which had seen high double-digit growth, remained impacted in the first half due to goods and services tax (GST)-led stock adjustments by traders. Others such as active pharma ingredients and Europe businesses grew seven and 49 per cent y-o-y, respectively, but didn’t help much, given their contribution of just 7-10 per cent to sales. 

With the decline in US sales, earnings before interest, taxes, depreciation, and amortisation (Ebitda) was bound to decline, but was still better than estimates. Elara Capital, for instance, had anticipated an Ebitda of Rs 340 crore, while the actual numbers came in at Rs 388 crore. During Q2, Glenmark witnessed 13 per cent price erosion in the US compared to 10-12 per cent earlier, analysts said. 

But, a strong product pipeline should take care of price erosion worries, going ahead. Glenmark has 61 abbreviated new drug applications pending for approval and will be filing about one-two more every quarter. With this, about 10-12 new drug launches annually should support the US sales, Ranbir Singh of Systematix Shares said. Also, some products approvals came late in the quarter. These would reflect in the December quarter sales. Hence, from about 300-basis point margin decline in Q2 to 17 per cent, analysts at Edelweiss see a rebound going forward, as business picks up. The company has guided for 21-22 per cent margins in FY18. 

Revenue growth guidance has been cut to 6-8 per cent from 12-15 per cent six months ago. This may still be tough to achieve given last year’s high base, which saw the launch of the Zetia generic. Thus, mega approvals of generics such as diabetes drug Welchol will be crucial going into FY19. 

A major trigger could be the out-licencing deal for dermatology treatment molecule GBR 830, which has seen positive trials data. Analysts at Edelweiss, too, said the trigger is outsourcing of GBR 830 molecule, while Singh, too, remains watchful. Any milestone payment can provide upside, while the downside for the stock is limited, Singh said. At 12x FY19 estimated earnings, it is at a significant discount to peers, he added. 

Despite the fall in Q2 profits, the stock corrected only by four per cent in two trading sessions to Rs 622.80. This is not far from its three-year lows, suggesting that the Street may be factoring in the concerns.