Strong outlook, attractive valuations driving Glenmark's bounce back

US growth remains crucial for earnings upgrades, while licensing deals can help reduce both, costs and debt

Shares of Glenmark Pharmaceuticals, which had fallen by almost half from their January highs, have seen a sharp rebound in the past few weeks. The stock — up more that 29 per cent in two sessions — has gained 70 per cent in three weeks. While the rally in pharma stocks is supporting this rebound, analysts say a strong growth outlook for the domestic business is helping, even as there are concerns over Glenmark’s US prospects and high debt.

Glenmark stock’s underperformance to peers till March had been attributed to high debt. 

Analysts at CLSA had said the worst returns have been from leveraged companies like Aurobindo Pharma and Glenmark. However, after steep correction and with domestic growth on a strong footing, valuations turned attractive. Domestic sales in the October-December quarter (third quarter) were up by 18 per cent year-on-year (YoY), propelled by the launch of a diabetes product, compared to 13-15 per cent growth during the first two quarters of 2019-20. Edelweiss expects Glenmark’s domestic sales to grow by 18 per cent YoY in the March quarter, despite disruption in logistics.

Not surprising, analysts at JPMorgan recently said that while leverage will likely remain a concern in the current environment, Glenmark presents a compelling value opportunity with the recent correction.

 

 

While stock valuations remain reasonable (price-to-earnings of 13.4x its 2020-21 estimates) and the sentiment towards the pharma sector improves, any significant upside in Glenmark would require its US growth prospects to gather pace.  The company, despite strong domestic growth, is expected to report flattish fourth-quarter performance, as analysts at Nirmal Bang Institutional Equities say the US has not seen any major launch during the quarter. 

Even the benefits of an appreciation in the euro will be offset by a depreciation in the EM currencies. Hence, a pick-up in US growth is important for improvement in earnings.

Though Glenmark had recently signed an exclusive licensing arrangement with Hikma Pharmaceuticals for commercialising decongestant nasal spray Rhinitis in the US, product approval is expected in the second half of this year and will be watched closely by investors. Further, research and development costs, too, remain high, with the company investing in novel chemical entities. Trials for treatment of autoimmune disease, diabetic neuropathy, oncology, inhaled respiratory compound, and biosimilar molecule will also take up some resources.

The recent sale of VWash, a female hygiene brand, isn’t going to significantly reduce its over Rs 3,500-crore net debt. Hence, more licensing agreements could provide fresh triggers, as they can help reduce development costs, garner milestone payments, and lower debt.