The Hindu Business Line : Glenmark Pharma: Buy

FRESH investments can be considered in theGlenmark Pharmaceuticals stock. Since our previous `buy' recommendation about a year ago (Business Line, July 6, 2003), when the stock was trading at Rs 63 (adjusted for the stock split), it has been one of the better performers in the mid-cap space.

The outlook on the stock remains positive on the back of continued strong showing in the domestic market, improving visibility on its plans to tap the lucrative American market, and the progress made in its research and development efforts.

Glenmark's earnings card in the just-ended quarter was driven by strong performance across the markets it operates in: Domestic formulations, bulk drugs and co-marketing, and exports.

A significant ramp up has been seen in the last two segments, with revenues more than trebling, albeit on a low base. The domestic formulations market grew 18 per cent, aided by the launch of four products.

Consequent to the change in the sales mix, enhanced contribution of exports and the supply of bulk drugs in the domestic market, operating profit margin improved by about 250 basis points.

Taking a different route

Unlike the big boys of the pharma firmament such as Ranbaxy and Dr Reddy's, which have chosen to enter the US market directly, Glenmark consciously chose a different tack. It used partnerships as the pivot of its US market strategy.

The partnership deal with KV Pharmaceuticals, entered into in the early part of this year, is a case in point. The deal, which involves the developing and licensing of eight products, will entail Glenmark receiving an upfront payment, milestone payments and royalty from sales.

The current fiscal and the next should see Glenmark receiving payments as part of the deal; the partnership also expects to launch its first product in the next few months, subsequent to which royalties to Glenmark would kick in.

In a business in which the earnings stream is either highly volatile or tends to gets lumpy, such a deal provides stability to revenues. Outside of this partnership, Glenmark would also be filing abbreviated new drug applications (ANDAs) through its alliance with Lannett, apart from filing ANDAs independently.

As this developed market foray takes off, expenses could also head north as Glenmark incurs costs associated with the filing procedures. This could mean a blip on operating margins

However, once the launch takes place, margins should also be back on track and, as export markets start accounting for a greater percentage of the revenue pie, might also exhibit an upward bias.

Progress on research

Glenmark continues to make strides in its attempt to be a research-driven pharma outfit.

Its molecule for the treatment of asthma is expected to go into clinical trials with Quintiles of the UK shortly; developments on this score could act as a positive trigger for the stock. Likewise, positive developments on Glenmark's molecule, addressing the diabetes/obesity space, could have a significant bearing on the stock movement.

Outlicensing opportunities that the molecule could throw up could add impetus to Glenmark's performance.

The company's product mix is such that the last three quarters of the fiscal contribute the most to its earnings. For instance, in both FY03 and FY04, first quarter earnings accounted for only 10 per cent of the earnings for the entire year.

Even if one reckons that earnings would grow by about 30 per cent on a year-on-year basis, the stock is available at price-earnings multiple of about 15 times its FY05 estimated earnings, which appears reasonable given the business prospects.

Investors should actively consider booking profits once their targeted rate of return is achieved, as opposed to pursuing a buy-and-hold strategy.

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