The Hindu Business Line : Glenmark Pharma: Hold

The stock has been among the best performers in the mid-cap space over the past couple of years and with a market cap in excess of Rs 3,000 crore now, may well lay claim to large-cap status.

Though we have been bullish on the stock's prospects at far lower price levels, stiff valuations and the uncertainty associated with a molecule in the clinical trials phase are the two principal factors that underpin our current stance on the stock.

The NCE thrust

What really propelled Glenmark into the limelight was its announcement in September last year that it was out-licensing its anti-asthma molecule to the US-based Forest Labs for the American market.

The deal involved a cumulative inflow of $190 million (Rs 840 crore) to be paid out in stages, depending on the molecule clearing certain milestones in trials; Glenmark has received $20 million (Rs 88 crore) last fiscal and looks set to receive a tranche this year, as the molecule has cleared Phase I trials and is set to enter Phase II.

As per the terms of the deal, Glenmark would receive royalties once commercial sales of the molecule commences, apart from supplying the active pharmaceutical ingredient for the molecule to Forest.

Glenmark has also out-licensed the same molecule to Teijin Pharma of Japan for a consideration of $53 million (Rs 233 crore) to address the Japanese market.

Glenmark has received $6 million (Rs 26 crore) in the first quarter of this fiscal as a milestone payment.

With the molecule having successfully cleared Phase I trials, Glenmark has indicated that it would seek a partner to address the European market.

As the opportunity in Europe would be significantly higher than in Japan, we expect Glenmark to pull in between $80-100 million (Rs 350-440 crore) once it finalises a deal in this geography. Glenmark also has plans to out-licence its anti-diabetic molecule, which is likely to commence Phase I trials in the UK this quarter.

It also intends to conclude a deal by the end of this fiscal. Such a deal would provide a further boost to its research effort and provide a further fillip to its already-healthy milestone payment revenue stream.

Valuation and view

Quite clearly, the street appears to have been impressed enough with the initiatives of Glenmark and marked the stock up sharply.

The three-fold rise in the stock's price since the time of its deal announcement with Forest is testimony to investor fancy for the stock.

Glenmark operates through its subsidiaries in markets such as the US and Brazil and the scale of operations there is relatively small compared to Glenmark's current size.

We expect these subsidiaries to make a more meaningful contribution to the bottomline in the medium term. The key subsidiary is the one Glenmark operates in Switzerland, through which the company carries on its R&D and clinical trial activities.

This subsidiary received the milestone payment in the first quarter of this fiscal.

On a standalone basis, if one were to assume earnings of between Rs 4.5 and Rs 5 per share for FY06 on a fully-diluted basis (Glenmark put through a $70-million FCCB issue in the early part of this calendar) and accord it a multiple of 16, the value works out to between Rs 72 and Rs 80 per share.

This suggests that the market is ascribing a value of about Rs 200 to Glenmark's discovery business.

The implied assumption is that the contribution from the other subsidiaries (excluding the one in Switzerland) would not be of significance in the near term.

Though positive news flow can drive the stock higher, there is also the risk of the stock going into a tailspin should any negative development buffet its efforts on the anti-asthma molecule.

Under the circumstances, we believe it would be prudent for investors to retain holdings and track news developments closely for possible entry points into the stock.

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