Glenmark Pharmaceuticals: Right prescription

The last year has not been a smooth one for pharma stocks. The BSE Healthcare Index has shed nearly 4 per cent during this period.

This was due to the scrutiny by the US drug regulator on the manufacturing facilities of Indian drug makers and regulatory actions in India (ban imposed on select drugs and price cuts). But these corrective spells provide good buying opportunity in pharma companies with good growth prospects. The stock of Glenmark Pharma is one such.

In the past year, the stock price has corrected by 20 per cent and this presents a good entry opportunity for investors with at least a two-year investment horizon. Three factors should help.

First, the performance in the US is expected to be very strong in 2016-17, thanks to the anticipated launch of exclusive products.

Second, steady growth in the domestic market despite the regulatory tightening in India is a positive.

Finally, expected reduction in debt over the next two years should also provide a leg up to Glenmark’s profitability.

At the current price, the stock trades at about 16 times its 2017-18 expected earnings, implying an over 30 per cent discount to smaller pharma players such as Biocon and Ajanta Pharma.

Growth in revenue The US is a critical market for Glenmark, accounting for about a third of its consolidated revenue. In the last four years, the revenue from this geography has grown at an average annual rate of over 20 per cent.

The company has about 112 products approved by the US drug regulator, Food and Drug Administration (FDA), and about 59 products are pending approval. Glenmark is the first generic company to receive the US FDA’s nod for selling generic version of cholesterol lowering drug Zetia. Merck, which is the innovator, reported global sales of $3.77 billion for Zetia in 2015.

Given the large opportunity in this product and Glenmark being the first generic company enjoying marketing exclusivity for six months, the launch of generic Zetia in December 2016 should boost Glenmark’s revenue and profit over the next two years.

The company is also among the first filers for the generic version of another cholesterol lowering drug Crestor, which was approved by the US FDA recently.

Impact of price cuts

In the home market, the company suffered a setback following the drug pricing authority’s (National Pharma Pricing Authority) decision to slash prices of a few drugs used to treat chronic diseases such as hypertension, diabetes, heart disorders and cancer.

As a result, the company had to slash the prices of a few drugs, including its key hypertension brand Telma. The impact on account of the price cuts is estimated to be around ₹25-30 crore annually.

However, the adverse impact of the price cuts can be more than compensated by strong growth in the anti-diabetes segment particularly Teneligliptin, which was launched in 2015. Likewise, the company launched its first digital dose inhaler in India this year. Hence, the company should be able to sustain healthy double-digit growth in the home market.

Glenmark has a pipeline of two innovative chemical molecules and five biologics. Its chemical molecule targeting neuropathic pain is in Phase II trials. So are two of its biologic drugs targeting multiple sclerosis and atopic dermatitis. The management is believed to be in discussion with global majors for out-licensing these molecules.

As of March 2016, the company had net debt (total debt less cash) of Rs 3,131 crore in its books. The total debt-to-equity ratio stood at 0.93 times.

Glenmark’s recent capital raise by way of foreign currency convertible bond (FCCB) to the tune of $170 million should help the company retire a good portion of the borrowing. Besides this, success on the out-licensing front, coupled with better cash flows in the next two years, can help Glenmark pay off its debt and improve profit thanks to lower interest outgo.

The company reported year-on-year revenue and net profit growth of 15 per cent and 48 per cent respectively in 2015-16. The operating profit margin improved by 320 basis points to 18.6 per cent in 2015-16, compared with the previous year. 

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