Glenmark’s attractive post fall on strong business, R&D

ET INTELLIGENCE GROUP: The poster boy of innovation in Indian pharma, Glenmark Pharma took a massive hit on the Street last week following its disappointing Q4 performance.

It lost market cap of over Rs 5,000 crore since it announced its results marked by a subdued 7 per cent growth in revenues and operating margin at 15 per cent after a stellar performance in the preceding quarter.

The less-than-expected revenues from the generic of Zetia during the exclusivity period sustained price erosion of 10-12 per cent impacting the base business, and the inability to significantly reduce net debt over the previous year disappointed the Street.



There has been a 17 per cent drop in the number of analysts having a buy call.

But interestingly, the 20 per cent drop in its stock amidst tempering of expectations has made it attractive for investing, especially in the near term for its generic business in the US, branded business in India, and in the long term, for its innovative research.

Drug approvals in the US, which had dried up in the past two quarters, have started trickling in again.

Excluding Zetia, the company expects to grow its US business at 15-20 per cent aided by its presence in the high-margin specialty areas of dermatology and respiratory.

Besides, the company does not have any serious regulatory issues with the USFDA.

In the domestic market, it has been one of the fastest growing companies in recent years, logging a growth of 15-20 per cent per annum.

Improved performance in two of its key markets should help the company reduce its net debt that stood at Rs 3,667 crore at the end of FY17.

In the long term, the company expects its focus on R&D to show results.

It has been historically spending the highest proportion of its revenues (11.8 per cent in FY17) on R&D in the industry.

It has now changed its R&D model from the earlier approach of out-licensing early-stage molecules and earning milestone payments to now developing compounds to a later stage and then looking for partnerships and commercialisation opportunities.

The company has a promising pipeline of five biologics and a biosimilar.

Two of the biologics are likely to enter critical stages of research within a year, enabling it to be able to out-license it to a partner.

However, it is still a long-term play.

The company expects one-third of its revenues to accrue from its innovative drugs by 2024.

The Glenmark stock is trading at attractive valuations of 15 times its FY18 earnings. The company has guided its revenues to grow by 12-15 per cent this fiscal with an EBITDA margin at 23 per cent.

Not bad, given the challenging times for the sector.