Limited Upside for Glenmark Pharmaceuticals

Glenmark Pharmaceuticals (GNP) is a global, research-driven, integrated pharmaceutical company headquartered at Mumbai, India. It is a leading player in the discovery of new molecules, both NCEs (new chemical entity) and NBEs (new biological entity). The company has several molecules in various stages of clinical development and is primarily focused in the areas of inflammation (asthma/COPD, rheumatoid arthritis etc.) and pain (neuropathic pain and inflammatory pain). The company has a significant presence in branded generics markets across emerging economies including India. Its largest markets are US and India, contributing 60 per cent to the overall revenue. In India, it is among the fastest growing companies having featured in the list of top 25 companies.

In the US, it has achieved reasonable scale by launching products in niche categories like derma, hormones, controlled substances and modified release products. The company is also gradually gaining scale in emerging markets such as Brazil, Mexico, Russia and Eastern European countries. Glenmark’s novel research pipeline is more advanced as compared to Indian peers and is a key differentiator.

GPL along with its subsidiary has 11 manufacturing facilities in four countries and has five R&D centers. Its subsidiary, Glenmark Generics Limited services the requirements of the US and Western Europe generics markets. The Active Pharmaceutical Ingredients (API) business sells its products in over 80 countries, including the US, various countries in the EU, South America and India.

GNP posted earnings in line with the first quarter of 2018 with revenue, EBITDA and profit after tax (PAT) shooting 20 per cent, 52 per cent and 47 per cent year on year (YoY), respectively. This is temporary relief on account of the Zetia opportunity and better than expected India performance.

gZetia boosts earnings

US sales representing 44 per cent of revenue has benefitted from launch of Zetia, which contributed USD55mn and on YoY basis leading to an increase in the revenue of US segment by 55 per cent and in local currency to USD 162 mn. The base business in US is facing 10 to 12 per cent pricing erosion.

The strong cash generating Zetia has been completely genericised and Renvela and Renagel pushed to 2019. However, the outlook for second quarter of 2018 remains challenging. GNP pruned 2018 revenue growth guidance to single digit compared to 12 to 15 per cent earlier and margin guidance of 22 per cent versus 23 per cent earlier. Though, achieving this is tough as US revenue is likely to dip and R&D cost may rise in second quarter of 2018.

The US sales from second quarter of 2018 is expected to decrease to USD125mn as benefit of limited competition sales of gZetia end with four new players already launching the product.

During the first quarter of 2018, Glenmark has filed two ANDAs with the USFDA and launched three products. The US base business for second quarter is in the range of USD125mn and the new approvals will reflect in third and fourth quarter. The market share of Strattera product has been good.

Pipeline

The pipeline segment remains strong with 67 pending abbreviated new drug applications (ANDAs), of which 27 are with paragraph IV certification. There are three derma products in the range of USD 150 to 300mn and two to three other products where GNP would be second generic in the range of USD 80mn.

Inhalers

In the Inhalers division, the company will meet the guidance given for the portfolio. Three products including Advair will be filed by 2019-20 period. With Celltrion device, GNP hopes to launch in at least one country by the last quarter of financial year 2018.

The company’s products such as Onglyza, Vesicare will not be launched immediately. The patent exclusivity of Nabivolol ends before 2019 financial year and has market size of one billion US dollars whereas Sevelamer portfolio has no visibility for Renagel and Renvela and Neuperocinproduct is not faced with any competition yet.

Deleveraging challenges persist

gZetia has generated Rs 700 crore free cash for GNP over the last six months, whereas the total debt reduced by Rs 390 during the same period.

The research and development spend (R&D) is expected to grow rapidly in the second quarter of 2018 by Rs 100 crore; representing 13 per cent of sales for half year and 11 per cent for full year. The large portion of R&D spends goes towards innovation R&D where it has four promising assets as per GNP, which is in various stages of development. The increase in R&D expense will spur the net debt by Rs 305 crore. In fiscal 2018, any further net debt reduction is unlikely. Niche launches such as Welchol, Renvela, Renagel, Finacea are critical to prune debt, which remains a key concern as the debt continues to keep increasing.

In the US business of the pharma, four molecules- GBR830, GSP-301, GBR 1342 and GBR 310 are under active discussions for out licensing. Out-licensing in any one of these is critical for the company, failing which GNP may find it difficult to de-lever and jumpstart sustainable growth trajectory with prudent organic/inorganic initiatives. Any out-licensing deals over the next 12 to 18 months could lend some upside. Glenmark expects at least one deal to close by year end.

For the second quarter (Q2) of 2018, net debt is expected to be at the same level as of March 2017 due to higher R&D expense in Q2. For 2018, the net debt will be Rs 3350 to Rs 3400 and the guidance for net debt repayment by end of fiscal 2018 is of Rs 300 crore.

India

The company surprised India business, which grew 15 per cent when the other companies were impacted by GST-related destocking, as Glenmark incentivised the distributors and dealers. The company’s base for the fourth quarter of fiscal 2017 was weak. On the whole, GNP performed well in the months of April and May’17. The growth guidance for the second quarter of 2018 is 10 per cent and 15 per cent for the fiscal year 2018.

Latin America (LatAm)

The revenue of LatAm declined 46 per cent YoY on back of Venezuela in the base quarter. However, excluding Venezuela, LatAm business grew by 15 per cent in the local currency. The Mexico subsidiary revenue grew in excess of 60 per cent in constant currency terms. During the fiscal year, EBITDA and cash have been positive and the business will start to grow from third quarter of 2018. On the quarter basis, the business de-grew due to seasonality.

On the other hand, revenue for the European business of Glenmark grew over 25 per cent in local currency.

Risks faced by Glenmark

The key risks faced by the pharma major are the currency risk in Latin America and Russia and the hindrance on the novel research pipeline could hurt multiples.  In addition to this, the delay in the ANDAs approvals and US Food and Drug Administration (USFDA) related regulatory risks are part of the generics business.

neha.seth@outlookindia.com