The failure of Oglemilast means that finding partners for its research molecules will be a priority if Glenmark has to bounce back quickly.
The stock price of Glenmark Pharmaceuticals has lost a fifth of its value since the company announced a failed test on its out-licensed molecule, Oglemilast for lung disease on August 19. The molecule was out-licensed to US-based Forest Labs to carry out trials and commercial launch to treat lung disease and asthma. The outcome of the trials on Asthma (results expected in the March quarter of 2010) is key if Glenmark has to receive any future payments (received $35 million so far) on this molecule. Considering that lung disease segment is among the top five killers in the US and the size of the lung disease market is double that of asthma, the out-licensing revenues could be significantly less if the trials reach the next stage.
The out-licensing business has contributed a little over a third of the aggregate consolidated profit before tax during 2004-2008. In this context, the drying up of out-licensing revenues over the last year has been one of the key reasons for the stock dropping significantly from its September 2008 high of Rs 683. While the failed test on Oglemilast molecule is disappointing, what is the future for research-based revenues? Though the Street is sceptical, Glenn Saldanha, CEO & MD, Glenmark Pharmaceuticals believes that company has been successful in monetising its pipeline in the past. He says, “We have been successful in receiving over $115 million (over Rs 500 crore) in upfront and milestone payments and have ploughed back these funds back into the discovery programme. Our strategy will be to continue to look for partners to out-license our other candidates in clinical trials.”
Research pipeline
Glenmark, which primarily focuses on pain, inflammatory and metabolic (diabetes) segments as far as research is concerned, has a pipeline of nine molecules (including biological entities and in-licensed entities) which are in various stages of research (See table: Long on promise…). Of this, the company will be looking at Melogliptin (diabetes) and Crofelemer (diarrhoea) to keep its research revenue hopes alive in the short term. The company has had maximum success with Crofelemer which it is developing with US-based Napo Pharma. The drug is in the final stages of phase III trials and the opportunity of this drug for the treatment of HIV-related diarrhoea for its territory (140 countries including India) is pegged at $80 million.
Specialty/branded business
While the news flow in the recent past has been on the failed trial of Oglemilast, the company’s generics has performed well. Its key formulation markets of India and semi-regulated markets (SRM) of Africa, Asia and the CIS region which make up for three-fourths of the speciality/branded business have been growing at an appreciable pace. In June 2009 quarter, Indian sales grew by 19 per cent y-o-y on the back of seven new launches and the company gained market share in cardiology and dermatology segments. SRM sales nearly doubled in the same period as distributors replenished stocks after two quarters of de-stocking. Analysts expect that the company will be able to sustain growth rates between 15-20 per cent for the two markets. Considering that the division contributed over half of the company’s 2008-09 revenues of Rs 2,093 crore, good growth prospects will help bring in much needed cash to fund expansion and R&D activities.
Generics
The US and Latin American businesses were the only ones to record de-acceleration among Glenmark’s key generic markets. The US business (three fourths of generics sales) slid 10 per cent y-o-y in the June quarter due to a high base while delay in new product approvals saw the Latin American market witness a decline of 4 per cent. The company is now eyeing its portfolio of four first-to-files (see table Para IV FTF: Some upside?) to give its US sales a fillip. One of the four is the anti-malarial drug Malarone, on which the company is facing a patent infringement suit by Smithkline Beecham. The product reported sales of $53 million (Rs 265 crore) for the 12-month period ended June.
Valuation
The company plans to raise about $250 million through a private placement and pay off its high cost debt of about Rs 2,000 (debt to equity ratio of 1.3). While the generics and specialty businesses of the company are doing well, the Street will keep an eye on partnership deals on its new molecules. These deals and the milestone payments thereof not only ensure robust profit growth but will also help knock off debt, fund expansion and keep research spending (Rs 250 crore in 2009-10) intact. The cash generation of Rs 300–Rs 400 crore for 2009-10 may not be enough to sustain its spending programme. The other option for the company is go in for an IPO of Glenmark Generics, its 100 per cent generics subsidiary; the company had deferred its IPO plans due to market conditions last year. With an estimated 2009-10 EPS of Rs 14, the stock at Rs 207 is valued at 15 times this number and the downsides are built in. The short-term weakness will give buyers an opportunity to buy the stock at lower levels.