Glenmark: Beneficial settlement

The company’s settlement with GSK is positive, but may not add significantly to its financials.

Glenmark Pharmaceuticals’ out-of-court settlement with GlaxoSmithKline LLC (GSK) over the launch of a generic version of anti-malarial drug brand Malarone, though positive, may not add significantly to its financials. The company has a Para-IV on Malarone (Atovaquone and Proguanil Hydrochloride 250 mg/100 mg tablets with sales of $56 million in 2009), which gives it a 180-day exclusivity prior to the patent’s expiry in 2014. With this settlement, Glenmark will now be able to start selling it earlier than scheduled.

According to the settlement agreement, subject to review by the Federal Trade Commission and Department of Justice, Glenmark will be able to sell its generic tablets under a royalty-bearing licence from GSK from the third quarter of 2011, or earlier under certain circumstances.

Analysts say since Glenmark is the only generic filer for the drug, even if a new player files for an abbreviated new drug application (Anda), it will take at least 30 months for it to enter the market. Hence, Glenmark will face limited or no competition for at least a year beginning the September 2011 quarter.

“With Glenmark and GSK being the only two players marketing the product, there can be 25 per cent price erosion. With a 50 per cent market share, 10 per cent sales royalty payment to GSK, and a 50 per cent profit after tax (PAT) margin, we expect this drug to add revenues of $14.2 million, PAT of $7.1 million in 2011-12 and earnings per share of Rs 1.1 to Glenmark’s 2011-12 earnings,” says Vikas Sonawale, analyst, Religare Institutional Research.

“The conclusion of an out-licencing deal would reaffirm strength in the new chemical entity pipeline and could thus spring a positive surprise,” states a Sharekhan report.

Over a two year period, analysts expect Glenmark’s revenues and net profit to grow at a compounded annual growth rate of 18 per cent and 29 per cent, respectively, on account of balance sheet restructuring, cost containment and management of working capital cycle.

While the counter had seen steady gains since end March 2010, it is down by 3.4 per cent (including Thursday’s 1 per cent gain) post the announcement on April 12. At Rs 269.30, it trades at a P/E of 16.5 times 2010-11 estimated base business earnings.

With contributions from Puneet Wadhwa & Sarath Chelluri