Glenmark Pharmaceuticals: Making a mark - Buy

The year 2016 was a docile one for Indian pharma companies. Regulatory tightening by the US drug regulator, coupled with price cuts in India, did not augur well for Indian drug makers. The BSE Healthcare Index lost over 12 per cent in 2016, with some large cap stocks losing as much as over 20 per cent. But there were some that remained resilient.

The stock of Glenmark Pharma is one such; it contained the fall at less than 5 per cent. Strong growth in key markets of the US, India and Europe, driven by niche launches, has helped the stock. With a healthy product pipeline in the US and strong market position in the home market in therapies such as dermatology, respiratory and cardiology, Glenmark is well placed to sustain good growth in the medium term.

At the current price, the stock trades at about 17 times the FY18 earnings; this implies 20-25 per cent discount to peers such as Lupin and Cipla. Investors with a two-to-three year horizon can buy the stock.

The US and India are the two key markets for Glenmark, accounting for nearly 60 per cent of the company’s consolidated revenue. With a pipeline of 111 products filed in the US, of which about 64 are pending approval, Glenmark is poised to clock healthy growth in the geography. During the first half of FY 2017, the company secured approval for eight generic drugs.

In December, the company launched the generic version of cholesterol drug Zetia and has exclusive rights to sell the product for a period of six months. With brand sales of $2.3 billion for the 12 month period ended October 2016, the launch should add significantly to the company’s profitability.

The revenue in this geography grew at a healthy 27 per cent year-on-year during the first half of the fiscal, driven by new launches.

Glenmark recently unveiled its medium to long term growth strategy. It plans to focus on three key therapies — dermatology, oncology and respiratory, and envisages building a portfolio of differentiated, technologically complex products such as hormones, semi solids and inhalers.

It anticipates India, the US, Europe and active pharma ingredient (API) business to contribute over 80 per cent of revenue over the next three to five years. These should hold Glenmark in good stead over the next five years.

In the home market too, the company has managed to clock healthy growth, amid challenges such as price cuts by the Indian drug regulator. Glenmark has been able to increase its market share in key therapies such as dermatology and respiratory besides chronic areas such as anti-diabetes and cardiovascular.

The company’s domestic formulation sales grew 12 per cent for the six months ended September 2016 and is expected to sustain healthy double-digit growth. In the last five years, Glenmark’s domestic revenue grew at an annualised rate of over 20 per cent.

Currently, about eight of its brands figure among the top 300 brands. Besides its prescription business, the company plans to strengthen its over-the-counter business by adding brands to its existing portfolio of VWash and Candid.

Apart from India and US, Glenmark intends to expand its presence in Europe over the next five years. The company is looking to launch differentiated products with limited competition in this market. For instance, it plans to launch generic Seretide inhaler in 15 countries next year. This should help increase contribution from this geography.

Glenmark has a pipeline of eight innovative molecules — two new chemical entities and six new biological entities in various stages of development. Monetisation of these molecules, if it happens by way of out-licensing, will be positive for the company.

Though the company’s long term debt-to-equity was higher at 0.72 times as of September 2016 vis-à-vis 0.58 times as of March 2016, its net long debt-to-equity went down from 0.38 times to 0.28 times.