Is the Covid-19 drug good news for Glenmark Pharmaceuticals?

The stock of Glenmark Pharmaceuticals came into the limelight two weeks ago and rallied as much as 40 per cent on a single day after the company launched favipiravir, an oral antiviral drug for treating mild to moderate Covid-19. Glenmark is the first company to receive manufacturing and marketing approval from India’s drug regulator as part of the accelerated approval process to bring out its version of favipiravir in India.

However, the exuberance in the stock quickly fizzled out in the following days.

The healthy set of numbers reported in the March quarter subsequently, also failed to enthuse investors.

One reason for this is the difficulty in estimating the earnings from favipiravir for Glenmark at this stage, considering the uncertainty over the potential number of Covid-19 patients and the pandemic’s longevity.

Under the brand name FabiFlu, the firm sells the tablets at ₹103 each (total requirement 122 tablets for a patient and the total treatment cost could be around ₹12,560).

Further, Glenmark has no exclusive rights to sell the product as many other pharma companies, including Strides Pharma Science, Optimus Pharma, Brinton Pharmaceuticals and Raghava Life Sciences, are likely to launch similar drugs in the next 1-2 months, which will increase the competition.

It is to be noted that the other competing drug, remdesivir (an injectable), has also received emergency drug approval for treatment of Covid-19 patients with severe conditions in India.

Hetero Drugs and Cipla have received the Indian regulator’s approval for remdesivir.

Hence, with the initial hype over the favipiravir drug fading and the focus turning back to the uncertainty over the company’s growth prospects in the current fiscal, the stock may see limited investor interest in the near term.

Investors with exposure to the stock can hold on to it and those on the sidelines can wait and watch the performance in the coming quarters before taking the plunge.

Challenges in the US market faced by the company need monitoring.

At the current price, Glenmark trades at about 16.3 times its trailing 12-month earnings, which is marginally cheaper than its three-year average of 17.4 times.

It is also cheaper than similar-sized peers Ipca Laboratories and Ajanta Pharma that trade at price earnings multiples of 35 times and 27 times, respectively.

Mediocre performance

Glenmark reported a decent set of numbers in the fourth quarter of 2019-20 driven by strong growth in India and Europe businesses.

Its consolidated revenue grew by 8 per cent (year-on-year) to ₹2,768 crore, while its consolidated net profit increased by 41 per cent (y-o-y) to ₹220 crore. Operating margin expanded to 16.8 per cent (up 260 bps y-o-y) on account of lower employee expenses and lower operational costs.

Its India business was up by 15 per cent (y-o-y) due to higher sales in key therapeutic segments, while the Europe sales grew by 29 per cent, benefiting from supply disruption for one of its competitors. The US market registered a flat growth (y-o-y) during the quarter.

For the full year of FY20, the consolidated revenue of the company grew 8 per cent from FY19 to ₹10,640 crore and the net profit declined by 16 per cent to ₹776 crore.

Glenmark Pharma has a commercial presence in more than 80 countries across the globe, focussing on generics, speciality and OTC (over-the counter) businesses. The US and India are the primary markets, constituting 31 per cent and 27 per cent of the overall revenue (as on 4QFY20), respectively. The firm has a strong presence in diabetes, cardiovascular and oral contraceptives.

Over the past five years, Glenmark has been hit due to a slowdown in its US business, higher R&D expenditure and a debt-ridden balance sheet. The company has been on a restructuring mode with reduction in R&D expenses and employee cost. Its recent initiatives, including sale of non-core assets and partnerships to reduce debt, can help strengthen its balance sheet.

The reduction in R&D spend will alleviate the pressure on the margins and improve free cash flows.

But the US market has been challenging for the company as there is no meaningful launch in the near term. Its dermatology segment that contributed around 45 per cent of the US sales in FY19 , continues to see price erosion. Now, the segment accounts for only 25 per cent (FY20) of the US sales. Recall of a key drug, ranitidine, due to impurity also impacted the US sales.

However, its domestic market is likely to be the key growth driver for the company in the near to medium term. It has been outpacing the domestic industry growth for the past decade. The domestic business is built around high-growth therapy areas — dermatology, respiratory and cardiology.

The company has also forayed into the consumer health segment in India, which is expected to prop up the domestic revenue.

Its Europe business, which contributes 16 per cent of the sales, is expected to grow well on the back of tie-ups and partnerships.

The company has not shared its growth guidance for the fiscal given the current uncertainties.