Street awaits fresh triggers for Glenmark Pharmaceuticals

Approvals to launch drugs in US, rebound in domestic growth, debt reduction key for upgrades

After Glenmark Pharmaceuticals reported a better-than-expected core performance for December quarter, its stock price firmed up. Ever since then, the share has given up most gains. For stock sentiment to improve, experts see the following as crucial: Approvals to launch drugs in the United States (US), rebound in domestic growth, and reduction in debt.

Glenmark's strong US performance in December quarter was led by launch of anti-cholesterol drug Zetia on exclusivity basis, which also led to higher-than-estimated operating profit margin. In fact, only a few pharma companies have topped Street expectations on profitability in December quarter; peers such as Dr Reddy's and Sun Pharma disappointed due to competitive pressure in US base business.

Glenmark has seen revenue, core profit, and net profit grow 41 per cent, 106 per cent, and 143 per cent from a year ago, respectively, as US sales doubled in December quarter with the country contributing 48 per cent to revenue. The trend is likely to continue on exclusivity sales of Zetia, until competition sets in by Junequarter-end. After that, high base in US business following Zetia launch will set in, and then timely approval and launch of other new products will be necessary for US momentum to continue.

In FY17, the company has seen a good approval rate and a good product pipeline. Currently, niche launches pending approvals include Zyvox (anti-bacterial drug), Welchol (anticholesterol drug) and Renvela and Renagel (kidney treatment drugs). Analysts at HDFC Securities see 15 per cent revenue growth (on high base of FY17), and assume good contribution from dermatological launches over FY18-19. This is visibly lower than recent trends.

What's more, domestic revenue, after growing in high double digits over past quarters, grew only 6.25 per cent in December quarter. Domestic sales account for a fifth of revenue.

Expectations of debt reduction after launch of Zetia haven't materialised in December quarter; net debt was flat sequentially. Glenmark has said debt reduction will start from March quarter. Thus, even as analysts remain positive on Glenmark, they remain watchful before making any changes to the company's net profit estimates. Analysts at HDFC Securities, for now, have a neutral rating, with stock target price of ~960. Those at Elara Capital have upgraded FY18 net profit by 3.4 per cent to factor in higher Zetia sales but have reduced FY19 net profit by six per cent on higher other expenses. Their target price is ~1,041. Analysts at Edelweiss, who have a much lower target price of ~820, say any out-licensing deals over 12-18 months could translate into stock gains.