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Glenmark: 'Oglemilast' hits a stone wall
Aug 22, 2009

Things have indeed not been going too well for Glenmark over the last three quarters. Uptil the end of September 2008, the company was growing at a scorching pace both on the topline and bottomline fronts. But once the economic slowdown intensified during the second half of FY09, the scenario took a turn for the worse. Hence, when the company announced this Thursday that its lead molecule 'Oglemilast' (for the treatment of COPD or chronic obstructive pulmonary disease) had failed in Phase IIb clinical trials, the timing could not have been worse. The stockmarkets reacted sharply with the stock plunging 14% in a single day. Further, the management stated that it will study the molecule for asthma and the results of the same are expected in the first quarter of 2010.

In this article, we shall take a look at what now lies in store for Glenmark, at least on the R&D front.

A thing or two about 'Oglemilast'
Glenmark created ripples in the Indian pharma industry in 2004 when it out-licensed 'Oglemilast' to Forest Laboratories of the US in a landmark agreement the deal size of which was US$ 190 m. Besides receiving an upfront payment of US$ 30 m, the company was scheduled to receive further milestone payments depending on how the molecule progressed in clinical trials. 'Oglemilast' was indicated for the treatment of COPD, which in layman's terms is a disease afflicting heavy smokers. Since then, this molecule has been a lead one for Glenmark having advanced as far as Phase IIb.

Glenmark's R&D setback
The failure of 'Oglemilast' highlights more than ever the high risk nature of R&D which nevertheless is important for any pharma company aspiring to be a force to reckon with in the global arena. In that sense, Glenmark’s strategy of entering into partnerships with global innovators made sense.

This is, however, not the first setback that Glenmark has received on the R&D front. Besides out-licensing 'Oglemilast', the company had also out-licensed two other molecules namely GRC 8200 (for diabetes) and GRC 6211 (for pain management) to Merck KgaA and Eli Lilly respectively all of which had then reinforced the strength of Glenmark's R&D pipeline based on its ability to strike three partnerships. However, both these molecules were returned back for various reasons thereby thwarting the receipt of any further milestone payments. While GRC 8200 has completed Phase IIb trials and will enter Phase III shortly, development of GRC 6211 has been stalled.

Further, while earlier Glenmark was confident of securing around US$ 69 m in the form of milestone payments every year, the subsequent economic slowdown has meant that the pace at which global innovators are entering into out-licensing agreements has considerably reduced as they have become vary of doling out huge milestone payments. This means that Glenmark’s R&D expenses will now increase.

The next in line
Glenmark's next bet appears to be the anti-diarrhoeal molecule 'Crofelemer' which is in Phase III trials currently. The following table gives a perspective of Glenmark’s R&D pipeline:

Glenmark's R&D pipeline
Compound Primary indications Progress
GRC 8200 (Melogliptin) Type II Diabetes End of Phase II
GRC 3886 (Oglemilast) Asthma, COPD End of Phase II
GRC 6211 Pain management End of Phase I
GRC 4039 (Revamilast) Arthritis & Inflammatory disorders End of Phase I
GRC 10693 Pain management End of Phase I
GBR 500 Multiple Sclerosis, Inflammatory disorders Phase I
GRC 15300 Pain management, Skin disorders Pre-clinical
GBR 600 Acute coronary syndrome Pre-clinical
Crofelemer Anti-diarrhoeal Phase III
Source: Glenmark presentation Aug 2009

What to expect?
At the current price of Rs 207, the stock is trading at a multiple of 8.6 times our estimated FY12 earnings. Investors should note that we had not factored in revenues from its R&D programme in our estimates and had also factored in a significant rise in R&D expenses. Hence, we do not feel the need to revise our estimates due to the failure of 'Oglemilast' in clinical trials. Further, while the company's performance is expected to remain tepid in FY10, we expect growth to pick up FY11 onwards. Thus, though we had downgraded our numbers post the FY09 results, we maintain our positive view on the stock from a long term perspective.

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