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Glenmark: The Forest deal analysis - Views on News from Equitymaster
 
 
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  • Sep 29, 2004

    Glenmark: The Forest deal analysis

    Glenmark Pharma, a mid cap pharma company, has been in the limelight over last five trading sessions, hitting the upper circuit on all days. This spurt in the price of the company came soon after it announced that one of its NCE (new chemical entity) molecules has been out-licensed to Forest Laboratories Inc. Let's take a look at this deal and evaluate whether the optimism is worth it.

    The Deal

    • Glenmark has out-licensed its anti-asthma drug (GRC-3886) to Forest Labs for the US markets.

    • The size of the deal is about US$ 190 m provided that the product is ready for successful launch after succeeding in 3 phases of clinical trials. If successful, the aforesaid consideration will come in over a period of 5 years.

    • Apart from the above, if the product comes into the market (in 2009), Glenmark will get royalty payment to the tune of 15%-16% of sales from this drug. As per the company's estimates, the product is expected to generate revenues to the tune of US$ 1.5 to US$ 2 bn once it is launched.

    • While these payments are subject to molecule clearing all the clinical trials, what is sure for Glenmark in US$ 10 m, which the company has already received as upfront payment from Forest Labs.

    • Also, Glenmark will be the sole supplier of API's for this product when it will come into the markets.

    • In all, the total sum that Glenmark may receive after the successful completion of clinical trial Phase I is about US$ 50 m, which may come up in another 8-12 months. Of this, it is expected that the company will receive US$ 20 m - US$ 30 m by the end of FY05. The molecule is under clinical trial phase I in UK, which is performed by a UK based CRO (contract research organisation) Quintles.

    • Glenmark has retained the rights for this drug in other non-US markets and is scouting for a partner in Japan and Europe. This is again a potential opportunity.

    About Glenmark Pharma

    Glenmark Pharma is a mid-sized company with focus on niche therapeutic areas of dermatology, gynecology, pediatrics, ENT and diabetics. It is ranked 24th in the domestic formulations market and has grown at a CAGR of about 26% in last three years. The formulations business contributed about 76% to the company's revenue in FY04.

    Apart from this, the company is also focused on API (active pharmaceutical ingredients) business, which contributes about 12% to revenues. The company recently upgraded its API plants to WHO compliant and expanded their capacity. The company has filed 4 DMFs with US FDA and is in process of filing another 8-10 DMFs.

    On the international front, Glenmark has signed a deal to supply 8 ANDA's to KV Pharma (a US based generic company). Glenmark is slated to get about US$ 3-4 m of milestone payments over the next year from this. Glenmark would also get royalties on sale of these products. Total deal size is about US$ 80 m over the next 6-8 years.

    At Rs 313 the stock is trading at 42x its FY04 earnings. This valuation at first glance looks very high, but considering the fact that company will get about US$ 30 m by the end of FY05 (which is almost 3 times the FY04 earnings) as milestone payment from its out-licensed molecule, the valuation then works out to be in the range of 9.9 times the expected FY05 earnings, which is not very high. Apart from this, the out-licensing deal, which is the largest by any Indian company, the cash generated from this would be utilised towards accessing the regulated markets of US and Europe, which again could offer a window of growth.

     

     

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