Buy Glenmark Pharma; target of Rs 360: KRChoksey

“Napo Pharma has terminated its Collaboration Agreement with Glenmark Pharma in regards to the drug crofelemer which the company had in-licensed on 7th July 2005. The molecule had finished Phase-III trials & is used in treatment of HIV associated Diarrhoea & multiple other indications. On Sep 9, 2011, Napo had sent Glenmark a notice of default, which gave it 60 days to remedy its defaults alleged therein. Napo terminated the agreement based on Glenmark’s failure to cure these defaults & unable to develop & commercialize the drug. In contrast to what Napo reported, Glenmark denies the fact as there is no reasonable basis & is seeking a declaration from an arbitration panel. Furthermore, On 10th Nov 2011, Napo has also terminated the deal with Salix Pharma (Authorization to North America, Europe & Japan) for which Glenmark was the key API supplier. Put together, if the termination of both the events takes place, we believe it might have a major impact on the company’s financials, going forward. But the key is to watch for an order from arbitration panel.”

“Despite the failure of crofelemer (if the termination comes through), Glenmark’s base business is well diversified across different geographies & is experiencing a robust growth as we saw in the previous quarters. We had estimated a NPV of ~ Rs 23.6/share for crofelemer along with the API supply to salix. Excluding the same, NCE valuation comes to around Rs.17.9/share. We value the business at 16x its FY13E EPS of Rs 19.9 to arrive at a base business value of Rs 319. Adding the NCE & Para IV values, we arrive at a target price of Rs 360, providing an upside potential of 23.2%. We believe the event would not hamper business prospects of any other segments and hence maintain our ‘BUY’ rating on the stock,” says KRChoksey research report.   

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