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Last Updated : Jun 26, 2019 08:31 PM IST | Source:

Will Glenmark's attempts to unlock value of API, R&D units prove beneficial?

Given its high spend on drug development and investment on capex over the years, Glenmark had amassed huge debt.

Viswanath Pilla @viswanath_pilla
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Pharma major Glenmark's stock hit a six-year low on May 24, losing nearly a third of its market value in the past three months. The latest trigger was the Complete Response Letter (CRL) from the USFDA regarding the company's new drug application for Ryaltris.

The CRL requires the company to address queries raised by the US regulatory agency, further delaying the approval.

The latest CRL cited deficiencies in the Drug Master File (DMF) pertaining to one of the active pharmaceutical ingredients (APIs) and in the manufacturing facilities.


Glenmark said it is confident about resolving the issues raised by USFDA within the next six to nine months.

Ryaltris is a nasal spray for the treatment of allergies, and Glenmark is banking on the drug to turn the tide for the company in the US.


Twin problems

The CRL, however, is a small problem compared to the bigger issues confronting the drugmaker in the form of high debt and a slow US business.

Given its high spend on drug development and investment on capex over the years, Glenmark had amassed huge debt. Its net debt as of March 31, 2019, stands at Rs 3,425 crore, while the gross debt was Rs 4,448 crore. The company's net debt-equity ratio at 2.2 percent, is the highest in the industry.

Meanwhile, the company's spend on R&D was much higher than the industry average. This was attributed to investment in discovery and development of new drugs

While Indian pharma companies increased their average R&D spend from 5.3 per cent in FY12 to 8.5 per cent in FY19, Glenmark's R&D expenditure for the same period rose from 8 percent to 12-13 percent.

The company spent about half of its R&D budget on developing new molecules that are fraught with high risk, where pay-off takes years if not decades. In contrast, R&D investments of most other Indian drug makers are primarily targeted towards building a pipeline of generic drugs with low risk and quick turnaround time.

Glenmark's current innovation pipeline consists of eight assets, including new chemical entities (NCEs) and new biologic entities (NMEs) in various stages of development. These are in the areas of immunology, oncology and pain management.

The company has generated around $250 million through eight out-licensing deals to companies including Merck, Eli Lilly, Sanofi and Forest Laboratories, but this amount does not cover all the costs.

Each year Glenmark spends over $100 million on innovative research, and the trend only moves north as the assets go for late-stage clinical trials, which call for tests on a large number of patients across locations.

Chairman & Managing Director Glenn Saldanha, who is a firm believer in the company’s hybrid model of investing money made from copycat drugs to develop novel drugs, envisages specialty and innovative products would contribute 30 percent of the revenues by 2025.

Meanwhile, investor patience is running thin. The cushion of high growth US generics business that allowed Saldanha to keep invested on finding new drugs is tapering-off.

In fact, analysts are worried about limited visibility of meaningful launches in the US that could have compensated for the steep double-digit price erosion the company is witnessing. Adding to that further spend on clinical trials related to GBR 830, biosimilar Xolair, and generic Advair would inflate the bloated R&D expenses.

To ensure its US business doesn't lose steam, Glenmark is boosting its pipeline through in-licensing deals with other generic companies.

US sales contributed Rs 10,073.5 crore, around 40 percent of Glenmark's FY19 revenue. However, US business growth in the first quarter of FY20 moderated to 8 percent.

"The US business is not performing well, now the launch of specialty product Ryaltris got delayed. We are waiting to see the demerger process," said Amey Chalke, Pharma Analyst at HDFC Securities.


Deleveraging balance-sheet

Glenmark's debt is still at manageable levels as the company generates cash flow to service it. The company initiated several steps to unlock the value of its business.

Glenmark sold its orthopaedic and pain-management business in India and Nepal to True North Enterprise towards 2018-end, to help reduce debt by a couple of hundred crore.

The big moves came this year.

The company in February spun-off its innovation R&D business under a new company with an aim to explore divestment of innovation subsidiary or licensing out its pipeline under development.

The new company,  based in New York, will be headed by Alessandro Riva, a former Gilead Sciences executive.

"This change will provide enhanced focus to the business, a better operating ecosystem and additional opportunities to unlock value for the parent company in future," Saldanha said.

"The idea is to make the new company fund the development of its own drug pipeline, without becoming burdensome on the parent company," said another executive of the company on condition of anonymity.

Just a month earlier, Glenmark had demerged its API division into a separate entity called Glenmark Life Sciences.   The intent was to raise money to repay debt. The company appointed Yasir Rawjee, a former Mylan executive as Glenmark Life Sciences  CEO.

Elara Capital expects the sale of API business to generate capital in the range of Rs 800-1,000 crore.

Glenmark outlined its objective for FY20 in the recent earnings call and has set 10-15 percent revenue growth in FY20. This would be largely helped by its domestic formulation business where Glenmark has leadership in dermatology and is also expanding in chronic segments such as diabetes and cardiovascular.

In the earnings call, the company also outlined that manpower cost a percentage of sales and stood lower than FY19. They are also looking at at least one partnership on innovative/specialty assets.

The company is also looking at total R&D expenditure to be lower in absolute value as compared to FY19. And will bring in a minority investor for Glenmark Life Sciences, besides divesting other noncore global assets.

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First Published on Jun 26, 2019 06:42 pm
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