Glenmark recently presented its ‘Strategic Blueprint for the Next Decade’ at an analyst meet. The company has identified oncology, dermatology and respiratory as focus therapy areas. Glenmark is investing in generics, specialty and novel drugs across these therapy areas. The company believes 30% of its overall revenue by 2025 will be from the specialty and innovative segment. We like the company’s attempt to focus on differentiated products and innovation, particularly when vanilla generics is under pressure from rising competition. However, this entails higher risk and a drag on cash flows in the near term. Over the next 2-3 years, we expect a scale-up in its generics business and some value unlocking in the innovation/specialty programmes.
We have a Buy rating on GNP with a 12-month target price of R1,154/sh. We value the base business at 17x (unchanged) Sept 2018F EPS (after adjusting for spend on innovation research) to arrive at our target price. We do not attach any additional upside from innovation R&D at this stage and assume break-even of R&D investments. The key risks to our Buy rating are: (i) adverse movement in foreign currencies; (ii) adverse regulatory action creating uncertainty on product launches; (iii) greater competition and price erosion in key products and markets; and (iv) government interventions on price controls and product bans.
Step-up in R&D – Focus on complex generics, specialty, and innovation
The company will look at developing products in oncology, dermatology and respiratory across the value spectrum in terms of complexity, right from generics to NCE (new chemical entities)/ NBE (new biological entities). GNP is also targeting to develop across all the key differentiated dosage forms such as inhalers (DPI/MDI), films, depot injectables and transdermal/topical products, either through in-house development or strategic partnerships (in-licensing). GNP plans to spend 11% of its overall sales ex licensing income as R&D expense. Approximately half of the overall R&D spend will be allocated towards specialty and innovative research. GNP also expects to strike out-licensing deals for its innovative pipeline products every 12-18 months, which will allow it to generate additional cash.
US generics – Focusing on new dosage forms
GNP currently has 75+ ANDAs under development, and it expects to file 20-25 ANDAs on an annual basis going forward. However, the company is expected to file products across multiple new dosage forms to differentiate itself from the competition. Oral solids are expected by the company to account for only 22% of its overall ANDAs filings over FY17-21, compared to 46% during FY12-16. Over the next five years, topical and drug-device-combination products will account for over 50% of the overall filings. GNP has 60+ ANDAs that are pending approval. The company expects to launch 15-20 products annually going forward. GNP has signed or is in advanced stages of discussion for 15 in-licensing deals in the US. Through these deals, the company will develop generic products addressing a $12 billion market. The deals have been signed with companies with a proven technology platform, which will be responsible for developing the ANDA; GNP will provide the funds for the purpose.
Specialty and innovative products
GNP expects to file 9 new drug applications (NDA)/biologic licence applications (BLA) over the next decade across its specialty and NME (new molecular entity) portfolio in the three key therapy areas – oncology, respiratory and dermatology.