Glenmark Pharma: Good News on Crofelemer: Citi

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Glenmark Pharmaceuticals (GLEN.BO)
Alert: Good News on Crofelemer
The positive outcome of the Crofelemer Ph-III trial is a step forward in GLEN’s
efforts at bringing a proprietary drug to market (likely in CY12). GLEN has
inlicensed Crofelemer from Napo Pharma & is the sole global API supplier besides
having exclusive marketing rights for 140 countries. We currently ascribe a value
of Rs18/sh to Crofelemer (50% probability of launch); positive Ph-III raises the
probability, in our view, & should reflect in valuations. We may revisit our
valuation, pending further discussions with management. Maintain Buy.


 Encouraging Phase III trial results – Napo & Salix announced the successful
completion & outcome of ADVENT, the pivotal Phase III trial to evaluate the
efficacy, safety & tolerability of Crofelemer in HIV associated chronic diarrhea. In
the trial, Crofelemer provided relief to a highly statistically significant portion of
patients compared to placebo. The overall safety profile of Crofelemer was also
balanced across all groups, including treatment & placebo.

 The Opportunity for GLEN – Crofelemer represents an opportunity in two ways:
– Marketing rights in certain markets: GLEN has inlicensed the molecule from
Napo. It has marketing rights (for HIV–associated diarrhea, pediatric diarrhea &
acute infectious diarrhea) in 140 countries, excluding North America, EU &
Japan, in return for royalties to be paid to Napo. GLEN expects to be able to
launch this drug in CY12 & attain peak annual sales of US$80m.
– Global API supplier (ex-China): Napo has tied up with Salix Pharma for the US,
EU & Japan (for HIV–associated diarrhea, pediatric diarrhea & acute infectious
diarrhea) & worldwide rights for all other indications (including irritable bowel
syndrome). Salix expects peak sales of c.US$300m from this product in the US
alone. GLEN has entered into a ten year (extendable by a further two years)
manufacturing and supply agreement for Crofelemer API with Salix. In addition
to the margins on global supplies, GLEN would also be entitled to receive
royalties from Napo on sales in the western markets.

 Road Ahead / Timelines: Salix is likely to file an NDA in the US in 1QCY11 & get
approval in early CY12. GLEN will access Salix’s NDA package & proceed with
registrations in emerging markets – launches likely in CY12. At the same time, it
will continue its initiatives to expand the label through trials for acute infectious
diarrhea (ph-II in India) & pediatric diarrhea.


Glenmark Pharmaceuticals
Valuation
Our target price for Glenmark Pharmaceuticals of Rs395 is based on 16x March
12E EPS for the base business. We are now more comfortable with the
sustainability of the positive trends seen in Glenmark’s key markets. This, along
with the improvement in balance sheet (lower leverage, tighter working capital)

lead us to use a multiple of 16x – a 10-20% discount (to factor in the higher risk /
uncertainty in the biz and weaker balance sheet) to what we use for sector leaders
such as Sun, Cipla, Dr Reddy’s & Lupin – to value the base biz. At 16x March 12E
EPS we arrive at a value of Rs335/sh for the base biz. Our TP also includes : a)
Rs26/sh for Glenmark's R&D deal with Sanofi for GRC-15300; b) Rs18/sh for
Crofelemer launch; c) Rs16/sh for its Para IV pipeline. Cumulatively, we arrive at a
TP of Rs395/sh.


Risks
We rate Glenmark as Medium Risk, as we do not see any major downside on the
R&D front in the near to medium term. Downside risks to our target price include:
(1) Continued delay in product approvals would impact sales and profitability; (2)
Adverse verdict in the ongoing Tarka litigation with GSK could lead to significant
damages; and (3) Growing competition, rapid price erosion, and fragmented
market share are risks inherent to the generics business.