Glenmark Pharmaceuticals:Napo arbitration in favor of Glenmark : Reliance Sec

Napo arbitration in favor of Glenmark
Key points
 Event: Glenmark has received a favorable ruling regarding anti-diarrhea drug
Crofelemer against Napo Pharma (arbitration filed in December 2011) by an
international arbitrator. It has received exclusive rights to develop, commercialize
and distribute Crofelemer in 140 emerging countries for the treatment of diarrheal
diseases. The arbitrator has also ruled that Glenmark has 2 years to file for
regulatory approvals in 140 countries post the approval of Crofelemer in India.

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 Background details: Napo Pharma had terminated its collaboration agreement
with Glenmark (entered in July 2005) in December 2011, alleging breach of the
collaboration. It claimed that Glenmark failed to file an application for regulatory
approval with DGCI in India as well as to other regulatory authorities, despite the
drug having completed the Phase III trials. Further, it also failed to develop the
drug for the treatment of pediatric diarrhea. Besides, Napo also terminated the
agreement with its partner Salix Pharma, which earlier had the rights to market
the drug in developed markets of US, Canada, Mexico, Europe and Japan. Post
termination, Salix went ahead and filed the NDA with the USFDA. It is also likely
to get an approval from the USFDA in September 2012. Glenmark shall supply
API to Salix for commercial production. For more details on the case refer our
note “Napo terminates Crofelemer agreement” dated December 13, 2011.
 Impact: Glenmark has already started filing in key markets (post a favorable
interim ruling in January 2012) and is likely to launch it in couple of ROW markets
(peak sales estimated at US$80mn) in FY2014. Using the DCF method, we have
estimated an option value of Rs13 for Crofelemer in ROW market. Given the
favorable ruling, we incorporate the option value of Rs13 in our target price.
Outlook and Valuation
Post the favorable ruling from the arbitrator, we remain confident that the USFDA
would follow suit. In our view, Crofelemer will make a meaningful contribution to
revenues and profits and would be a steady source of revenue due to the patent
protection rights. We believe Glenmark has the capability to generate more outlicensing
income by monetizing its existing R&D portfolio.
Based on the visibility of strong product pipeline across markets, we expect the
growth momentum to sustain in the medium term. Niche launches in US
(Dermatology, Oncology and OCs) and strong secondary sales in other geographies
remain key factors for margin improvement and act as catalyst for the stock. Besides,
the remarkable improvement in the balance sheet ensures strong FCF over FY2012-
14E. We value Glenmark’s core business at 14x and add Rs66 from the R&D
pipeline. Given the healthy performance expectations on the core business, we
maintain Accumulate on the stock with a revised target price of Rs445.
Risks to the view
 Reduction in debt remains a key monitorable
 Termination or delay in commercialization of licensing molecules