Even as most pharma companies with a global presence gained from the weakness in rupee against the US dollar, those with high foreign currency debt have not seen the entire benefit percolate to their net profit.
Glenmark Pharma is one of these companies. Higher interest outgo on foreign currency borrowings taken by the company to fund its expansion plans muted the gain from sustained fall in the rupee. The currency depreciation has also inflated Glenmark’s total borrowings in rupee terms.
The stock has delivered over 28 per cent gains since our recommendation in October 2012. Despite sound fundamentals, continued weakness in the rupee may risk Glenmark’s profits. At the current price of Rs 514, the stock trades at around 16 times its 2014-15 earnings. This is at a premium to other quality mid cap names such as Torrent Pharma and IPCA Labs. Investors may consider booking profits in the stock.
Glenmark derives nearly three-fourth of its revenues from overseas markets. With a portfolio of 87 drugs, the US accounts for over a third of the company’s revenues. It has a healthy pipeline of 53 drugs pending approval by the US Food and Drug Administration (FDA). However, heightening competition in the US market and resulting price erosion on its existing portfolio remains a challenge.
INCREASING COMPETITION
Given the pricing pressure in its existing portfolio, regulatory delay in new approvals may add to the woes. The impact of this was visible in the company’s June quarter performance. The constant currency growth in the US market remained modest at 11 per cent, despite exclusive opportunities such as the anti-infective ointment Mupirocin Calcium.
The growth in rupee terms was lacklustre at 13.9 per cent. Even as the management expects to grow its US revenues by 18 per cent in the current fiscal, competitive and pricing challenges could play spoilsport.
On the domestic front, implementation of the new drug pricing policy, regulatory tightening and delays in new drug approvals may pose growth hurdles. Domestic formulations constitute a fourth of the company’s revenues. In the past, Glenmark has managed to consistently grow faster than the market through its foray into new therapies and product launches. While the company’s growth may continue to beat the market, the pace of growth may slow over the next two years.
Glenmark has challenged the validity of US drug major MSD’s patent on the anti-diabetic drug Januvia and launched the generic version of the drug this April. The case is currently being heard by the Delhi High Court and an unfavourable verdict may risk Glenmark’s revenues and profits.
REGULATORY RISK
Though the company continues to grow at a healthy pace in other emerging markets — Brazil and Russia, there are growth challenges. Delay in new product approvals by the Brazilian regulator Anvisa (National Health Surveillance Agency) remains a concern. The management is cautious about the tightening regulatory landscape in the key emerging markets — Brazil, Russia and India — which may impede the pace of growth in the medium term.
Glenmark’s June quarter revenues grew 19 per cent over the same period last year to Rs 1,238 crore. Operating margin declined by 1.1 percentage points to 20 per cent due to higher spend on research. With the management indicating higher spend on this count in the coming quarters, margins are likely to remain subdued. Net debt rose 14 per cent in the June quarter, largely on account of a weak rupee.
Net profit, after adjusting for forex loss of Rs 55 crore incurred last year, declined by 2 percent to Rs 129 crore. Adjusted net profit margins declined by 2.2 percentage points to 10.4 per cent.
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