Glenmark Pharmaceuticals Ltd sorely needed a pep pill to drive away the blues and its out-licensing deal with Sanofi has done just that. That is easily seen from the stock’s reaction. As of Friday, Glenmark’s shares had fallen by about 23% since 1 December, while the BSE Healthcare Index of the Bombay Stock Exchange had fallen by 8% in this period. On Monday, Glenmark gained 11.5%, while the sector index was up by about 1%.
Nevertheless, this is only the first step in the out-licensing transaction and a long uncertain wait lies ahead before all of the estimated $613 million (around Rs2,765 crore today) in payments make it to Glenmark’s books. The novel biologics entity being out-licensed, GBR500, is undergoing clinical trials in the US for Crohn’s disease (inflammation in the digestive system) and multiple sclerosis.
Also see | A Shot In The Arm (PDF)
After announcing its March quarter results, Glenmark had said that the product had cleared the animal trials’ stage and would move into human trials in fiscal 2012 (FY12). This stage is critical and also very expensive to finance. Sanofi will now incur this expenditure, taking over the development of the molecule. Glenmark will get $50 million as upfront payments, half of which it will get after relevant data submissions.
If the drug makes it to the market, Sanofi will have exclusive rights for lucrative developed markets such as North America, Europe, Japan, and other markets such as Mexico, Argentina, Chile and Uruguay. It will co-market the drug with Glenmark in countries such as Brazil, Russia, Australia and New Zealand. And in emerging markets such as India and rest of the world, Glenmark will have sole rights.
What Glenmark gets is a stream of payments, but with unpredictable timing and quantum, as the drug moves ahead in clinical trials to final approval. After the drug is launched, it will also get a share of the product’s sales as royalty, which will be in double digits.
The deal limits Glenmark’s investment exposure to this drug, and the risk that it may not make it to the market. The product goes into the hands of a large multinational firm, with the requisite experience and financial muscle. The deal is also its second with Sanofi and the first out-licensing deal by an Indian company of a novel biologic entity. That, of course, is a vindication of Glenmark’s research competence.
Glenmark also needed some breathing space from the investments required for its research activities. As of 31 March, its debt was Rs2,100 crore and its debt-to-equity ratio stood at 1:1. In FY11, net interest (interest expense less interest income) was about Rs16 crore, or about one-fourth of its profit before interest and tax. It has eight molecules, of which two are out-licensed to Sanofi. The milestone payments from this deal will help it fund development work on these molecules, before they can be similarly out-licensed.
The very positive share price reaction is partly due to its underperformance for so many months. Investors should not forget that a number of years will elapse between now and the time that a launch is likely. The remaining $563 million will flow in over this long period.
Also, if the drug fails at any stage, the deal will be abandoned and so will the milestone payments. That is of course unpredictable, but has been the fate of many out-licensing deals by Indian pharmaceutical companies.
The $50 million payment will add to Glenmark’s income and profitability in FY12 and give earnings a boost, which is reflected in the share price rise. But an improvement in its core business performance is what investors would look for, as it is more predictable and sustainable. Further positive triggers could be: release of further milestone payments from the two out-licensed molecules, the launch of crofelemer—an anti-diarrhoea drug licensed to Glenmark from Napo Pharmaceuticals Inc.—and more out-licensing deals, apart from an improvement in the performance of its core business.
Graphic by Yogesh Kumar/Mint
We welcome your comments at firstname.lastname@example.org