Buy Glenmark Pharmaceuticals - Sharekhan

Recommendation: Buy
Price target: Rs404
Current market price: Rs296
Legal tangle on Crofelmer

Napo declares to terminate agreement with Glenmark on Crofelmer: Napo Pharmaceuticals Inc (Napo) has sought to terminate the agreement which was entered in July 2005 with Glenmark Pharmaceuticals (Glenmark) relating to Crofelmer, on the ground that Glenmark has failed to start regulatory filings and commercialise the product as per schedule despite the completion of phase-3 trials last year. In response, Glenmark has filed a statement of claims to American Arbitration Association against Napo seeking a declaration about Glenmark's right to develop, commercialise and distribute Crofelmer in 140 countries. Although Glenmark is confident to pass through the case and continues to work on molecule with a target to launch it within 15-18 months of regulatory filings, we believe the legal battle may either delay the product launches or the agreement may be terminated by court in a worst case scenario.

The legal tangle seems to be complex: The sequence of events which revolve around Crofelmer involve Glenmark (which holds the license for development and commercialising the product in 140 less regulated countries), Salix Pharma, USA (Salix; which holds a similar licence for regulated markets and has a separate agreement with Glenmark as well for API supplies) and the primary proprietor of molecule, Napo. Napo now wants to terminate agreements with both Glenmark and Salix for non-compliance of terms of agreements (mainly on the grounds of delay in regulatory filings). The products were allowed fast track approval process, given their high demand in HIV infected areas. Napo is claiming damages exceeding $150 million and seeks a declaratory judgment entitling Napo to terminate the collaboration agreement with Salix. Although, we do not expect any pay back by Glenmark, the complex legal battle raises acute uncertainties.

We take a conservative stand to exclude value from Crofelmer: The sequence of actions and counter actions by litigating parties and Glenmark's failure to register the products even in less regulated markets indicates possible delays and that brings uncertainties over the launch of this product. We prefer to take a conservative view about the launch of products in FY2013 and therefore exclude Crofelmer from the research and development (R&D) pipeline from the valuation points of view. Accordingly, our discounted cash flow based valuation of the R&D pipeline of Glenmark would get reduced by Rs21.8 to Rs41.9.

Maintain Buy with a reduced target price: We reduce our target price by 5% to Rs404 to factor the exclusion of upsides from Crofelmer. Our target price represents Rs42 per share for the R&D pipeline and Rs362 for the regular pharmaceutical business (16x FY2013E core earning per share [EPS]). However, we maintain our Buy recommendation on the stock given the strong traction in its generic and branded business in regulated and less-regulated markets respectively.

Source : Equity Bulls

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