Maintain ‘reduce’ on Glenmark Pharma

We maintain our 'reduce' rating on Glenmark Pharmaceuticals with a target price of R510, based on 18x FY2014e EPS of R28.3, as we expect limited near-term financial upside for Glenmark from supplies to Salix. Crofelemer US sales are likely to be less than $50 million in FY2014-15.

The USFDA has granted approval to Crofelemer (brand name: Fulyzaq) delayed release tablets from Salix Pharma. Crofelemer is the first drug to be approved for symptomatic relief of non-infectious diarrhea (twice daily) in HIV patients (on anti-retroviral therapy). Salix has the marketing rights for all indications in North America, Europe and Japan under a licence agreement with Napo Pharma. The drug is expected to have US peak sales of $150-200 million according to Salix. Crofelemer is only the second botanical prescription drug approved by the US FDA.

Under the agreement, Glenmark will supply Crofelemer API to Salix for sales in regulated markets. The US launch will depend on the outcome of the ongoing litigation between Salix and Napo related to the alleged failure of Salix to commercialize the drug in a timely manner. The botanical raw material in Crofelemer (Croton lechleri) is harvested from South America and will be converted into API.

In July 2011, Glenmark received up-front payment of $15 million from Salix to fund capacity build-up for Crofelemer, which is yet to be recognized by Glenmark in the P&L (expected to be recognized on US launch). In Q2FY13 Glenmark invested Rs 700 million in capital expenditure towards the Crofelemer facility. Besides there will be additional milestone payments (total of $6.6 million) to be received in five equal annual installments. Glenmark will also receive payments for the API supply. Salix had shown limited interest in commercializing Crofelemer despite the $150-200 million in peak-sales opportunity. We believe this may indicate the limited commercial potential for the drug in the US. We remain cautious about the peak sales potential, indicated by Salix.

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