Biotech Values

[DewDiligence]

As Indian Drug Firms Join Push to Create, Glenmark Is a Leader

http://online.wsj.com/article/SB120767470359398329.html

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By RUMMAN AHMED
April 9, 2008

BANGALORE, India -- After years of making generic drugs, some Indian pharmaceutical companies are trying their hand at developing new ones -- a risky, expensive strategy that pits them against global giants such as Merck and Pfizer.

India's biggest drug makers have joined the rush to create products, typically under licensing deals with foreign pharmaceutical companies that help finance costly, lengthy research.

Industry heavyweights like Dr. Reddy's Laboratories and Ranbaxy Laboratories have entered the R&D fray, but some analysts contend that Mumbai-based Glenmark Pharmaceuticals may be best-placed to cash in on the trend.

The new strategy reflects big changes in the business environment. For one thing, established Indian drug makers face slimmer profits from their traditional focus on copying popular drugs, as more local and foreign competitors join the global generic market and governments aim to lower health-care costs.

At the same time, India's adoption of product patents in 2005 has boosted the incentive for innovation by local companies that, in the past, simply tweaked the way foreign-patented drugs were made and sold cheaper generic versions.

Enhanced by the prospects of earnings from R&D business, Indian pharmaceutical stocks could be a good defensive bet in current uncertain market conditions, analysts say. When listed drug concerns this month start reporting fourth-quarter and annual results for the year ended March 31, their earnings are expected to rise 25% on average. The pharmaceutical sector has also been much less volatile than banking, power and metals since India's stock market turned bearish this year.

And -- with growing worries over the global economy – Indian drug companies also stand to gain from outsourcing contracts, thanks to manufacturing costs 30% to 40% lower than most Western drug makers.

Drug development in India is still in its relative infancy. And there is no guarantee of success -- years of effort often end in failure. Indeed, no company has yet released an original drug, a process experts say can take 10 years and cost about $1 billion.

Most Indian companies still lack the financial muscle to bear such expenses, so they have turned to licensing deals with foreign concerns that cushion them from the cost of clinical or human trials -- the most expensive part of the process.

Even so, industry analysts are increasingly rating Indian drug concerns on their R&D activities. With almost 60 new drugs in various stages of development in the local industry, analysts are evaluating companies on the number of compounds, or drug molecules, they have in trial and whether research results are rewarded by their foreign licensing partners with so-called milestone payments.

"In today's market, one needs to look at stocks that have a slightly differentiated story," said Vikas Sonawale, an analyst at Mumbai-based Religare Securities. "A retail investor does not have a thorough knowledge of the drug R&D business. So, when Glenmark receives milestone payments from a global pharma company, it helps value the company's R&D efforts."

That is why Mr. Sonawale and some other analysts like Glenmark, India's fourth-largest drug maker by market capitalization after Sun Pharmaceutical Industries, Cipla and Ranbaxy.

Like its peers, Glenmark develops drugs until they are ready for human testing and licenses further development to global concerns for a fee, ensuring a steady flow of cash on top of its older generics business. In the nine months ended Dec. 31, Glenmark's licensing revenue rose 29% to 1.79 billion rupees ($44.9 million) from a year earlier, contributing about 13% of total revenue.

"Glenmark stands out because it has a successful track record" in clinching licensing deals to develop new drugs, Mr. Sonawale says.

Glenmark already receives fees from companies such as New York-based Forest Laboratories, which bought the U.S. development and marketing rights for an asthma drug in 2004 [#msg-17985629]. The same drug is being tested in Japan by Teijin Pharma, which signed a licensing deal with Glenmark in 2005 [#msg-6152499].

Last October, Glenmark licensed a pain-treatment molecule it is developing to Indianapolis-based Eli Lilly. Glenmark is also developing a diabetes drug and is looking for a licensing partner.

"Glenmark will have eight drugs in clinical trials" by March 31, 2009, says Chief Executive Glenn Saldanha. "This is a very broad portfolio and improves our chances of success."

Dr. Reddy's, which began research and development operations in 1993, eight years ahead of Glenmark, has one molecule for the treatment of diabetes in the final stage of human testing and two other drugs in the initial stage.

Among the other companies, Ranbaxy is working on Arterolane, an antimalarial drug that is in the midstage of human trials. The company also has a tie-up with European drug giant GlaxoSmithKline to develop one molecule for asthma treatment. Ranbaxy has projected that its milestone payments could exceed $100 million.

But analysts say Glenmark holds the lead in the licensing sweepstakes. The company says that since 2004 it has received between $110 million and $115 million for the drugs so far licensed for development. It expects to receive payments of about $70 million for both the just-ended fiscal year and the one that ends in March 2009.

Glenmark is "one of the best innovative R&D plays in Indian pharmaceuticals," says Prashant Nair, a Mumbai-based analyst with Citigroup, who has a "buy" rating on the stock. He says its licensing deals have been a key driver of its stock price.

On Tuesday, shares of Glenmark soared 6.2% to 522.15 rupees. Citigroup has a 12-month price target of 592 rupees, 13% above the latest close.

At Tuesday's close, Glenmark is trading at 20.9 times one-year forward earnings, according to Citigroup. Based on its projections, Ranbaxy is trading at 21.6 times and Dr. Reddy's at 17.2 times.

Balaji Prasad, a Mumbai-based analyst with Goldman Sachs Group, has a 12-month target of 664 rupees for the stock. While Glenmark isn't slated to commercially launch its first drug until 2011, Mr. Prasad says he expects the company to report positive safety and efficacy data in the next six to nine months on some of the drugs now in the human testing stage. That could give Glenmark shares a boost, he says.

On April 28, Glenmark is expected to report results for the year ended March 31. Citigroup estimates Glenmark's net profit for the just-ended financial year almost doubled to 5.9 billion rupees, with sales rising 52% to 18.6 billion rupees.

Citigroup expects the listing of wholly owned subsidiary Glenmark Generics -- expected later in 2008 -- to benefit Glenmark stock. On April 1, Glenmark shifted its generics business to the subsidiary to streamline operations.
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