Glenmark Pharmaceuticals (Glenmark) has reported that the experimental treatment for chronic obstructive pulmonary disease (COPD) has proved ineffective (ie failed to show significant benefits) in mid-stage clinical trial, as Oglemilast (Phase II b, lead molecule) did not show statistically meaningful increase from baseline compared to placebo in the primary endpoint.
The partners for the molecule, Forest Laboratories (Forest Labs) would drop Oglemilast for COPD indication owing to the disappointed study, but would continue the research on Oglemilast for Asthma cure, the results for which are expected during the first calendar quarter of FY2010. However we feel the visibility for the same is low. A positive data could have resulted into another milestone payment.
The news of disappointing results for Oglemilast COPD was hidden under the backdrop of in-licensing deal, which Glenmark?s research and development (R&D) partner Forest Labs signed for a similar molecule Daxas (Roflumilast) from another company, Nycomed, in the last week. The Forest Labs? management had then stated Oglemilast as a ?potentially complementary opportunity?.
Forest Labs in-licensed Roflumilast from Nycomed by paying upfront milestone payment of $100 million. Roflumilast also falls in the same drug category?PDE-4 inhibitor?and is targeted for COPD.
We had viewed Oglemilast as a promising molecule in Glenmark's later stage pipeline (constituting 55% of our R&D pipeline value), however a failure now would result in declining focus, which could cast a shadow over the chances of success for Oglemilast (for Asthma) commercialisation and monetisation of other NCE molecules in pipeline.
Although we await more clarity from Glenmark?s management about the future of Oglemilast (now for Asthma cure), it would not surprise us if the deal falls through wiping out the option value completely (as the main indication was COPD). In the event of uncertainty clouding the fate of the molecule, we remove our probability adjusted discounted cash flow (DCF) of Rs50 for Oglemilast from our estimates and value Glenmark at 12x its base business earnings and Rs43 for its R&D pipeline (Melogliptin and Crofelemer).
Sighting the lower visibility of monetisation of its R&D pipeline and no near-term catalyst in sight, we feel that the stock is likely to be under pressure for the next two-three quarters diminishing the possibility of any near-term re-rating. Hence we downgrade our recommendation on the stock to Hold with the revised price target of Rs251.
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