[Investors Please Listen] Glenmark Pharma Event Update ; Poor data on Oglemilast ; downgrade to Hold ; Targe : Rs 211

Forest Laboratories (licensing partner) and Glenmark has announced that Phase IIb result on Oglemilast in Chronic Obstructive Pulmonary Disease (COPD)  did not show a statistically meaningful increase from baseline compared to placebo in the primary endpoint trough FEV1, a measure of pulmonary function that is decreased in patients with COPD. Though, Forest Labs has indicated that they will continue to carry Phase II study in other indication of Asthma, where the Phase IIb clinical data is expected somewhere in Q1CY10.
We view this development as a big setback for Glenmark. This is the second molecule after GRC 6211 (out-licensed to Eli Lilly), which has shown negative clinical result. Though, drug discovery is always associated with high risk high return proposition. However, because of two consecutive failures, we would not like to ascribe any value to R&D pipeline (Rs34/share for Melogliptin) till the time company successfully launches at least one molecule in the market. Moreover, we are of the view that earnings will remain under pressure because of high debt and R&D cost. It will be imperative for the company to replace his high cost debt either by diluting equity/ placement in the generic business or through efficient working capital management even if it has to compromise on the growth. Our earning estimates for generic business are Rs12.9 and Rs17.6 for FY10E and FY11E. We are now valuing Glenmark on base business and removing the value of R&D assets. As a result we are lowering our target price from Rs299 to Rs211 (12x FY11E; in-line with mid-cap Pharma peers) and downgrading our rating from Buy to Hold. The key risk to our call is company's ability to generate significant milestone payment by out-licensing other molecules in the pipeline.
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