U.S. Business, Stretched Balance Sheet To Weigh On Glenmark, Says Morgan Stanley

Brokerage firm Morgan Stanley downgraded Glenmark Pharmaceuticals Ltd. to ‘equalweight’ from 'overweight' citing weak business outlook in the U.S. and a stretched balance sheet. It has also cut its 12-month target price from Rs 1,146 to Rs 706.

Fewer regulatory approvals and pricing pressure in the U.S. will continue to weigh on the stock going forward, the report said.

It also sees only limited scope for the company to grow inorganically, limiting the overall growth prospects.

Morgan Stanley’s Bull Case

Price Target: Rs 962

Factors: Better than expected base business, additional out-licensing deals and surprise niche launch in the U.S.

Morgan Stanley’s Bear Case

Price Target: Rs 387

Factors: Sales slowdown and lack of new launches, setback in discovery research and higher competitive intensity in the niche portfolio.

The drugmaker's 180-day exclusivity period to sell Zetia, a cholesterol drug in the U.S. will also end soon, prompting the brokerage house to reduce its earnings-per-share (EPS) estimates for financial year 2016-17 and financial year 2017-18 by 26.4 percent and 24 percent respectively.

Hurdles

Unsuccessful clinical trials of New Chemical Entities (NCEs), volatility in emerging market currencies and regulatory hurdles are some of the key risks which could prove as impediments for the stock to touch its target price, said Morgan Stanley.

Tailwind

Faster than expected growth in the base business, new approvals in the U.S., improvement in balance sheet and earlier than expected monetisation from the NCEs and speciality pipeline are some of the factors that may provide impetus to the stock to reach its target price.

Morgan Stanley expects a 8.8 percent Compounded Annual Growth Rate (CAGR) for FY17-18 and an EPS CAGR of 2.6 percent.

Shares of Glenmark fell as much as 2.92 percent to Rs 632.15 on the National Stock Exchange.