Glenmark Pharma: Buy

Exposures can be considered in the stock of Glenmark Pharma, which trades at about Rs 460. Though the stock has appreciated 40 per cent over the past three weeks on the back of the out-licensing deal struck with Merck of Germany for its anti-diabetic molecule, we believe that there still is some more steam left in the story. We have remained consistently positive on Glenmark's prospects and continue to position it as a best play on the pharma R&D theme in the country.

The key driver of Glenmark's stock in the recent past has been its ability to monetise molecules in its development pipeline through an out-licensing arrangement. The latest deal with Merck is once again a vindication of Glenmark's forte in this space. The deal envisages an upfront payment of $32 million (about Rs 145 crore), which will be reflected in the latter half of the current financial. Another such deal could be concluded this fiscal (possibly on the anti-asthma molecule for the European geography). With four other molecules set to enter trials, we believe that news flow on out-licensing arrangements will remain strong and act as catalysts for the stock.

On the base business front, too, there are positive signs. The India business continues to grow at a rate that's higher than the overall market, on the back of product launches and sharper focus on physicians. In the key US market, with a front end in place, Glenmark is ramping up filings with the US Food and Drug administration through alliances with partners. We expect the traction seen in these markets, as well as in other geographies, to sustain, going forward.

Clearly, the street appears to be attributing significant value to the R&D business, as the sharp run-up in price suggests. Any adverse developments on the discovery front - more so in the case of the two molecules that have been out-licensed - would be a major reversal for the stock, and, as such, would constitute the principal risk to our recommendation.