GRC 8200 out-licenced to Merck

Glenmark Pharma has entered into an out-licencing agreement with Germany's Merck KgaA for its prospective diabetes molecule GRC 8200.

Event

In its second major out-licencing deal in two years, Glenmark Pharmaceuticals Ltd (GPL) has entered into an out-licencing agreement with Germany's Merck KgaA for its prospective diabetes molecule GRC 8200. The first molecule out-licenced by Glenmark was a prospective drug for asthma, GRC 3886.

Background

GRC 8200 is a prospective anti-diabetes molecule to be used in the treatment of Type II diabetes. GRC 8200 belongs to a class of drugs called dipeptidyl peptidase IV, or DPP-4, inhibitors. They increase the body's ability to lower blood sugar. Compared with the existing drugs, research shows that patients using DPP-4 do not gain weight and suffer fewer side effects.

Currently, GRC 8200 is undergoing Phase II clinical trials (in which it is tested on humans) in India and South Africa. With its unique properties and fewer side effects, the drug can turn out to be a blockbuster molecule upon commercial launch in 2010. The DPP-4 category of drugs is expected to have peak sales of an estimated 9 billion euros globally. Apart from being a potential blockbuster, Merck could also use the drug in combination with its other anti-diabetes drugs.

The transaction is expected to close this year, pending approval from the US antitrust agencies.

Nature of the deal
Glenmark has out-licenced its anti-diabetic molecule to Merck KgaA for further research, development and commercial launch. The terms of the agreement are as outlined below:

* Glenmark will get a total of €190 million (approximately Rs1,110 crore), including an up-front payment of €25 million (approximately Rs146 crore), besides milestone payments upon successful development and launch of mono-therapy and combination products based on GRC 8200.
* Merck KGaA will develop, register and retain commercial marketing rights for GRC 8200 in North America, Europe and Japan.
* Glenmark will retain commercialisation rights for India for the GRC 8200 molecule.
* Both companies—Merck and Glenmark—will share the marketing rights for the other countries in the world.
* Merck KGaA will bear the cost of ongoing studies on GRC 8200 and will be responsible for planning, managing and sponsoring all development activities in the future.
* Upon commercial launch, Glenmark will supply the active ingredient to Merck and will receive royalties on net sales of the product.

Rationale

Research and development of new molecules is a long-term process in which the new molecules undergo pre-clinical trials, clinical trials and patent approval before they are commercialised. It usually takes close to seven to nine years of research to develop a single molecule and costs over US$800 million. After having reached Phase II clinical trials, Indian companies typically out-licence further development of new molecules to international partners who have larger financial resources, infrastructure and marketing networks to take the molecules to subsequent levels of trials and commercial launch. Most large Indian pharma players have followed this practice in the past as is seen below.

Implications & valuation

The out-licencing deal for GRC 8200 is expected to generate revenues of €25 million (approximately Rs146 crore) for Glenmark in FY2007. This revenue will accrue directly to the company’s bottom line and is hence expected to add Rs11.6 (assuming a diluted equity) to the company’s earnings per share (EPS) in FY2007. The Rs11.6 per share increment provides a 57.6% upside to the company’s current FY2007 consensus EPS estimate of Rs20.3.