Glenmark Pharmaceuticals' Q2FY18 results (Neutral) - Good quarter
Q2FY18 result highlights
- Consolidated revenues at Rs22.6bn were marginally ahead of est Rs22.1bn. US sales came at $113m ($162mn in Q1; est $110m). Domestic sales grew +8% yoy (like to like growth) vs est +6%. EU sales came at Rs2bn ahead of est Rs1.75bn.
- GMs came inline at 66.7% vs est of 67%. GPs came at Rs15bn vs est of Rs14.8bn. Emp cost stood higher at Rs5.6bn (+16% yoy). SG&A cost stood sharply lower at Rs5.6bn (-17% yoy) led by lower selling cos and overall cost control drive. Driven by lower SGA costs EBITDA stood at Rs3.88bn (17.2% margin) ahead of our est of Rs2.5bn (11.2% margins).
- Other income at Rs297m was higher than estimates while tax rate at 22% was lower than est of 26%. Consequently PAT came in at Rs2.14 sharply ahead of our est of Rs0.73bn
- On net debt front, company reported ~Rs1.4bn qoq increase but guided to Rs3b overall debt reduction in FY18.
Key positives: Sharply lower SGA costs
Key negatives: RoW sales; continued stress on free cash generation
Impact on financials: Reduced our FY18/19 earnings est by 7%/10% to account EM revenues, lower GMs and higher depreciation.
Valuations & view
Given a sharp decline in base business (ex-Zetia FTF) earnings in FY17, we are cautious on Glenmark’s earnings growth trajectory over FY17-19. While 2QFY18 earning performance has been encouraging, the sustenance of the same needs to be monitored. While the potential of Glenmark’s R&D driven growth model has always been a compelling story, the volatility in its earnings profile and company’s inability to generate free cash / reduce debt have been dampeners. At CMP, the stock trades at reasonably rich valuations of 15.5x FY19e. Further, net debt continues to stay high at ~1.6-1.8x EBITDA. This should cap upsides unless the company is able to launch some high value ANDAs in US and/ or unlock value in its innovation R&D assets through some big ticket out-licensing deals. Maintain Neutral with a target price of Rs709. The impending data on GBR830, a prime outlicensing candidate, will be a key monitorable in the near term.
Glenmark Pharmaceuticals is engaged in the discovery of new molecules, both NCEs (new chemical entity) and NBEs (new biological entity), with seven molecules in various stages of clinical development & pre-clinical development. Co.'s Drug Discovery business primarily focuses in the areas of inflammation, metabolic disorders and pain. Co.'s Formulations business focuses on therapeutic areas such as dermatology, anti-infectives, respiratory, cardiac, diabetes, gynecology, CNS, and oncology. Co.'s Glenmark Generics Ltd. business focuses on developing, manufacturing, selling and the distribution of generics through wholesalers, retailers and pharmacy chains.
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