Glenmark Pharmaceuticals' Q1FY20 results (Neutral) - Another soft quarter; Sluggish US performance
1FY20 result highlights
- Consol Revs came at Rs23.2bn vs est Rs23.9bn; +7% yoy. US revs came at $105m – lower vs est of $110m; $109m Q4; Mgt ascribed it to gMupirocin volume declines and higher price erosion in derma products.
- India biz grew at 13% largely in line with est; EU growth was lower than est (10% yoy) at Rs2.4bn; Q4 was Rs3.2bn. RoW and Lat-Am sales were below est and API sales were inline
- Consol EBITDA (incl. forex loss) came at Rs3.4bn vs est Rs3.8bn; -1.5% yoy – impacted by higher staff costs and a forex loss of Rs250m; EBITDAM – 14.7% vs est 15.8%
- GMs at 65.1% were below est of 66%. R&D costs at Rs2.95bn vs Rs4.0bn in Q4; For FY19, R&D costs came at Rs13bn (13.1% of revs–highest amongst peers); 60% spend on innovation.
- Glenmark booked Rs250mn worth of forex loss in other expenses. PAT came at Rs1.1bn vs est Rs1.7bn
- Net debt rose Rs1.18bn qoq
- Corporate action guidance update– Likely delays in efforts to bring minority investor in GLS (API subsidiary); Mgt banking on non-core asset sales to reduce debt by Rs7-8bn in case GLS stake sale doesn’t materialize; Continue to aim for fund raise in innovation R&D business by Q4FY20; Continue to guide to close one partnership on innovative /speciality assets – close to partnering bXolair.
Impact on financials: Reduce FY20/21 earnings by 18/13% to bake in lower sales revenues and reduced profitability.
Valuations & view
While the potential of Glenmark’s R&D driven growth model has been compelling, company’s volatile earnings trajectory, inability to generate free cash along with frequent disappointments on its multiple guidance measures have been dampeners. Recent case in point is potential delay in GLS stake sale and reversals wrt Ryaltris / US branded derma strategies. On the core business front, Glenmark struggles to grow its US business (key driver for profitability along with India) despite receipt of multiple niche approvals. While post sharp correction in last few months, Glenmark’s valuations are attractive at ~11.5x FY21E, we would prefer to await delivery on the mgt guidance on debt reduction and free cash generation to review our rating. Maintain Neutral with TP of Rs470 (13x FY21E PER).
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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