Glenmark Pharmaceuticals' Q3FY19 results (Neutral) - EBITDA miss; Seeks to unlock value in innovative R&D
Q3FY19 result highlights
- Consol Revs came at Rs25.5bn vs est Rs24.9bn; +18% yoy. US revs came at $119m – bit lower vs est of $122m; $116m qoq; despite few meaningful launches, qoq pick-up been modest
- India biz grew strongly at 15% much ahead of est of 8%; notably dom sales growth is even higher adj for Ortho biz divestment. Another positive surprise was strong EU growth – 43% vs est +11%; Rs3.2bn vs est Rs2.5bn; Q2 was Rs2.6bn. RoW, Lat-Am and API sales were in line
- Consol EBITDA came at Rs4.3bn vs est Rs4.6bn; flat qoq – impacted by higher other expenses; EBITDAM – 17% vs est 18.5%
- GMs at 66.3% were in line. Staff costs at Rs5.0bn was lower than est Rs5.3bn. However, other expense rose sharply to Rs7.5bn vs est Rs6.6bn; Q2 was Rs6.5bn. R&D costs at Rs3.45bn was higher vs Rs3.05bn in Q2
- Glenmark booked Rs1.3bn worth of forex loss in other income. PAT came at Rs1.16bn vs est Rs2.1bn
- Company has decided to spin-off its innovation business in a new subsidiary based in the US; Generics and speciality business will stay with the listed entity. This company will be headed by a separate CEO and have an independent board
Key positives: Domestic and EU growth
Key negatives: US sales
Impact on financials: Reduce FY19/21/21 earnings by 7% / 5% / 3%
Valuations & view
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 have been dampeners. Additionally, the company struggles to meaningfully grow its US business (key driver for profitability along with India) despite receipt of multiple niche approvals. On the positive side, there has been improvement in the core EBITDA generation over the last couple of quarters which bodes well. Over the last few quarters, Glenmark has also initiated multiple corporate actions to reduce debt which can create a meaningful impact on earnings as well as balance sheet from FY20 onwards. While valuations are now attractive at ~16x FY20E, post the recent correction, 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 Rs652 (15x 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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