Glenmark Pharmaceuticals' Q4FY18 results (Neutral) - Operationally in-line
Q4FY18 result highlights
- Revs at Rs22bn came in-line with est of Rs23bn. US sales came at $109m ($114mn in Q3; est $114m). Domestic grew +6% yoy (LTL growth of 8%) vs est +9%. EU/LatAM stood higher at Rs3.2bn/1.28bn vs est of Rs2.4bn/Rs1.04bn; while RoW / API were below estimates.
- GMs came at 65.6% (64.5% in Q3) in line%; GPs at Rs15bn (Rs14.2bn in Q3) vs est of Rs14.9bn. SG&A cost stood higher at Rs7.04bn (+11% qoq) vs est of Rs6.9bn with inline employee cost. R&D was Rs3.2b (14% of revs) vs Rs2.8bn (12.7% in Q3). Resultant EBITDA at Rs3.27bn / 14.3%; flat qoq – marginally lower than est of Rs3.4bn / 14.9%
- Other income stood higher at Rs696mn (includes forex gain of Rs650mn) vs est of Rs182m. Tax rate stood higher at 39% vs est of 15%. PAT at Rs1.5bn lower than est of Rs1.8bn due to sharply higher tax rate
- On net debt front, company reported a decline of~Rs2.6bn vs March’17
- Company guided to 10-15% revenue growth for FY19 with flat qoq US sales in Q1FY19.
Key positives: Higher EU/LatAM sales; higher GMs
Key negatives: Lower US/India sales, higher SG&A cost
Impact on financials: Reduced FY19/20 earnings est by 12%/14%
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. Notably, the core FY18 EBITDA has reverted to FY15 levels despite maintaining a fairly clean record in terms of regulatory compliance during this period. This is indicative of the base business profitability challenges due to aggressive R&D investments and expansion in operating costs as also a fairly lackluster US business. Given the low exit base in FY18, earnings will likely bounce back strongly going forward when the pace of US approvals picks up. Given successive earnings cuts, the stock still trades at reasonably rich valuations of 19.3x FY19e. Further, net debt continues to stay high at ~2x EBITDA FY19e. This should cap upsides. Maintain Neutral. Triggers for upgrade will be high value ANDA launches in US and / or generation of meaningful cash flows from corporate actions / big ticket out-licensing.
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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