Glenmark Pharmaceuticals' Q4FY19 results (Neutral) - Soft quarter; Sluggish US performance
Q4FY19 result highlights
- Consol Revs came at Rs25.6bn vs est Rs26bn; +12.4% yoy. US revs came at $109m – significantly lower vs est of $122m; $119m Q3; Mgt ascribed it to gMupirocin supply shortage and higher price erosion in derma.
- India biz grew at 10% largely in line with est; EU growth was flat in line with est at Rs3.2bn; Q3 was Rs3.2bn. RoW and Lat-Am sales were above est and API sales were below est
- Consol EBITDA came at Rs3.6bn vs est Rs4.3bn; -16% qoq – impacted by higher other expenses; EBITDAM – 14.2% vs est 16.6%
- GMs at 66.4% were in line. Staff costs at Rs4.9bn was lower than est Rs5.3bn. However, other expense rose sharply to Rs8.4bn vs est Rs7.7bn partially due to a one-off expense of Rs600mn related to launch of Remogliflozin launch activities and restructuring of GLS; Q3 was Rs7.5bn
- R&D costs at Rs4.04bn vs Rs3.45bn in Q3; For FY19, R&D costs came at Rs13bn (13.1% of revs–highest amongst peers); 60% spend on innovation.
- Glenmark booked Rs308mn worth of forex gain in other income. PAT came at Rs1.6bn vs est Rs1.7bn
- Net debt was flat yoy; lower ~Rs2bn in constant currency terms
- FY20 Guidance: 10-15% rev growth; R&D costs to be lower than FY19; Staff costs as % of sales to decline yoy – if executed, this should drive operating leverage
- Corporate action guidance - Bring minority investor in GLS (API subsidiary); close one partnership on innovative /speciality assets
Impact on financials: Reduce FY20/21 earnings by 8% / 4%
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. 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 Glenmark’s FY20 guidance underlines focus on cost control and valuations are attractive at ~13x 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 Rs625 (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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