Glenmark Pharmaceuticals' Q2FY20 results (Upgrade to Outperformer) - Strong performance driven by US & India backed by cost optimization
Q2FY20 result highlights
- Consol Revs came at Rs28bn vs est Rs26bn; +9% yoy. US revs came at $120m – higher vs est of $108m; $105m Q1; Mgt ascribed it new product launches and expects these levels to sustain with market share gains. Post the erosion, gMupirocin is now no longer a meaningful product.
- India biz grew at 15% way above est of 10% - Mgt guided to maintaining growth momentum, EU growth was inline with est (9.3% yoy) at Rs2.9bn; Q1 was Rs2.4bn. RoW, Lat-Am and API sales were above est
- Consol EBITDA came at Rs4.5bn vs est Rs3.6bn; 2% yoy, driven by higher revs and lower other exp as a % of sales; EBITDAM – 16% vs est 14%
- GMs at 65% were below est of 65.5%. R&D costs at Rs3.55bn vs Rs2.95bn in Q1; For FY19, R&D costs came at Rs13bn (13.1% of revs–highest amongst peers); 55% spend on innovation in Q2.
- Other income stood at Rs808m vs est of Rs100m primarily driven by forex gains. PAT came at Rs2.6bn vs est Rs1.4bn
- 6m OCF of Rs5.9bn; Capex of Rs5.1bn and interest payout Rs1.56bn; Net debt inc of ~Rs2.4bn since March’19 – largely due to MTM impact; Mgt indicated debt has gone by ~$3m in USD terms.
- Corporate action guidance update– Non-core asset sales to reduce debt by Rs7-8bn in case GLS stake sale doesn’t materialize; To initiate fund raise in innovation R&D business during Q4FY20; Continue to guide to close one partnership on innovative /speciality assets
Impact on financials: Maintain earnings estimates
Valuations & view
After a series of disappointing quarters / developments, Glenmark finally seems to be turning the corner as reflected in its solid operational performance across revenue and cost management during Q2. We believe a combination of capex optimization along with improvement in operating performance should enable the company to finally start generating FCF from FY21 onwards and address a key investor concern. Ability to raise capital in the innovative R&D business can further ease the pressure of innovative R&D spends on cash flow generation. While company’s patchy earnings performance and inability to generation FCF in the past are concerns, with ~Rs36bn of branded domestic formulation sales along with ~Rs20bn of branded formulation exports and a profitable US business apart from sizeable API / EU franchises, we see significant upside opportunity in Glenmark’s current valuations of ~Rs120bn. Ability to generate value in innovation R&D business can provide further upsides. Upgrade to Outperformer 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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