Glenmark Pharmaceuticals' Q3FY20 results (Outperformer) - Good quarter; compelling valuations
Q3FY20 result highlights
- Consol Revs came at Rs27.4bn vs est Rs26.5bn; +7% yoy. US revs came at $113m – lower vs est of $115m; $120m Q2; Mgt attributed lower sales due to price erosion in derma and loss of Ranitidine sales
- India biz grew at 18% way above est of 13% - Mgt guided to maintaining growth momentum, EU sales stood at Rs3.1bn vs est of Rs3.2bn (-4% yoy); Q2 was Rs2.9bn. Lat-Am came sharply above est and API and RoW sales were marginally below est
- Consol EBITDA came at Rs4.4bn vs est Rs4.3bn; 1% yoy, driven by higher revs and higher other exp as a % of sales; EBITDAM – 16.1% vs est 16.3%
- GMs at 66.1% were above est of 65.5%. R&D costs at Rs3.52bn vs Rs3.55bn in Q2; For FY19, R&D costs came at Rs3.5bn (13% of revs–highest amongst peers); 60% spend on innovation in Q3.
- Other income stood at Rs330m vs est of Rs100m primarily driven by forex gains (Rs280m). PAT came at Rs1.9bn inline with est
- Guidance going forward – FY21 Capex aimed at Rs7-8bn; Current net debt levels of Rs36.6bn have peaked out; India growth to continue momentum at 10-15%; APIs – 10-15% CAGR in next 3-5 years
- Corporate action guidance update–To initiate fund raise in innovation R&D business during Q4FY20; Close one partnership on innovative /speciality assets; Continue to work on divesting non-core assets
Impact on financials: Reduce earnings estimates by 2/6% in FY20/21E to account for lower US sales and higher expenses and introduce FY22 est
Valuations & view
Successive stable quarters led by strong growth in domestic formulations adds comfort to our view that Glenmark’s operating performance finally seems to be turning the corner. We believe a combination of capex optimization (~Rs8bn annually) along with improvement in operating performance should enable the company to finally start generating meaningful FCF from FY22 onwards. 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 the slow progress on balance sheet concerns is disappointing, with ~Rs42bn of branded domestic formulation sales (FY22) along with ~Rs23bn of branded formulation exports (FY22) and a profitable US business apart from sizeable API / EU franchises, we see significant upside opportunity in Glenmark’s current valuations (EV) of ~Rs125bn. Notably, at CMP, Glenmark trades at ~3x FY22E domestic formulations revenues with zero value for all other business segments. Maintain Outperformer with TP of Rs536 (12x FY22E 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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