Glenmark Pharmaceuticals' Q3FY18 results (Neutral) - Below estimates; Gross margins dip sharply
Q3FY18 result highlights
- Consolidated revenues at Rs22bn came inline with est Rs21.5bn. US sales came at $114m ($113mn in Q1; est $115m). Domestic sales grew +12% yoy (like to like growth 14%) vs est +9%. Other segments were in line.
- GMs came lower at 64.5% (66.7% in Q2) vs est of 67% led by lower India sales. GPs came at Rs14.2bn vs est of Rs14.4bn. SG&A cost stood higher at Rs6.4bn (+13% qoq) led by forex loss of Rs250mn; ex forex it was inline. Consequently EBITDA stood lower at Rs3.2bn (14.6% margin) vs our est of Rs3.7bn (17% margins).
- Other income came at negative Rs232m vs est of Rs100m led by reversal of ~Rs230m of prior forex gains while tax rate stood higher at 32% (includes one-time charge of Rs52mn) vs est of 24%. Consequently PAT came in at Rs1.05 sharply lower than our est of Rs1.8bn
- On net debt front, company again reported ~Rs1.05bn qoq increase.
Key positives: Higher India sales; outlook for non-US sales
Key negatives: lower GMs, continued stress on free cash generation
Impact on financials: Reduced FY18/19 earnings est by 32%/15% and introduced FY20 estimates
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 / reduce debt have been dampeners. Notably, the core FY18e EBITDA is likely to revert to FY15 EBITDA levels despite maintaining a fairly clean record in terms of regulatory compliance during this period. This is indicative of the challenges in the base business arising from 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 the sharp earnings cut, at CMP, the stock still trades at reasonably rich valuations of 16.4x FY19e. Further, net debt continues to stay high at ~2x EBITDA FY19e. This should cap upsides unless the company is able to launch some high value ANDAs in US and/ or unlock value in its innovation R&D assets through some big ticket out-licensing deals. Maintain Neutral with a target price of Rs635 (18x FY19E).
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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