Corporate Development     

Published: September 30, 2023
Updated: September 30, 2023

Glenmark Pharmaceuticals

Will GLS holders bite Nirma carrot ?

In just over two years of listing its subsidiary, Glenmark Life Sciences (GLS), on NSE and BSE, holding company Glenmark Pharmaceuticals (GPL) has entered into a definitive agreement with Ahmedabad-based Nirma Ltd to divest 75% stake in GLS out of 82.84% it holds in the company. GPL intends to continue with the balance 7.84% stake in GLS. At Rs 615 per share, GPL will get an aggregate consideration of Rs 5,651.50 crore. Pursuant to this transaction, Nirma will make a mandatory open offer to all public shareholders of GLS for 17.15% at Rs 631 per share.

NON-COMPETE DEAL

The transaction will help strengthen GPL’s balance sheet, as the company will utilize the sale proceeds to prepay its entire debt, making it net debt-negative. GLS contributes about 11% to the consolidated revenue and about 25% to the operating profits of the consolidated entity. GLS and Nirma have agreed to certain non-compete and non-solicit arrangements for a specific period. GPL will continue to have a five-year procurement agreement with GLS as GPL procures about 15% of its API requirements from GLS.

As of March 2023, GPL had a consolidated long-term borrowing of Rs 3,852.14 crore (PY: Rs 2,571.74 crore) and short-term borrowing of Rs 495.59 crore (PY: Rs 1,098.60 crore), resulting in a combined debt of Rs 4,348 crore (PY: Rs 3,670 crore). Post the GLS realisation, GPL’s finance cost will get reduced to almost zero – it has been Rs 349.58 crore in FY23 and Rs 298.09 crore in the FY22.

India Ratings and Research (Ind-Ra) has placed GPL’s bank facility ratings on ‘Rating Watch’ with positive implications, which indicates that the ratings may be either affirmed or upgraded. Some of their observations are being summarized here to get a better insight:

Subdued performance in FY23: In FY23, consolidated revenue grew by only 5.6% yoy to Rs 129.9 billion, led by the muted performance of GPL’s India and US businesses (jointly accounting for 55% of its sales). The consolidated EBITDA margin fell to 17.5% in FY23 (FY22: 18.9%), due to higher operating expenses (FY23: 7.3% yoy; 12.7% yoy) and staff cost (13.6% yoy; 4.4% yoy). In Q1FY24, revenue increased 22.5% yoy to Rs 34 billion, led by strong growth across geographies (US: over 22.0% yoy; rest of the world (RoW): over 30.4% yoy; Europe: over 73.7% yoy; API: over 15.9% yoy), except India (up by only 2.8% yoy).

The EBITDA margin remained healthy at 18.6% in Q1FY24 led by moderation in research and development (R&D) ing pressure to continue in the US business in the near term, but the impact of the same might be offset by its new launches. Ind-Ra expects GPL’s US business to continue to face delays in approvals and regulatory risks.

Diversified business profile: GPL remains a strong and consistent player in the domestic formulations business, with higher sales contribution from the chronic segment (57% of India business), which offers steady income and higher margins. Formulations account for 89% of the company’s sales, and APIs account for the rest. The company generates equal revenue from both regulated and semiregulated markets. In terms of geography, India and the US are the largest markets for the company, accounting for 31% and 24% respectively of its sales. Other geographies such as RoW (18%) and Europe (14%) jointly account for 32% of sales. In the US business, the top 10 products contribute on average 43-45% to sales. GPL has a large pipeline for the

US market, with 233 abbreviated new drug application (ANDA) filings, of which 183 ANDAs have been approved by the US Food and Drug Administration (USFDA). The company’s growth prospects are being driven by its R&D spend of around 11.5% of sales over FY17-FY23, which is higher than the average R&D spend of its peers.

India business on strong footing: GPL generates one-third of its total sales from its India formulations business, which grew 15.5% yoy to Rs 40.9 billion in FY22 (FY21: Rs 35.4 billion), led by a higher contribution by Fabiflu drug and new launches. The company has been recording steady revenue growth over the past 10 years (CAGR of around 15% as against around 10% of the Indian pharmaceuticals market) while maintaining a strong competitive position in cash flow-sticky chronic therapies (57% of India sales) which offer higher profitability. However, in FY23, the India business’s sales fell by 1.4% yoy to Rs 40.3 billion, due to the higher base in FY22, following Covid-19. Ind-Ra expects mid to low double-digit sales growth in the India business in FY24.

Regulatory overhang: GPL’s ratings continue to reflect the regulatory risk emanating from the price control, with around 10% of India sales under the drug price control order, and the USFDA’s regulatory scrutiny of the company’s manufacturing facilities. Three facilities of the company have been under the USFDA scanner: i) the Baddi plant received an import alert in October 2022 (warning letter in October 2019); ii) the Goa unit received a warning let

in November 2022 (official action indicated (OAI) in May 2022), and iii) the formulations manufacturing unit in Monroe, North Carolina, received a warning letter in June 2023. GPL settled its drug pricing case with the US Department of Justice in August 2023 ($ 30 million). Undoubtedly, GLS has good potential to accelerate its growth. However, it is equally important to wait and watch till the new management unfolds their business plans for the next level of growth for the company.