Glenmark: steering financial deleverage through new products

Glenmark: steering financial deleverage through new products

Glenmark sales, aided by strong growth in the US, increased by a healthy 16.5% but net profit grew just 3.5% and missed analysts’ estimates

The Glenmark Pharmaceuticals Ltd stock has been falling steadily in the past few days. The company’s September quarter results have not been anything to write home about. Aided by strong growth in the US, sales increased by a healthy 16.5% but net profit grew just 3.5% and missed analysts’ estimates as high expenses and finance costs crimped earnings.

Nevertheless, there are two factors aiding the stock. One is the product pipeline. Business in the US is gaining traction. The company received approvals for 11 products in the first half of the current fiscal year. Last quarter it filed applications for two generic drugs and plans to do more in coming months. In India, another large market for Glenmark, it made two major product launches and is said to be seeing good sales.

The new drugs along with the forthcoming launch of a generic version of a patented cholesterol lowering pill will result in strong performance in the coming quarters, Glenn Saldanha, chairman and managing director of Glenmark, told CNBC-TV18.

The second factor is the financial deleveraging plan. A cholesterol lowering drug, gZetia, scheduled for launch in December, will have sales exclusivity for the company. It is a blockbuster drug (with annual sales of more than $1 billion) and is likely to have disproportionate impact on Glenmark’s earnings in the next three quarters at least. “The gZetia launch scheduled in H2 FY2017 will give a big fillip to sales and profitability,” Sharekhan Ltd said in a note.

Glenmark plans to use earnings from this drug to lower debt, a legacy problem that has weighed on its return ratios and stock valuations. The management aims to bring down the net debt-to-Ebitda ratio from 2.2 times last fiscal year to 1.25 times. Even otherwise, the management expects the profitability in the core business to improve due to new products. Ebitda is short for earnings before interest, taxes, depreciation and amortization.

Analysts estimate the cholesterol lowering drug and recently-raised funds to help cut debt by $150-200 million (Rs1,000-1,334 crore) by the end of the current fiscal year or early next year.

If things progress as planned, then a niggling worry about the company’s balance sheet will be addressed, which will bring down finance costs and help expand valuation of the stock, which is trading at a discount to sector average valuations. According to HDFC Securities Ltd, the Glenmark stock, up 10% in the last six months, reflects some of the positives.

A better-than-expected earnings boost from the forthcoming cholesterol drug launch can lead to “surprise returns”, adds HDFC Securities. While one cannot prejudge the business environment, the coming six months will be crucial to Glenmark’s balance sheet deleveraging strategy.


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