Glenmark Life Sciences

Stock Opportunities
1

Hi All,

Could not find any thread on Glenmark Life Sciences(GLS) and hence started the thread. While the recent listing was definitely muted but fundamentals tell a very different story. Company is primarily into API business with a small proportion of business dedicated to CDMO. It has got 80% of Top 20 pharma companies as its clientele and has got an envious product range. It boasts of ~120 high-value products across cardiovascular, CNS, diabetes, anti-infectives and other therapy areas. These are all non-commoditized products. Additional capacity building is ongoing and Dahej facility should come with this additional capacity by early 2023. They are also coming up with a new Greenfiled facility in Solapur that will increase the current production by 100% in 3-4 years. Last quarter results were very strong. Management commentary was bullish where they talked about China+1 being real and demand environment is pretty solid. Track record has been good, no severe or import alerts has been issued for the company.

If anyone is tracking the company or has got any inputs, please do share your thoughts.

Thanks
Naveen

9 Likes
2

This was a good piece posted by ICICI Direct on GLS.

Disc:- Already invested in the company

(https://www.icicidirect.com/mailimages/IDirect_GlenmarkLife_IPOReview.pdf)

2 Likes
3

Thanks a lot. This was the IPO note.

Looking at the last results, and management confidence post results concall, I feel GLS deserves better. From a valuation standpoint, compared to famous or named players, this appears inexpensive in comparison. Other point to note is that it has got 0 import alerts or severe warnings post regulatory audits in last 5-6 years, which is an envious track record.

1 Like
4

Q122 concall notes

  • 16-18% growth guidance
  • RoCE of 30%+ to continue as focus on regulated mkts + non commodity generics
  • Brownfield and Greenfield expansion is going on - internal accruals
  • Generics are non commodity in nature
  • Growth strategy- generics current base to help with geo expansion and (price erosion impact + growth ) to come from new launches , emphasizes process innovation as key differentiators to deal with price erosion while giving Sartan example where price erosion didn’t impact them much
  • CDMO - bit cyclical/lumpiness, 3 commercial molecules currently and Q422 to see 1 more being added - this segment to help in margins- didn’t give revenue share in mix
  • Top Customer concentration risk exists, Glenmark share in rev is 40% - too high if I got it right
  • Valuations are attractive at sub 20 PE, very few generic players have reported good growth in Q122 - GLS stands out, Debt free, Ongoing Capex indicates good demand
  • RoW seems to be a crucial part in growth contribution though mgmt emphasizes focus on highly regulated mkt
  • New Mgmt has been around for 8 Qtrs now and have improved performance by driving multiple Initiatives( R&D focus, MPP plants giving fungible capacity, process and yield etc), including IPO readiness

Mkt may need some performance visibility given muted performance from most generics players, hence probably muted reactions after listing as well as Qtrly results.

Disc - Tracking positions

13 Likes
5

They got into oncology and peptides space…
Spending 2.3% on R&D and 13% of employees in R&D
Owns 39 patents and 41 currently pending application

3 Likes
7

this warning letter for Glenmark Pharma not Glenmark Life Science

Since 2015 Glenmark Life Science company facilities have been subject to 38 inspections and
audits by regulators including the USFDA and others. It has not received any
warning letters/import alerts from regulatory authorities. Its facilities have
also been subject to 432 inspections by customers during this period.

8 Likes
8

Hello,

This is my first post here. I have been reading up on this company, given the current valuation and high return ratios, this seems like an interesting proposition. Some concerns/risks which I think might be contributing to the low valuations as compared to the peers.

The parent, Glenmark Pharma, buys 40 per cent of Life Sciences’ sales. It will take some time to see how this plays out.

It sources 40 per cent of its basic raw material from China, so there is a geopolitical risk here as well.

Glenmark Pharma, the parent, does not have an outstanding track record. Its revenue grew at an annual rate of 7.5 per cent over the last five years while net profit compounded at 5.5 per cent. It has a debt of Rs. 4200 crore. There is a possibility that the parent could further dilute its stake to pare down its debt.

Disclosure:- Initiated a tracking position. Not an investment advice.

10 Likes
9

Does anyone know share holding pattern? I was not able to find the holding patter. Would be interesting to see, other than promoters who else has got the stake in the company.

10

Hello,

Since the thread was started by @gnaveen4 (Mr Naveen Gupta) only he can edit it. I have tried to elaborate on the company as below, hoping it would suffice the forum standards and expectation. If it does then I would request you to reopen the thread.

Company background

Glenmark Life Sciences (GLS) is an active pharmaceutical ingredients (API)arm of Glenmark Ltd. Glenmark launched the API manufacturing business in Kurkumbh in Maharashtra in 2001-02. In 2019, the API manufacturing business was spun off into a different company with sole focus on API business. Glenmark Life Sciences is engaged in the development/manufacturing of high-value, non-commoditised APIs. The company has a portfolio of 120 products that have a market size of $142 billion. These products are used in various therapy areas, such as central nervous system, cardiovascular, diabetes, anti-infective.

The business

API business:- The API business is engaged in manufacturing high-value raw materials to make drugs for chronic problems like heart disease, stroke, cancer, diabetes, and chronic lung disease. Due to chronic nature of these diseases, they require regular medication. The API business accounts for around 90 per cent of the company’s revenue (FY21). As of FY21, it had a portfolio of 120 molecules globally, sold APIs in India and exported APIs to multiple countries in Europe, US, Latin America, Japan and RoW.

CDMO business:- Besides developing its molecules to be sold as APIs, it also researches and develops specific client requirements on a contract basis. This business is called contract development and manufacturing operations (CDMO) and brings in 8 per cent of its business. It provided Glenmark Pharma, its parent, favipiravir, a covid drug that the former sold last year. The company has scaled up its contract development and manufacturing operations (CDMO), accounting for around 8 per cent of the overall revenue in FY21.

Capacity

Currently, it has four manufacturing facilities at Ankaleshwar, Dahej in Gujarat and Mohol, Kurkumbh in Maharashtra with total installed capacity of 726.6 KL as of FY21. It plans to use the part of the proceeds from the IPO (152 crore) to expand the capacity of its existing API facilities by 28 per cent. These are expected to come online by 2023

It also plans to commission an 800 KL greenfield facility in Solapur, Maharashtra, in the next three to four years. This new facility will double the current capacity of the company. This facility is intended to be funded from internal accruals and debt financing (if required).

Glenmark’s addressable market size

The global API market is valued at $181 billion (in 2020). Of this, Glenmark’s 120 products have a market size estimated at $142 billion. This addressable market is expected to grow by about 6.8 per cent over the next five years to $211 billion by 2026.

Strengths of the company

Non-commoditised/Niche products:- The company’s API portfolio comprises specialised and profitable products, including niche and technically complex molecules, which reflects GLS’s ability to branch into other high value products. The future growth of these products is expected to remainstable driven by the increasing prevalence of non-communicable diseases (including heart disease, stroke, cancer, diabetes and chronic lung disease),
growing demand from the regulated markets for drugs indicated for hypertension, diabetes and cancer, and an aging population.

Quality track record:- Since 2015, its facilities have been inspected by the USFDA and other global regulatory authorities 38 times. However, it has not received any warning letter or import alerts from these authorities.

High ROCE business:- GLS has earned a high return on capital employed (ROCE). ROCE averaged at 33 per cent in the last two years.

No Debt:- Out of the IPO proceeds, it will pay Rs. 800 crore to Glenmark Pharma as payment for outstanding purchase consideration for the spin-off of the API business into a new company, so the company is debt free. The repayment of debt to its parent will allow it to use more of its free cash into building R&D and higher capacities.

Risks/Concerns:-

The parent, Glenmark Pharma, buys 40 per cent of Life Sciences’ sales. It will take some time to see how this plays out.

It sources 40 per cent of its basic raw material from China, so there is a geopolitical risk here as well.

Glenmark Pharma, the parent, does not have an outstanding track record. Its revenue grew at an annual rate of 7.5 per cent over the last five years while net profit compounded at 5.5 per cent. It has a debt of Rs. 4200 crore. There is a possibility that the parent could further dilute its stake to pare down its debt.

Glenmark Life Sciences operates at risk of regulatory restrictions. The fact that it cleared all inspections in the past is no guarantee it will continue to do so.

The company’s top 10 products accounted for 66.36% of FY21 revenue. If market growth in key products declines, or if profit margins on products sold
in key products decline, results of operations could be adversely affected.

Management
Dr Yasir Rawjee (MD & CEO) has headed Glenmark Life Sciences since 2019. His last stint was at Mylan as the head of Global API operations. He has worked at the SmithKline Beecham Pharmaceuticals, GlaxoSmithKline and Matrix Laboratories Ltd in his two-decade career.

19 Likes
14

I was trying to edit but cannot do so. Your post is extremely helpful.

18

I have a very basic question which I’ve even mailed to the management.

How was the consideration of 1162 cr, book value of API business transferred to Glenmark Life Sciences (GLS), arrived at?

As per my understanding, the parent company Glenmark Pharma was still the 100% sole beneficiary after the slump sale i.e. there was no dilution in the equity or shareholding of parent in GLS.

So why was there a need for any consideration at all in the first place?

19

Look at it this way! If you are a Glenmark pharma shareholder you no longer have an API business. Whats your compensation for that
Glenmark pharma essentially sold it’s API business to it’s subsidiary which had no business. GLS had no money to buy it then but now it does from the IPO proceeds. It’s a clever way of transferring your debt really. Please let us know the managements reply here on the forum. Would like to know how they came up with this 1162 number. Thanks!

2 Likes
20

Sorry, I don’t get you - where is the “selling” involved? Can you explain?

This is what’s my understanding. If I’m a Glenmark pharma (GP) shareholder, I still have ownership of the API business via GP as it still has 100% equity ownership of Glenmark Life Sciences (talking before the IPO when the slump sale was announced in 2018-19).

From page 69 of the GLS IPO prospectus - Glenmark Pharma was the sole owner of GLS.

image
image986×542 99.9 KB

Now IPO fund raise break-up as per below (ICICI IPO note):

image

The offer for sale of 453 crore (~5% of equity at issue price) is the sale of shares by Glenmark Pharma to the institutional and public shareholders. And including the fresh issue dilution, Glenmark Pharma now holds 82% in GLS.

However, the other major chunk - 800 crores is part of the 1162 crores to be paid by GLS to Glenmark Pharma, also money which has been paid for by the institutional and public shareholders which has raised the company’s valuation by 10%. The remaining 362 crores was paid by GLS to the parent in the last couple of fiscals.

However, my question remains - why does GLS need to pay Glenmark Pharma any consideration at all for the slump sale when Glenmark Pharma remained as the 100% sole beneficiary?

This is how I read it - Glenmark Life Sciences IPO subscribers have given 800 crore of cash to Glenmark Pharma (& assume it’s shareholders) without getting anything in return!

As per the posts below, sort of satisfied that this 1162 crore is the book value of assets (PPE, inventory, receivables) transferred to GLS by GP based on 2019 balance sheet figures.

Prospectus - https://www.bseindia.com/corporates/download/384650/IPO%20BasisOfAllotment/Glenmark%20Life%20Sciences%20Limited-%20Prospectus_20210803100938.pdf
ICICI Note - https://reports.chittorgarh.com/ipo_notes/Glenmark-Life-Sciences-IPO-Note-ICICI-Direct.pdf

PS: I was on the Monday morning 8:30am (suspiciously early time for a first call as many analysts joined around 9am and call was closed by 9:20) Q1 conference call as well waiting to ask this question, but the operator abruptly closed the call 50 mins into the call and I never got a chance. Alas, will be pursuing this at every level to understand this slump sale transaction better.

Disc: Have taken a position post IPO as the company is into complex high margin APIs, growing CDMO business and doubling capacity in the next few years.

8 Likes
21

I think there’s a very simple explanation to this transaction. GLS was probably a shell company when it became a 100% subsidiary of GP. Thereafter in Oct 2018, GP transferred its API business to GLS for consideration to be received in cash. Against the deal value of app 1162 crs, a sum of 362 crs was paid off from Oct 2018 to date. The balance 800 crs was sought to be paid from the IPO proceeds. Even if GLS is a WoS it has to pay for the assets it gets from parents, either in cash or in kind.

3 Likes
23

Hey gurjot. in my haste to finish researching,I had a cursory look at the slump sale and assumed a few things- since slump sale is transfer of business for a lump sum consideration , i assumed this consideration was non monetary in this case and sits on it’s books as a liability… i haven’t checked the books yet. apologies for replying without doing my due diligence.bull market has made me less sceptical than usual:)

In a typical slump sale both seller and buyer will look out for their own interests and come to a fair price but what happens when both parties are the same. like a parent and it’s subsidiary?. i think thats the larger question you are asking. Is it?
Anyway thanks for bringing this to my attention. i will resume my research on GLS tmr. will try to understand the nature of slump sale and check for red flags if any. Not invested yet

3 Likes
24

Thanks! This is what I assumed without confirming the same because I thought slump sale is kind of a corporate restructuring thing between group companies. But I had a question. Does it involve capital gains as it is sale of assets? I remember reading something like this and just checked online to confirm the same but it’s unclear. Could you shed some light on the same

25

A slump sale of a business, even if between related parties, will need to have an arm’s length valuation and yes, there is a tax liability in case the sale value is in excess of net assets value (book value of assets - liabilities) transferred.

3 Likes
26

Thanks for clarifying! Is it possible that Glenmark pharma did the slump sale with plans to do an IPO of GLS eventually so that they could eventually reduce Debt on their books. That’s how I saw it at first. Would it be too speculative of me to assume that?

27

I doubt that that could have been the thought process on day one. They could have taken multiple routes to raise these funds- take external debt in GLS or sell part stake to PE investors or demerger. But I don’t think there was any hurry to get the debt repaid as they did wait more than 3 years. What tilted the scales in favour of IPO, IMO, is that suddenly API business has become the ‘flavour of the month’. Looking at the huge valuation of Divis and success of Solara post demerger has prompted several pharma companies to go the same route of demerger/spinoff. (demerger of pharma biz by Aarti Industries is latest example). I think the primary objective was to unlock value and separate out the profitability of API and formulations biz. Post IPO, the value of GLS in books of GP has gone up from ~ 1500 crs to ~ 6500 crs. The payment of outstanding debt was a secondary but welcome outcome of the transaction.

4 Likes
28

Thanks a lot for clarifying.

So if i look at GLS 2019 balance sheet, the sum of fixed assets (plants and machinery), inventory and receivables is around 1300 crores and subtract payables of ~180 crore, to get 1120 crores which is what the transaction was valued at.

Is this what is referred to as the book value of the business and the approx. value of the slump sale?

image
image828×1336 123 KB

I thought about this some more, I still don’t fully get it.

If GLS is liquidated today, GP would still get 82% of the entire proceeds (equity, assets, etc) and so it’s like they’re getting double consideration for the same assets?

2 Likes