Glenmark to boost cash flows, pare debt as it eyes a lighter balance sheet

Pharma major is monetising assets through licensing arrangements, restructuring operations

Glenmark Pharma has announced a slew of licensing agreements and steps to improve cash flow and pare debt. Pricing pressures in the US, investments in new molecules and drug development programmes, and capex have all led to higher leverage. In late August, the company entered into an agreement for sale of an inhaler drug in the European Union, having a market size of $724 million.

Executive Vice-President Achin Gupta believes there is significant opportunity in the inhaler market and the deal will give a further impetus to Glenmark’s growth in Europe. Earlier in August, Glenmark had entered into another licensing agreement for the China market for an oncology molecule, ensuring potential milestone payments in excess of $120 million. Glenmark has been investing in novel molecules and licensing opportunities, which helps reduce risk, improve cash flows, and deleverage its balance sheet.

The company has a net debt of close to Rs 36 billion on its books, with debt-to-equity ratio of about 1. This is much higher compared to peers. Sun Pharma, Lupin, Cipla, Dr Reddy’s and Cadila Healthcare’s debt-to-equity ratio ranges between 0.27 and 0.62.

As the company eyes licensing more molecules across various regions, analysts say that it is the potential milestone payments from its late phase R&D pipeline (especially oncology treatment GBR-1302 and GBR-830 for atopic dermatitis) that may warrant a re-rating, as the growth of earnings from its base business will remain subdued in the near term.  

Analyst concerns on the base business are led by challenges in the US market, which include channel consolidation and pricing pressure. While the US contributes about a third to Glenmark’s revenues, the company aims to give a push to domestic revenues (which contribute 30 per cent to overall revenues) to cushion growth worries in other markets. 

The company has also announced various restructuring moves and a partnership in the domestic arena. It is collaborating with private equity firm True North to create a separate entity and transfer its orthopedic and pain management business for India and Nepal at a valuation of Rs 6.35 billion. 

Though the proposed capital structure is not known, the transaction will be completed over the next couple of months. This will help improve its focus and resources to the orthopedic franchise, which has remained stagnant of late. The company is also expected to expand its presence in key growth drivers of the cardiology, dermatology and respiratory segments.

The orthopedic franchise was a smaller contributor, accounting for two per cent of consolidated FY18 revenues. Glenmark plans to transfer its larger active pharmaceutical ingredients, or API, business to a wholly-owned subsidiary at a book value of Rs 11.2 billion. API had contributed about 9.6 per cent to consolidated revenues in FY18. Glenmark also plans to monetise part of the business by selling a minority stake, and is waiting for the right valuations.

Ranvir Singh of Systematix Shares says Glenmark has been reeling under sizeable debt and hence a financial partner may bring some comfort. If the firm can garner the right valuations, the net debt can go down by as much as a third. In case it can bring its net debt down to Rs 20-22 billion, its debt-equity ratio will fall in line with many other large pharma peers, say analysts.

Meanwhile, with the various developments and recent transactions, Fitch Ratings feels that Glenmark’s financial flexibility will benefit from the management's focus on reducing leverage through stake sales, and partnerships. It is not surprising, then, that the stock has gained over 12 per cent over the last couple of weeks.