Glenmark Generics listing unlocks value for parent

Glenmark Generics listing unlocks value for parent

New Delhi: GlenmarkGenerics Ltd(GGL) is raising Rs575 crore through an initial public offering (IPO), marking the last step in the spin-off of Glenmark Pharmaceuticals Ltd’s (GPL) generics division. The IPO gives GGL a market-determined valuation, and GGL is using a large portion of the proceeds to meet some of its obligations arising from the spin-off.

GPL owns about 96% of GGL’s equity capital, which will come down to about 85% post-issue. That translates to an indicative market capitalisation of about 5,000 crore. GPL’s own market capitalisation is 6,400 crore while its share in GGL alone will be worth about 4,200 crore.

What will GGL do with the money being raised? It will pay about 480 crore, or 80% of the issue size, to fund an equity investment in its Swiss subsidiary Glenmark Generics Finance SA. This company will in turn pay this sum to Glenmark Holding SA, a subsidiary company of GPL, as part of the consideration for the generics business spin-off. The total consideration due is 215.6 million Swiss francs, or about 1,000 crore, which will come down by half after this transaction.

Incidentally, Glenmark Holding had borrowed foreign currency loans worth $113 million, according to the offer document of GPL’s recent qualified institutional placement issue. GPL is also a guarantor for these loans. These loans came with some financial covenants, like a cap on total group borrowings, which were to be computed based on the dollar-rupee rate. According to the document, a 27% appreciation in the dollar has led to a ‘technical default’ on these financial covenants. These defaults also trigger cross-default provisions in some of its other borrowings. These lenders can ask for a repayment or enforce the security given for the borrowings. Or, they could also ask for accelerated payments from the company. The company has sought a waiver of these technical defaults from its borrowers.

The money that flows from GGL to Glenmark Holding SA gives it the flexibility to use this money for meeting its obligations, if any. While the issue lowers GGL’s obligations, it does not fund any specific business related project. The residual amount of 95 crore can be used for various corporate purposes. Thus, it will be its existing business that will drive performance and return for shareholders.

GGL focuses on the pure generics and active pharmaceutical ingredient (bulk drug) markets. The US is its main market, contributing about three-fourths of revenue. GGL’s FY09 operating profit margin was a healthy 26%. GGL has also focused on niche segments, where there is lower competition; and on drugs where there are patent challenge opportunities. If it wins a patent challenge, it can get marketing exclusivity for six months, leading to a windfall. Its profit margins will thus be better compared to that of low end generics.

In FY09, GPL’s generic business revenue grew by 25% to 986 crore though it declined by 15% in the last quarter. The company attributed the decline to destocking at the distributor level and fewer new ANDA (abbreviated new drug application) approvals from the US Food and Drug Administration. In the first quarter of FY10, revenue was virtually flat at 239 crore, better than the decline in the previous quarter.

Both GGL and GPL would like to see their respective debt burdens come down. Apart from the issue proceeds, they would seek to use cash flows from the business to pay off debts. GPL has one more option: after listing, its stake in GGL is more valuable and also liquid. It can sell some more of its stake to raise more funds if needed. As for GGL, its valuations depend entirely on returning to growth in the coming quarters.