(Naveen Kumar Saini/ Mint)
(Naveen Kumar Saini/ Mint)

Glenmark’s debt reduction therapy does not cut much ice with investors

  • The US business was impacted by a decline in sales of its Mupirocin cream
  • Glenmark is undergoing a restructuring exercise

Glenmark Pharmaceuticals Ltd perhaps needs a stronger pep pill. Its first-quarter (Q1) results disappointed and fell short of analysts’ expectations. Besides, investors are not expecting its debt reduction plans to be any smooth either.

A bigger disappointment came in its overseas businesses, particularly in the US, which clocked revenue growth of just 3.86% year-on-year in the June quarter. Analysts were expecting double-digit growth in the low teens from this important market.

Europe posted a fairly decent increase of about 10.5%, while Latin America saw revenues shrink 17%. Revenue growth in the rest of the world was about 5.4% year-on-year.

The US business was impacted by a decline in sales of its Mupirocin cream. Besides, tropical dermatological and skincare products are seeing significant price erosion, which has been continuing for three quarters now. Thankfully, two generic approvals in the second quarter could shore up its US business.

Besides, the company has launched multiple products in major countries in Europe during Q1, which should aid growth in the coming quarters.

Costs, though, have piled up in Q1. Raw material prices have surged by about 22% year-on-year. As a result, Ebitda margins have dipped from 16% a year ago to 14.7% in the June quarter. This is about 200 basis points below analysts’ estimates. Ebitda is earnings before, interest, taxes, depreciation and amortization.

Besides, Glenmark is undergoing a restructuring exercise. The company plans to reduce debt by about 700-800 crore in FY20. On this front, it is seeking a partner for its specialty chemicals business. Additionally, it is also seeking a minority partner in the recently separated active pharmaceutical ingredient business, Glenmark Life Sciences Ltd.

But slow business conditions, particularly in the US, are not convincing the market of this debt reduction programme. “Despite several niche approvals, Glenmark’s US business has failed to take off and restricted the company’s ability to meaningfully reduce debt as parallel investments in specialty/innovation pipeline have continued. Given a tepid outlook, we expect debt reduction to be gradual ( 400 crore vs. 700-800 crore guidance)," said analysts at Emkay Global Financial Services Ltd in a note to clients.

Additionally, its Baddi plant is facing regulatory issues, with the US FDA classifying it as Official Action Indicated, which impedes business from this facility. Much will depend on how soon Glenmark comes out of this and how its US business progresses, going forward.

“Increasing pricing pressure in the US and highly leveraged balance sheet limit the stock’s upside potential," said Reliance Securities Ltd in a recent client note. Little surprise, Glenmark has tumbled over 15% since its results were announced on 13 August.

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