Home >Markets >Mark To Market >Improved cash flow, debt reduction crucial for Glenmark Pharma

Glenmark Pharmaceuticals Ltd’s shares have run far ahead of peers in the past year. The Street is now looking for progress on the debt reduction front, even as sales improve. Hence, the recent news that the company is preparing for an initial public offering (IPO) of its wholly owned subsidiary Glenmark Life Sciences will be keenly watched.

Glenmark is one of the few companies in the pharma world with slight concerns on debt. It had a net debt of 3,758 crore on 31 March, 2020 which translated to net debt-to-Ebitda of 1.6 times. Ebitda, which stands for earnings before interest, taxes, depreciation and amortization, is a measure of profitability. Analysts estimate net debt to be at 3,550 at the end of FY21.

Even as Glenmark's growth in India remains strong, improved sales performance in the US remains crucial to drive its earnings
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Even as Glenmark's growth in India remains strong, improved sales performance in the US remains crucial to drive its earnings

High investments in developing new molecules have been a key reason for rising debt. Glenmark is also focused on out-licensing deals, which would help fund R&D costs, improve profitability and cut some debt. However, analysts say other capital-raising initiatives are crucial for debt reduction. Out-licensing in pharma refers to partnerships to develop molecules. The company has remained in active discussions with various partners for monetizing the Ichnos Sciences business, a 100% innovation subsidiary based in the US. The monetization was anticipated in the second half of FY21, but hasn’t materialized yet, which has been a dampener. “Lack of free cash flow (FCF) generation by Glenmark has been a long-standing concern. Delay in Ichnos monetization is a recent dampener on this front," said analysts at Macquarie Research in a report dated 30 March, 2021. Apart from capital-raising initiatives, analysts are also looking at improvements in cash flow through improved profitability. The company’s Q3 performance provides some encouragement on this front. The domestic formulation business grew 12% and is likely to grow further, supported by improved acute segment sales.

While US sales were soft, they had indicated some reduction in pricing pressure. After the Q3 results, analysts at Motilal Oswal Financial Services Ltd (MOFL) raised their earnings estimates for FY22 and FY23 by 8% and 6% respectively. They are factoring growth to be driven by new launches in the domestic and US formulations markets. The Q4 performance too is anticipated to be better with analysts at Anand Rathi Securities Ltd expecting US sales growing 3.5% year-on-year (y-o-y) from a 2.3% y-o-y decline in Q3. Helped by the launches in the injectables and nebulizers segments, MOFL anticipates US sales growth of 10% y-o-y in FY22.

Analysts at Macquarie Research too say that “FCF prospects in FY22 are looking promising led by likely 400 crore organic FCF". They expect the company to raise 350-550 crore through the Ichnos fund-raise, 900-1000 crore from the IPO and an out-licensing deal in the US. As these can reduce debt, there is little room for disappointment and delays that have been the case in the past.

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