The 1% gain on Monday notwithstanding, the Glenmark Pharmaceuticals Ltd stock is still down 5% from last week, when its December quarter (Q3) results were announced. The fall demonstrates how central the US market is to the company and the Indian drug industry.

Q3 revenue increased 15.9%, in line with Street estimates. What came as a negative surprise though is a mere 5% expansion in US revenue in dollar terms. Revenue lagged despite notable product launches last quarter. Just like for most Indian drug firms, the US is a key driver of profitability for Glenmark. In the first nine months of FY19, a third of the company’s revenues came from the US.

Despite new product launches, Glenmark's sales in the US grew just 5% in Q3 over a year ago.
Despite new product launches, Glenmark's sales in the US grew just 5% in Q3 over a year ago. (Vipul Sharma/Mint)

India, another large market, fared relatively better, clocking 15% growth in revenues last quarter. That, however, brought limited solace as the US business, where much of Glenmark’s efforts and investments were directed, continues to lag. Revenue in dollar terms is down 12% so far in FY19.

What impacted revenue was price erosion in the generic drug business and contrary to expectations, new drugs launched did not offset this. “Given the pick-up in sales of big ticket products like gVagifem, this modest quarter on quarter increase (in Q3) is disappointing. This raises concerns on the company’s ability to secure a meaningful delta in its US business despite a fair share of niche product approvals during 9mFY19," IDFC Securities Ltd said in a note. The concerns have led to cuts in earnings estimates.

The slow growth in the US business is having bigger ramifications. The lag in cash flows is delaying the deleveraging process as well. Net debt remains above two times that of ebitda (earnings before interest, tax, depreciation and amortization). Net debt showed a decrease of 60 crore on a sequential basis, but at 3,430 crore, it has changed little from March 2018.

To reduce leverage, Glenmark decided to separate its research business. It plans to bring in a strategic or financial investor, which could help the company raise funds and reduce the financial burden from research. “We think the move is a significant positive as it can substantially reduce the drag on base business valuation," Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a note.

But such stake sales take time. Further, since Glenmark met with limited success in its earlier efforts to reduce debt, analysts are in a wait-and-watch mode. “While (the stock) valuations are now attractive at 16 (times) FY20 (estimates), post the recent correction, we would prefer to await delivery on the management guidance on debt reduction and free cash generation," said the IDFC Securities note.