Glenmark Pharma announced on Thursday that it was selling 75 per cent of its stake in Glenmark Lifesciences (GLS – API manufacturing) to Nirma Ltd for ₹615 a share and would realise ₹5,651 crore from the transaction. The sale consideration implies a trailing PE of 16 times, which is in line with API peer Granules, but lower than the stock price of ₹646 on Thursday. The parent company will be left with 7.8 per cent of GLS and Nirma will have to undertake an open offer to the remaining shareholders.

While the company indicated only a 7-8 per cent stake sale in GLS, even as late as in the Q1FY24 earnings discussion, in the ‘sell’ call in the August 19, 2023 edition of bl.portfolio, we noted that the large stake in GLS is a counter to debt concerns, as it could be monetised. The parent Glenmark had a gross/ net debt of ₹4,400/3,000 crore at the end of Q1 and will become net cash positive from the proceeds as it intends to clear ‘a significant’ portion of debt. This removes the primary overhang on the stock and eases the pressure to monetise assets from Ichnos Lifesciences – its R&D subsidiary.

Impact on Glenmark Pharma

GLS reported revenues of ₹2,161 crore in FY23, which is 17 per cent of Glenmark’s consolidated revenues, but the API unit accounts for 28 per cent of the consolidated EBITDA. This is on account of 30 per cent margins for GLS, compared to Glenmark’s 15-19 per cent margins in the last three years.

The sale of the API unit may be marginally EPS dilutive to Glenmark Pharma. An EBITDA of Rs 475 crore (assumed for FY24) from the API unit may no longer be available, but it is offset by savings on the annualised Q1FY24 interest costs of ₹450 crore. However, the higher margins of GLS implies a margin dilution for the consolidated entity on asset sale. The improved pricing scenario in the US and lower R&D outlay could help cushion the dilution to an extent. The 7.8 per cent holding can add to other income. Overall, Glenmark Pharma can expect 2-5 per cent EPS dilution from the sale in FY24.

Large overhang cleared, others remain

Glenmark Pharma has rallied 88 per cent YTD as Ryaltris (hay fever) sales have gained traction in the US/EU, and many other markets. Besides, US portfolio led by derma had tailwinds from improved pricing. Additionally, expectations of debt clearance has added to the rally. The expectation was built on internal accruals, monetising of Ichnos Lifescience assets, and GLS stake sale. EU and RoW markets (24 per cent of FY23 sales) also delivered strong growth, supporting expectations of a revival.

Post debt clearance, Glenmark will still have to resolve Ichnos. The carved-out subsidiary houses high cost R&D assets, which have been cash-intensive, without a clear return profile. The company will still have to pursue asset monetisation through partnerships, even as debt clearance is tied up. The company had 13 per cent R&D expenses (as percentage of sales) in FY18-20 (largely to Ichnos’ assets), before reining it down to 10 per cent in FY23, and guiding it to 7-8 per cent going ahead. Monetisation is key to control this cost.

India and the US markets need higher investment on sales force and a sharpened portfolio approach to match peer growth. But Glenmark needs plant clearance from the US FDA to realise its portfolio, which includes a few asset launches starting from FY25 in respiratory, and may not match the launch momentum of its peers. We reiterate our sell call on the stock, unless the company announces a renewed strategy post transaction.