Glenmark Life Sciences Ltd- Q3FY22 Analysis
Updated: Feb 17, 2022
Glenmark Lifesciences struggle with growth continued for the second consecutive quarters. During the quarter, company's revenue grew by just 4.5%. Even this growth was feasible because of the CDMO business, which grew by 45% YOY, although on a very small base.
Brief Profile: Glenmark Lifesciences Ltd
Glenmark Lifesciences Ltd is a developer and manufacturer of select high value, non-commoditized active pharmaceutical ingredients (“APIs”) in chronic therapeutic areas, including cardiovascular disease(CVS), central nervous system disease(CNS), pain management and diabetes. The company also provides contract development and manufacturing operations (“CDMO”) services to a range of multinational pharmaceutical and specialty pharmaceutical companies.
Glenmark Lifesciences has 500+ clients in more than 65+ markets/countries. GLS is adding a number of new geographies and trying to grab more projects with existing customer base.
You can read my previous blog on 'Glenmark LifeSciences ltd' :
Glenmark Life Sciences Ltd- Q1FY22 Analysis
Glenmark Life Sciences Ltd- Q2FY22 Analysis
Glenmark Lifesciences Ltd - Q3FY22 Analysis
The slowdown in Generic API business was on account of higher base of COVID portfolio sales last year.
As you must be aware, Glenmark Pharma is the parent company of Glenmark Lifesciences(GLS) holing 82.85% stake in the company. GLS supplies to APIs to its parent and during the quarter, the revenue contribution from Glenmark Pharma i.e. was 41%.
As mentioned in my earlier blogs, Glenmark Lifesciences derives revenue from 2 segments:
1. Generic API (91% of Revenue) :
Generic API revenues in Q3FY22 increased 0.9% YoY, the growth appeared lower due to high base of COVID portfolio sales last year. If adjusted for COVID portfolio sales, the growth in this segment would have been 10%. In line with previous quarter, GLS is witnessing robust growth in Latin America, North America and Japan.
2. CDMO (9% of Revenue) :
CDMO revenues registered strong growth of 45.1% YoY in Q3 FY22 (from 28cr to 40.6c) and 30.9% in 9MFY22. The company is working on 3 commercial projects with MNCs. Fourth project which according to the management is quite large in size was to be commercial by Q4 FY22 has been delayed to Q3 FY23. The delay according to the management was due to delay in filing by the client. Also, they are in ongoing discussions with various global companies.
Margins are way better in the CDMO biz as compared to Generic API business.
Glenmark Life Sciences Ltd- Q3FY22 Financial Analysis
While the Q1FY22 for GLS was robust on the back of Favipiravir API sales. The sales and margins have been declined from then on. A couple of key factors impacting the top and Bottomline are increase in input cost and non-availability of KSM for one of its key product. In terms of revenue growth, the company is also faced with capacity constraints. The massive brownfield expansion at their Dahej plant is likely to commence partially from Q1FY23.
Also, there is also backward integration project going on in full throttle at their Ankleshwar plant which will come online in Q2FY23, this will help the company increase its margin as well as get assurance of the intermediate supply, the shortage of which GLS faced in Q3FY22.
The company is debt free and undertaking all its CAPEX via internal accruals.
Glenmark LifeSciences Ltd Product pipeline:
They have 26 products in development pipeline including 4 Iron complex and 7 Oncology products.
Of the 7 oncology products, 3 would be launched as soon as the brownfield expansion at the Dahej plant gets completed which is Q1FY23.
Iron Complex are high end APIs
6 DMF/CEPs were filed across major markets in Q3 FY22 and 20 DMF/CEPs filled during 9 M FY22 which take cumulative filings to 418 as on 31st Dec’21.
Glenmark Lifesciences Ltd - CAPEX:
Capex during the quarter was ₹32cr and 79cr for 9mFY22. All Capital expenditure(CAPEX) is being done via internal accruals only.
Company is accelerating the Ankleshwar project which is towards backward integration. Doing it aggressively. Being an inspected site, it helps in expanding the capacities of intermediates & APIs quite quickly. Amidst the supply uncertainties caused by various restrictions imposed by the Chinese govt on its companies, if there is supply security assured by GLS, reliance by its clients on the company will increase.
The Phase I of API brownfield capacity expansion has been delayed by a quarter. Earlier this capacity was expected to come in Q4FY22, now it will come in Q1FY23. It was on account of reduction in manpower on the site in the month of January owing to COVID restrictions.
One the key raw material used in the pharma industry is solvent which has now seen price stabilize after long period of steep increase.
Another input cost, Natural gas has witnessed price increase from ₹35 to ₹62.
Also, One more raw material used is Caustic Soda has witnessed price surging from ₹22 to ₹70.
During the quarter, the contribution towards R&D was 2.9%.
Some other initiative taken by the company are bringing in flow chemistry, membrane system for solvent recovery. GLS also keeps undertaking Cost improvement programme(CIP) to increase efficiency of its processes.
Let me quickly give a brief about these initiatives taken:
Granted there is more complexity in setting up a continuous system as compared to batch but once that work is done, the payback is very large.
Other links: https://blog.syrris.com/2018/04/21/flow-vs-batch-chemistry-how-the-reactor-design-affects-the-reaction/
Membrane system for Solvent recovery:
Membrane system for solvent recovery helps in scaling flow chemistry, enabling new chemistries, working with sensitive chemistries in small volumes, or reducing solvent costs and environmental footprint
Cost Improvement Programme is undertaken to improve process efficiency of GLS base business.
Glenmark Life Sciences Ltd
Management expect the EBITDA margin achieved in Q3FY22 of 28%, would be the bottom for the company. The increase in solvent cost has stabilized now.
Q3FY22 performance also suffered due to destocking by its customers given that this was the last quarter of their calendar year.
The third problem faced by the management in this quarter was the non-availability of Key Starting Materials(KSM) for its Sartan APIs. CVS (Cardio Vascular System) being GLS top therapy area, the impact felt was much more.
The massive brownfield expansion at their Dahej plant is likely to commence partially from Q1FY23. That would provide growth visibility.
Also, there is also backward integration project going on in full throttle at their Ankleshwar plant which will come online in Q2FY23, this will help the company increase its margin.
Glenmark Life Sciences Ltd
As on 11th Feb 2022, Glenmark Lifesciences Ltd's valuation stood at ₹6660cr. Its trailing 12 month sales stands at ₹2076cr with TTM profit of ₹424cr. The price to sales of the company stands at just 3.2x whereas price to earnings stands at a meagre 15.7x. I would think its a good price to start adding the stock for the long term.