Glenmark Life Sciences IPO — Why It May Not Be the Best Buy

The IPO of API manufacturer Glenmark Life Sciences (or “Glenmark Life”) is scheduled to hit the markets on July 27th, marking this year’s 29th public offering. With another company riding the wave before it crashes (relax, it always does), let us hit you with the finer points of this listing, and why we are not liking it so far.

IPO Stats

• Issue Size: ₹1,060cr ($142.4m) — Fresh Issue AND ₹453.6cr ($61m) — Offer for Sale of 63 lakh shares assumed at the higher end of the announced range i.e. ₹720 ($9.7)
• Issue Price Range: ₹695–720 ($9.5) per equity share
• Market Lot: 20
• Issue Break-up: QIBs (50%), NIIs (15%) and Retail Investors (35%)

What We Object?!

Before we head into some spiel on the company and the super exciting outlook it sits on, let us call a spade a spade. Not much of this money would be used to fuel growth!

What?! Yes. Around two-thirds of the c. ₹1,500cr ($201.6m) to be put in by the IPO investors would end up reaching the company (i.e. The primary). And out of this two-thirds (₹1,060cr), almost ₹800cr ($107.5m) would be paid to the promoter (“Glenmark Pharmaceuticals Limited”) as part of an outstanding liability Glenmark Life owes from its spin-off transaction executed in October 2018.

Translation: Glenmark Life was spun-out from Glenmark Pharmaceuticals as a standalone company. The former has to pay a consideration to the latter for the same, which would be funded by this IPO. In a way, the promoters would run to the banks, taking a large part of the IPO proceeds (₹800cr + ₹453.6cr = ₹1,253.6cr or 83% of total funds raised) — something which excites no investor.

Probably no one cares since shares of the company have already begun attracting a 40% grey market premium. :)

For more on this, check the “Objects of the Offer” section in the DRHP (pg. 75).

Company Profile

Glenmark Pharmaceuticals, the parent company (and promoter) of Glenmark Life, is one of the top pharma companies in India. Established in 1977, the company grew to be a leading manufacturer of generic drugs and active pharmaceutical ingredients (API).

The company made a fortune capitalising on the rising market and policy winds favouring generics and patent liberation from exclusive manufacturers. By 2011, Gracias Saldanha, the Founder of the company rose to become one of the richest men in India.

However, after his son Glenn Saldanha took over the reins, he was faced with multiple challenges in the form of slowing revenues and mounting debts. He decided on a path of consolidation to salvage the generics operation of Glenmark into multiple verticals (API and innovation).

Result: Glenmark Life was spun off as a wholly-owned API business subsidiary of Glenmark Pharmaceuticals in 2018. A month later, it spun off another wing — innovation and R&D — into a US-based subsidiary.

Following this, Glenmark Life began operating as an independent, professionally-managed global API business with four manufacturing and three R&D facilities spread over Gujarat and Maharashtra. Currently, it has strong market share in selected APIs (those related to cardiovascular, central nervous system, pain management and diabetes).

The company is looking to expand into the contract development and manufacturing organisations (CDMO) business. This involves drug development and manufacturing services. It is a way for pharma companies to outsource their development and manufacturing business while they focus on R&D and innovation. Suffice to say that this is a step ahead in the planned course-correction from “imitating old drugs” to “innovating new drugs” that Glenn Saldanha had embarked upon.

Company Financials

Glenmark Life operates along two business lines — Generic API (generic and complex APIs) and CDMO (including specialty). The former accounts for more than 90% of its revenue (as per FY21 financials).

Assuming listing at the higher end of the issue price, Glenmark Life trades at a trailing P/E of 22.08x, comparatively at a discount vis-a-vis its peers.

The business has demonstrated 16% growth in revenues over the last three years and 17% growth in EBITDA. Operating margins have been stable, although rising interest costs (accruing on the outstanding consideration to promoters) is taking a toll on the bottom-line. Interest cover as a result has shrunk from 13.6x in FY20 to 6.4x in FY21.

Cost competitiveness is a differentiator but can also act as a risk factor — considering the company is exposed to availability, price fluctuations, and cannot effectively pass on increased raw material costs to customers (with government price caps). In fact, the gross margin reduction in FY21 despite robust revenue growth makes a case in point.

Global & Domestic API Terrains

As of March 31st, 16 of the world’s largest generic companies were customers of Glenmark Life. Its portfolio constitutes 120 molecules (API formulations) and it co-owns 39 granted patents plus 41 pending patent applications.

The US is projected to lead the world in API production by 2026 and China will enjoy the second spot in dominating the global share. Emerging markets like India are growing fast, no doubt. In 2019–20, the Indian API market grew at a CAGR of 9.1% that is expected to increase to 9.5% through 2021–26. The Indian market is ranked third in the whole world and houses over 3,000 pharmaceutical companies.

India has a fairly distinct advantage considering the lower manufacturing costs, ample talent pool, R&D capabilities and high adherence to intellectual property (IP) standards. Another new variable in the mix is the high cost of developing a new drug which is estimated to lie around $2.6bn (averaged globally). So, outsourcing R&D and innovation is a good place to start for pharma companies in terms of cutting costs and leading innovation.

This is also linked to expansion in the CDMO business, as Glenmark Life plans to do. When companies farm out their development and manufacturing operations, it makes it easier for them to concentrate on R&D, which ultimately contributes to refining drug-processing and reducing costs further.

This has become especially important ever since China pulled the plug on the global API raw materials supply at the height of the COVID-outbreak last year. The “China Plus One” policy has subsequently been extended to the pharmaceutical sector so that Indian companies can de-risk the supply chains. With a robust growth in the e-pharma sector as well, domestic retail chains could benefit immensely from manufacturing integration along verticals by the manufacturing sector.

Indian players like Syngene (Biocon subsidiary), Anthem Biosciences, GVK Bio and Sai Life Sciences have emerged as successful examples in the expansion of the CDMO industry. The top Indian CDMO companies have registered a CAGR of 14.1% over the last five years compared to the top global CDMO companies which grew at a CAGR of 9.1%.

Bottom line is, pharmaceutical companies realigning their business models in the favour of innovation-led growth has proven beneficial in the past. Pairing that with cost-cutting interests and diversification of manufacturing operations from global partners, there is ample opportunity for growth in the Indian API and CDMO industry, which could bode well for Glenmark Life. But the jury is still out on whether the IPO is the right time to get in.

(Originally published July 23rd 2021 in transfin.in)