Investors have been waiting for the initial public offering (IPO) of Glenmark Life Sciences (Glenmark Life) to hit the primary market for a while. Glenmark Life is one of the most highly awaited IPOs of 2021. It is touted as a value unlocking exercise for the parent company Glenmark Pharmaceuticals (Glenmark Pharma) and an avenue for investors to directly participate in the growth of an active pharmaceutical industry (API) specific pharmaceutical company. 

Glenmark Pharma hived off its API manufacturing division into Glenmark Life in 2018. Now, it’s looking to cash in on investors’ appetite for API makers. With many international pharma companies looking to Indian API players as China cracks down on polluting pharmaceutical and chemical factories, Glenmark Life’s IPO is timed almost perfectly.

But does it make sense for investors to look at this pure-play API maker?

Glenmark Pharmaceuticals will receive Rs 1,250 crore

Glenmark Life is the wholly-owned subsidiary of Glenmark Pharmaceuticals, the company’s promoter. Members of the promoter group include Glenn Saldanha, the CEO of Glenmark Pharmaceuticals, and Cherylann Pinto, an executive director on Glenmark Pharmaceuticals’ board. Post the IPO, Glenmark Pharmaceuticals’ stake will drop to 82.8% and the public will hold a 17.2% stake in the company.

Glenmark Life’s IPO is worth Rs 1,513 crore, divided between a fresh issue of 1.5 crore shares worth Rs 1,060 crore, and an offer for sale (OFS) of 63 lakh shares by Glenmark Pharma for Rs 453 crore. The IPO price band is Rs 695-720 per share. Post the issue, at the upper end of the price band, Glenmark Life will be valued at Rs 8,800 crore.

Glenmark Life was originally incorporated as Zorg Laboratories in 2011. It was acquired by Glenmark Pharmaceuticals in July 2018, and subsequently, renamed Glenmark Life Sciences. In October 2018, Glenmark Life acquired the API business from Glenmark Pharma for Rs 1,162 crore. This resulted in Glenmark Life Sciences hiving off from Glenmark Pharma to become a separate API-only company.

Out of the acquisition amount of Rs 1,162 crore owed by Glenmark Life to Glenmark Pharma, Rs 800 crore is still owed prior to the IPO. From the IPO proceeds, Glenmark Life will pay Rs 800 crore (75.5% of the proceeds) to Glenmark Pharma as part of the acquisition amount. Glenmark Life will use Rs 152 crore (14.4% of the proceeds) to expand its API manufacturing capacity at its Dahej plant.

In total, Glenmark Pharma will receive Rs 1,250 crore from Glenmark Life’s IPO. It will receive Rs 453 crore through the OFS and Rs 800 crore as part of the original acquisition. This amount was owed to Glenmark Pharma based on the 2018 acquisition agreement. Glenmark Pharma will use these proceeds to reduce its debt.

Taking the upper end of the Rs 720 price band, Glenmark Life is valued at 22 times its FY21 earnings. This is at the lower end of the valuation scale compared to its mid-cap pharma peers.

Glenmark Life’s return on equity (RoE) was 46.7% in FY21, and 77.9% in FY20. This is significantly higher than its mid-cap pharma peers.

Diverse API maker, for the domestic and international market

Glenmark Life primarily makes APIs, but it also produces pharmaceutical formulations. APIs are the base ingredients used in the production of generic drugs and formulations. Glenmark Life’s API portfolio mainly caters to chronic therapeutic areas, cardiovascular diseases, and central nervous system diseases. It also makes APIs for pain management, diabetes, and gastrointestinal disorders. The company also has a contract development and manufacturing operations (CDMO) division to produce specialty pharmaceutical APIs for formulations.

In FY21, the company’s biggest revenue driver was APIs for cardiovascular drugs at Rs 776 crore (42% of revenues), up by 16.2% YoY. Revenues from neuropathic APIs (to produce drugs affecting the central nervous system) grew by 31% in FY21 to Rs 167 crore.

The CDMO segment’s revenues in FY21 was Rs 62 crore or 8% of total revenues. Glenmark Life’s CEO Yasir Rajwee said that the tepid growth in CDMO revenues was a one-off due to supply chain problems caused by the Covid-19 pandemic. He expects the CDMO segment to recover strongly in FY22 as international companies look to India for contract manufacturing of APIs.

Glenmark Life supplies APIs to domestic and international pharmaceutical companies. Its APIs are used by pharmaceutical companies in North America, South America, Europe, and Japan. In FY19, over 60% of revenues came from exports. As domestic demand for APIs rose between FY19-21, its domestic revenues almost tripled. In FY21, 56% of revenues came from API sales to domestic pharmaceutical companies at Rs 1,048 crore, a 33% YoY growth. 

Steady revenue growth and consistent EBITDA margins

In FY21, Glenmark Life’s revenues rose by 23% YoY to Rs 1,885 crore due to an increase in generic API sales by 32% to Rs 1,708 crore. Between FY19-21, revenues more than doubled due to strong growth in its API vertical.

Net profit in FY21 was Rs 352 crore, a 12% growth YoY. This increase in Glenmark Life’s bottomline was after a 2.6X rise in raw material costs to Rs 976 crore due to an increase in the price of base specialty chemicals.

Glenmark Life’s EBITDA was Rs 591 crore in FY21, an 18% growth. EBITDA margins were 31.4%, a 10 basis points decrease from the previous year. Between FY19-21, EBITDA margins were stable between 28-31%. Glenmark Life’s margins in the past two years were the most consistent among midcap pharma companies.

Glenmark Life’s and its parent company’s high debt levels

At the end of FY21, Glenmark Life’s total debt was Rs 933 crore, a 12% decline against the previous year. Debt over the past three years (FY19-21) decreased by 20% but still remains alarmingly high. Glenmark Life’s debt-to-equity ratio was 1.2 times in FY21, against a debt-to-equity ratio of 2.6 times in FY20. The company is not planning on using the proceeds of the fresh issue to reduce its debt.

Glenmark Life’s parent company Glenmark Pharmaceuticals’ also has high debt levels. In FY21, Glenmark Pharmaceuticals’ total debt was Rs 3,889 crore, with a debt-to-equity ratio of 0.6 times.

Glenmark Life’s operating cash flows in FY21 was Rs 388 crore, a two-fold increase from the previous year. Over the past two years (FY20 and FY21) the company’s capital expenditure (capex) was Rs 120 crore in total, used to expand its API manufacturing capacity. The company’s free cash flows since FY20 have been steadily increasing.

Indian API industry set to grow due to PLI benefits

In 2020, the global API market was valued at $181 billion (Rs 13.5 lakh crore) and is expected to grow at a compounded annual growth rate (CAGR) of 6.2% to reach $259 billion (Rs 19.2 lakh crore) by 2026. The Indian API market, despite having only a 6% market share, is valued at $11 billion (Rs 81,000 crore). This is expected to grow at a CAGR of 9.6% between 2020-2026. This is a higher growth rate than the API markets in the US (6.5% CAGR), China (7.5% CAGR), and Europe (5% CAGR). 

The higher growth for the Indian market will stem from the expansion of domestic API manufacturing under the government’s production-linked incentive (PLI) scheme. Yasir Rajwee expects international demand for Indian APIs both direct production and through CDMO to grow in the coming years. This will be backed by international drug makers preferring Indian pharmaceutical companies over Chinese companies. Indian drug makers are sourcing base specialty chemicals domestically rather than from China. This will help Indian pharmaceutical companies’ supply chains and will lower production costs. 

Glenmark Life and its wide API portfolio will benefit from the move to source APIs from India. Its revenues grew at a CAGR of 45% between FY19-21 with stable EBITDA margins of 31%. The IPO looks purely a means for Glenmark Pharma to reduce its debt. Glenmark Life will still have debt worth Rs 933 crore post its IPO. But with cheap valuations, a high RoE, stable margins, and consistent revenue growth, Glenmark Life looks interesting to investors wanting to invest in a pure-play API maker.