Glenmark Pharma’s life sciences arm deal may hit FY25 revenue estimates

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Shares of Glenmark Pharmaceuticals slipped 3 per cent to Rs 802.25 on the BSE during Friday’s trade after the company inked a deal to sell 75 per cent stake in Glenmark Life Sciences (GLS) to Nirma for Rs 5,652 crore at Rs 615 per share. Glenmark Pharma will own 7.84 per cent in GLS after the divestment.


During the past two trading days, the stock price of Glenmark Pharma fell 9 per cent from its 52-week high of Rs 879. During the past one month, the stock has rallied 6 per cent.


“The company has entered into a definitive agreement with Nirma to divest 75 per cent stake in its subsidiary, GLS, at a price of Rs 615 per share for an aggregate consideration of Rs 5,652 crore, subject to closing adjustments and necessary approvals,” Glenmark Pharma said in a press release.


GLS manufactures active pharmaceutical ingredients (APIs).


This deal aligns with Glenmark’s strategic intent of moving up the value chain to become an innovative / brand-led organisation, with continuous focus on its core therapeutic areas of dermatology, respiratory and oncology, said Glenn Saldanha, chairman and managing director, Glenmark Pharma.


Nirma, whose products range from soaps to cement, will make a mandatory open offer to all public shareholders of GLS.


Glenmark Pharma will continue to focus on consistent growth across its key markets. It will have a strong emphasis on return ratios with a net cash positive balance sheet, ultimately creating value for its shareholders, the company said. 


Proceeds from the transaction will be used to pare gross debt of Rs 4,627 crore at the end of financial year 2022-23 (FY23). The company had cash of Rs 1,470 crore in FY23.


Abdulkader Puranwala and Rohan John of ICICI Securities said that the proposed transaction may have a negative impact of 10 per cent on FY25 revenue estimates of Rs 17,200 crore.


Also, operating profit margin may shrink 150 basis points (bps), though repayment of debt may partially offset the impact.


The divestment will clear the current debt pile, but in the long run, it will continue to require cash to fund its research and development budget of Rs 1,300-1,400 crore per annum. It also needs funds for the marketing cost of Ryaltris and an ailing US generic business.


ICICI Securities has a sell rating on the stock. 


The stake sale, according to analysts led by Tushar Manudhane of Motilal Oswal Research, removes the debt-related concern for Glenmark Pharma. In fact, it would have additional cash to recalibrate the innovative pipeline and improvise on the branded generics business.


However, it would be earnings neutral, given that the net reduction in operating profit from business (Rs 550 crore) would be offset by a reduction in interest cost and higher other income, they added. The brokerage expects return ratios to improve to an extent on the back of improved outlook over the next two-three years.


It is also because of significant deleveraging and superior execution in both the domestic formulation, European Union and the rest of the world markets.


However, the brokerage has maintained a neutral rating, given that the current valuation adequately captures potential earnings upside/better return ratios.

Meanwhile, shares of GLS were up 2.95 per cent to Rs 645.60 on the BSE on Friday. The stock had hit a 52-week high of Rs 674 on August 1. GLS made its stock market debut on August 6, 2021. The company had issued shares at a price of Rs 720 per share.