Glenmark Pharma Shares Fall As It Plans To Sell Life Sciences Business

Shares of Glenmark Pharmaceuticals Ltd. fell the most in four months after it agreed to sell 75% stake in its life sciences subsidiary to Nirma Ltd. for Rs 5,651.5 crore

The pharma company will sell shares of Glenmark Life Sciences Ltd. at Rs 615 apiece, according to an exchange filing. Glenmark Pharma will own 7.84% after the transaction. The deal, subject to customary approvals, is expected to close in FY24.

Nirma will make the mandatory open offer to all public shareholders of Glenmark Life Sciences at Rs 631.20 apiece for an additional 17.33%. That's close to Thursday's closing price of Rs 627.10 apiece.

The deal aligns with Glenmark’s strategic intent of moving up the value chain to "become an innovative, brand-led organisation with continuous focus on our core therapeutic areas of dermatology, respiratory, and oncology", Glenn Saldanha, chairman and managing director at Glenmark Pharma, said in the statement. "It also presents an opportunity for us to strengthen shareholder value through deleveraging and enhancing our overall return profile.”

There is no plan to deploy capital, and the goal is to stay net cash positive, Saldanha said in a virtual press conference after the announcement. "The company's total debt will be extinguished after the deal."

Glenmark Pharma had a gross debt of Rs 4,600 crore, Saldanha said, against net proceeds of Rs 5,000 crore from the sale.

Glenmark buys less than 15% of its APIs from the life sciences subsidiary and plans to become a major API manufacturer itself, according to Saldanha. The sale will, however, affect revenue in the short term, but "we expect double-digit growth within four to six quarters", he said.

• Brokerage maintains a "neutral" rating with a price target of Rs 780 per share, implying a downside of 6% over the next 12 months.

• The current valuation adequately captures potential earnings upside and better return ratios, according to Motilal Oswal.

• The proposed divestment of its API business, Glenmark Lifescience Ltd. will be done with the aim of reducing debt and increasing its emphasis on branded and innovative products.

• This is the third transaction by the pharmaceutical company with a cumulative cash generation of Rs 6,250 crore over the past 12-15 months, according to the brokerage.

• After the stake sale, Glenmark Pharma is set to transition from a net debt position of Rs 2,950 crore to a cash surplus Rs 2,100 crore, Motilal said in its note.

• The net reduction in overall operating profit or Ebitda due to the sale of API business would be partially offset by a reduction in interest. 

• Expect significant deleveraging and superior execution in both the domestic formulation and European markets.

• Brokerage anticipates an improved outlook for the pharma company over the next 2-3 years, which should positively impact return ratios to some extent.

"Topline is going to be impacted by a 10% cut. The life sciences unit had a better Ebitda margin in fiscal 2023. The Ebitda cut for Glenmark Pharma will be 17–18%, although there will be some cost savings in terms of interest and depreciation. Thus, the implications for Glenmark Pharma's profit would be less than 3-5%," Abdulkader Puranwala, analyst at ICICI Securities, told BQ Prime. The brokerage has a 'sell' rating on the stock with a price target of Rs 663 per share.

"Nirma as a group is quite diversified, but in terms of the pharma sector, they have acquired other entities in the past. The magnitude of this acquisition would be quite large as a whole. The promoter is itself a chemist, which can ensure a smooth transition," he said.

Shares of Glenmark Pharma fell as much as 6.37% intraday to Rs 775 apiece, the most since May 22, before paring losses to trade 6.04% lower at Rs 777.7 apiece, as of 10:26 a.m. This compares to a 0.19% decline in the NSE Nifty 50.

It has risen 83.58% on a year-to-date basis. Total traded volume so far in the day stood at 8.1 times its 30-day average. The relative strength index was at 44.5.

Out of the 16 analysts tracking the company, five maintain a 'buy' rating, eight recommend a 'hold,' and three suggest a 'sell', according to Bloomberg data. The average 12-month consensus price target implies a downside of 6.8%