Glenmark Life Sciences Ltd.: (Subscribe)

From the IPO proceeds, Glenmark Life Sciences Ltd will be using ~Rs 8 bn as repayment of an outstanding purchase agreement to the promoter for the spin-off of the API business. The company has also envisaged using Rs 1.53 bn as capital expenditure. This includes a new multi usage facility, which will mainly focus on the company’s CDMO business aspiration from Q4FY23.

• The Company is a leadership in select high value, non-commoditized APIs in chronic therapeutic areas. As of March 31, 2021, it has sold its APIs in India and exported the APIs to multiple countries in Europe, North America, Latin America, Japan and ROW. The total market size in terms of sales for company’s portfolio of 120 molecules globally was estimated to be around US$142 billion in 2020 and is expected to grow by about 6.8 pct over the next 5 years to reach to about USD 211 bn by 2026. The market size in terms of volume for its 120 molecules was estimated to be at 9,959 tonnes in 2020 and is expected to grow at a rate of 6 pct over the next 5 years to reach to about 12,079 tonnes by 2026.

• Glenmark Life Sciences Ltd enjoys strong relationships with leading global generic companies. As of March 31, 2021, 16 of the 20 largest generic companies globally were its customers and the company enjoys a reputation of trust and reliability with such companies.

• The company intends to increase its API manufacturing capabilities at Ankleshwar facility during FY22, and Dahej facility during FY22 and FY23 by an aggregate annual total installed capacity of 200 KL. This additional production capacity is expected to help the company further expand generic API production and also grow oncology product pipeline.

• In the last 3 years, Glenmark Life Sciences has started working with innovator pharmaceutical companies in the area of CDMO. The growth drivers for the global CDMO market include: (1) Costly breakthrough therapies which drive higher demand for pharmaceutical products (2) Increasing pressure to lower drug prices (3) Disruption by COVID-19 pandemic (4) Realignment of business models (5) Highly fragmented CDMO market.

• Regulatory Risk- In FY21, ~65 pct sales come from regulated markets. Thus, the company’s manufacturing facilities and products are subject to periodic inspection/audit by customers and regulatory agencies.
• Dependence on key customers – It derives ~55.88 pct from its top 5 customers as of FY21. The company typically does not have exclusivity with its customers which include its key customers.
• Dependence on key products- As of FY21, the company derives ~66.36 pct of its revenues from its top 10 products in the generic API segment which overall contributes ~91 pct of total revenues.
• Delay in capex implementation GLS intends to spend ~Rs 1.5bn in the next 3 years on capex which includes a new facility for the CDMO business. Any delay in execution of the capex could impact the company’s future growth strategies

Valuation At the upper end of the price band of Rs 720, the stock is quoting at a P/E of 25x its FY21 EPS of Rs 29. Considering its strong R&D capabilities, clean regulatory history, strong promoter backing with synergies and planned capex to drive medium term growth, we recommend investors to Subscribe for a longer term perspective.

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