Glenmark Life Sciences is a whollyowned subsidiary of listed Glenmark Pharmaceuticals. API manufacturing business of Glenmark Pharmaceuticals was sold and spun off into Glenmark Life Sciences as part of a broader reorganization designed to place Glenmark on an accelerated trajectory to attain its objectives in three different verticals.

The API portfolio of the company comprises of specialized and profitable products which includes niche and technically complex molecules. Company has the capacity to branch into other high value products. As of 31December 2020,the company had a portfolio of 120 molecules globally.

The company has a strong market share in select specialized APIs such as Telmisartan (anti-hypertensive), Atovaquone (anti-parasitic), Perindopril (antihypertensive), Teneligliptin (diabetes), Zonisamide (CNS) and Adapalene (dermatology). The company is also engaged in providing contract development and manufacturing operations (CDMO) services to a range of multinational and specialty pharmaceutical companies.

The company currently operates four multi-purpose manufacturing facilities which are situated on leasehold properties located at Ankleshwar and Dahej in Gujarat, and Mohol and Kurkumbh in the state of Maharashtra, India, with an aggregate annual total installed capacity of 725.8 kilo liters(kl) as of December 31, 2020.

Management intends to increase the API manufacturing capabilities by enhancing the existing production capacities atAnkleshwar facility during the financial year 2022 andDahej facility during the financial years 2022 and 2023 by an aggregate annual total installed capacity of 200 kl.

Management also intends to develop a new manufacturing facility in India. This new facility will provide a platform for the growth of CDMO (contract development and manufacturing operations) business and add capacity for the generic API business. It will include a high degree of automation and comply with global regulatory standards and will have an aggregate capacity of 800 kl over the next three to four years.

Currently, India imports around 68% of its API consumption by value from China and is highly reliant on China for fermentation-based APIs (antibiotics). Thus, the government is expected to incentivize API companies which manufacture products with complete backward integration.

The pharmaceutical industry is becoming more active in high-potency, combination, and specialty products. There is a real opportunity for API companies like Glenmark Life Sciences, if invested in relevant expertise and capabilities.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 1060 crore and an offer for sale of Rs 453.6 crore by existing shareholder Glenmark Pharmaceuticals.

Price band for the IPO is Rs 695 to Rs 720 per equity share of face value Rs 2 each.

Objectives for the fresh issue are Payment of Rs 800 Crore of outstanding purchase consideration to the Promoter Glenmark Pharmaceutical for the spin-off of the API business through Business Purchase Agreement, funding the capital expenditure requirements of Rs 152.7 crore and remaining amount will be used for general corporate purposes.

The company entered into a Business Purchase Agreement with its promoter on 9^th October 2018. The aggregate consideration for the spin off in accordance with the Business Purchase Agreement is Rs 1162.19 crore. As on July 9, 2021, outstanding liability towards the promoter stands at Rs 800.83 crore (inclusive of interest). As part of the objects of the offer, the company proposes to pay an amount of Rs 800 crore from the Net Proceeds towards payment of remaining purchase consideration to the Promoter. In addition to such payment, the promoter will also receive proceeds pursuant to the OFS.

Glenmark Pharmaceuticals is the promoter of the Company, which currently holds an aggregate of 10,78,04,950 Equity Shares, aggregating to 100% of the pre-offer issued and paid-up Equity Share capital. The post IPO shareholding for the same is expected to be around 82.84%.

The issue, through the book-building process, will open on 27 July 2021 and will close on 29 July 2021.

Strengths

The company is a leading developer and manufacturer of select high value, non-commoditized APIs in chronic therapeutic areas, including CVS, CNS and pain management and diabetes.

The company has a track record of delivering strong financial performance. Its proforma total revenue from operations for the financial years (FY) 2021, 2020 and 2019 was Rs 1885.16 crore, Rs 1537.31 crore and Rs 1405.02 crore, respectively. Revenue grew at a CAGR rate of 15.83% from FY2019 to FY2021.

The company has a strong relationship with leading global generic companies. It has been able to maintain high customer loyalty with a high rate of repeat customers.

The cost of manufacturing is very low in India, it is only two-fifths of what it costs to set up and operate a modern manufacturing plant in the West. Because of the low production and labor cost, company can operate on healthy margins.

With the company having a strong cash flow position, it has the potential to expand its operations further and gain a more significant market share.

The company has the capability to achieve cost Leadership across products.

The company exports its products to major countries like Europe, Latin America, North America, Japan, and the rest of the world. Exports accounted for 44.44%, 48.78% and 59.85% of total sales in FY2021, FY2020 and FY2019 respectively.

Although there is high competition in the traditional API manufacturing market, complex API development has a high entry barrier thus it provides competitive differentiation to the company.

The company has started working with innovator pharmaceutical companies in CDMO (contract development and manufacturing operations). It has the ability to attract innovator pharmaceutical companies to partner with, for providing unique solutions tailored to the needs of specialty pharmaceutical companies.

Weaknesses

Company derives significant portion of revenue from few key customers. For the financial years 2021, 2020 and 2019, its five largest customers for each period accounted for 55.88%, 56.65% and 54.35% of total revenue from operations respectively. Moreover, the company's promoter was the largest customer for each of these periods.

There is no formal non-compete arrangement between Glenmark Pharma and Glenmark Life sciences and there is good possibility of conflict of interest, which promoter Glenmark Pharma may tilt in its favor as it will continue to exercise substantial control over Glenmark Life even after the IPO.

Company is dependent on API business for a significant portion of revenues. For the financial years 2021, 2020 and 2019, company's API business accounted for 90.63%, 84.16% and 89.87% of total revenue from operations, respectively.

API manufacturers like Glenmark Life Sciences must be able to reduce operating costs to maintain profitability as there is always demand from customers to reduce prices. However, such price reductions may affect sales and profit margins if company is unable to offset customer price reductions through improved operating efficiencies.

Company operates in a highly regulated environment and is subject to extensive government regulation governing the Indian and global pharmaceutical market. Any failure to get required approvals may affect financial performance.

Company does not own the brand name ‘Glenmark' and the trademarks for name ‘Glenmark Life Sciences',furthermore company's logo is also registered in the name of the Promoter.

The API business requires significant working capital for manufacturing operations and development of new products.

Valuation

For FY 2021, proforma consolidated sales were up by 22.63% to Rs 1885.17 crore compared to FY2 2020. OPM increased by 65 bps to 31.35% which led to 25.24% increase in operating profit to Rs 591.07 crore. Other income decreased 93.24% to Rs 0.81 crore while interest cost rose 161.22% to Rs 87.55 crore and depreciation increased 13.17% to Rs 33.39 crore. PBT increased 11.85% to Rs 470.94 crore.

Tax expenses for FY21 was of Rs 119.36 crore compared to tax expense of Rs 107.97 crore in FY20. Net profit rose 12.29% to Rs 351.58 crore.

The annualized EPS on post-issue equity works out to Rs 28.70 for FY2021. At the price band of Rs 695 to Rs 720, P/E works out to 24.21 atthe lower band and 25.08 for the upper band for FY2021.

In terms of P/E ratio, its other listed peers are: Divis Laboratories has P/E of 65.48, Laurus Labs has P/E of 36, Shilpa Medicare has P/E of 36.32, Aarti Drugs has P/E of 24.13 and Solara Active Pharma Sciences has P/E of 26.66. FY21 annualized EPS is used in the calculations above with share price being used as of date 26^th July 2021.