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Glenmark’s financial flexibility to improve from disposals

Fitch Ratings expects that India-based Glenmark Pharmaceuticals Ltd’s (Glenmark, BB/Stable) financial flexibility will benefit from management’s focus on reducing leverage through stake sales and partnerships. The company recently entered into transactions aimed at selling shares in certain segments of the company’s generic formulations business and reducing risks in the novel drug pipeline by introducing equity partners.

On August 10, 2018, Glenmark announced it would transfer its orthopaedic and pain-management business in India and Nepal to an entity of True North Enterprise Private Limited, an India-focused private equity company, which valued the business at Rs640cr. Glenmark aims to enhance its focus on its core therapy areas of dermatology, oncology, cardio-vascular and respiratory in India with the transaction, which is expected to be completed in the next two to three months.

On the same day, Glenmark also announced it would transfer its active pharmaceutical ingredients (API) business to a wholly owned subsidiary at book value of Rs1,120cr. Glenmark has indicated that it may later seek to sell a minority stake in the business, which generated Rs880cr of revenue, or 9.6% of consolidated revenues, in the financial year ended March 31, 2018 (FY18).

On August 6, 2018, Glenmark entered into a licensing agreement with Harbour BioMed to develop its immuno-oncology candidate – GBR 1302 – for greater China, with potential aggregate milestone payments to Glenmark in excess of $120mn.

Fitch believes these transactions will help Glenmark improve its financial flexibility without a material impact on its business strengths. The orthopaedic and pain-management business accounted for only 1.7% of Glenmark’s consolidated revenues in FY18. Glenmark’s API business is bigger and provides some backward integration to the company’s generic formulations, which is an important business strength that will help overcome tightening supply conditions in China following stricter emission norms. Fitch believes the impact of a sale of a stake in the API business on Glenmark’s business profile will be limited, as long as only a small minority stake is disposed.

In Fitch’s view, the licensing deal for GBR 1302 at such an early stage in the molecule’s development highlights Glenmark’s novel drug development capabilities. The deal is consistent with Fitch’s expectation that Glenmark aims to mitigate inherent regulatory and financial risks in its novel drug programme by introducing equity partners.

Fitch expects Glenmark to use a significant part of the proceeds from the recent transactions to reduce debt. This will increase leverage headroom at Glenmark’s rating and enhance financial flexibility. Overall, we believe improved financial flexibility will help Glenmark to make progress in its novel drug development programme and reduce dependence on the highly competitive generic drugs business over the long term.

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