Glenmark Pharmaceuticals Limited analyst Q&A

Glenn, a couple of things. One is, a -- clearly, this whole -- the way that Q2 results came out, they were really from the corrections that were there in the P&L balance sheet [inaudible 0 30:39]. So fairly unexpected. So that's for the record. And on this part, we've heard your explanations on how you see things going forward. But as an assurance, I mean is this -- I mean, from what you've done so far, is it -- I mean, are we done with these corrections on the legacy issues on the balance sheet and the P&L? Or I mean, is this literally the end of it? If you would like to just reconfirm?

So Nitin, very clearly, if you heard my commentary, right, I mean, we are clearly in a position where we'll take each of the pieces, okay? For example, for India, we have clearly guided to INR1,150 crores, INR1,200 crores is starting Q3. And next year, over INR4,800 crores of sales, right? So that should tell you that the India business is back on track. As far as the balance sheet changes, right, the pre -collections, we are pretty much done with everything. We changed the model completely, right? It's clearly -- I think -- and the balance sheet changes is clearly reflective in our ROCE and ROE, right? If you see the -- obviously, this year, ROCE, ROE will be very high. Next year also, we are -- we'll have industry best ROCEs and ROEs, right? So given all this, we are pretty much done with -- and a lot of provisioning. We made a lot of provisioning. Some of that could obviously get added back as we go forward, right, part icularly better than inventory. So I think from our perspective, there are no further changes in either the P&L or balance sheet corrections, which need to get done going forward.

So Nitin, basically, just to add to that, actually, we have looked at all the provisioning norms, and we have now made it on a basis of principles, certain principles. We had a new auditor also in place and then we discussed thoroughly with them. And we ha ve now made a very standard process of the provisioning norms. And going forward, I can assure you that's the reason we have actually taken a onetime in terms of debtors was largely because of pre-collection and inventories are in line. So all these charges actually will help us that balance sheet is in a very strong place and truly reflect the capital employed in the business because that will help us to truly reflect the capital employed in the core business and improving the ROCE and ROE accordingly.

And sir, just to pick up working a little bit on that. So you mentioned in your opening comments that in the past, because of investments in R&D and everything, cash flows have been a constraint for Glenmark in the past. Now with that constraint ease, what kind of changes do you think -- what impact does it have on the business? I mean what flexibility does it give you for the business on a going-forward basis?

So look, the way I see it, Nitin, the journey for Glenmark for the -- at least for the next few years is very clearly related to continuing to be a high -growth business, right? We are back in the growth phase because all these years, right, we were investing heavily in innovation, right? And we couldn't optimally invest in the base business. We are now back into a high-growth phase as an organization. And I anticipate -- my aim is to grow this business around 15% as we go forward, right? And if you see India, for example, last month, we had a 17% growth, right, which was the highest -- among the highest in the industry, right? So we are back into a high -growth phase, right, as an organization. Our focus is to grow this business organically. So we will continue to grow organically in most of our geographies. And just by focusing on organic growth, we will get to those high -growth numbers going forward, right, as an organization. And of course, free cash generation, we talked about the EBITDA margins going to 23% immediately. And then eventually, we will -- as the business scales, we'll go up to 25 -odd percent. And then the free cash generation is a must -have, right, for us. Although we have zero gross debt, right, by the end of FY '26. Thereafter also, we will ensure that the business will continue to generate free cash. And then we'll figure out, right, what the next steps are with the cash that gets generated by the business from FY '27 and beyond. So the journey ahead is a very different one than what we faced in the past, right? In the past, a lot of constraints came because of our high i nvestment in innovation, right? And now that with 2001 deal happening, the cash coming in, automatically, the next steps for the organization is very different, right, where the business will throw a lot of free cash from FY '27 and beyond, right? This year, of course, we are well funded, right, for this year. But FY '27 and beyond, the business will throw a significant amount of free cash, right, as we go forward. On a very high EBITDA, almost INR17,000 crores, INR18,000 crores top line with EBITDAs of 23-plus percent, right, will generate significant amount of free cash.

I just to squeeze, to build on that. So H1, I mean, our guidance is almost INR1,800 crores EBITDA or thereabouts. So I presume given what we've discussed so far, we should have some generation of free cash in the second half of the year?

Yes. If you see that I think we are still at INR2,700 crores of cash in the books. And as the business generates, we will surely be in a cash positive. And as Glenn mentioned that we will be -- first, we -- our aim will be to have a completely gross debt zero by FY '26 -- end of this March, end of this fiscal. And the business will continue to have a cash generation, and we'll have a -- as we outlined, we'll have a very prudent capital allocation going forward to grow the business.

The next question is from the line of Damayanti Kerai from HSBC.

My first question is, you mentioned you paid around INR650 crores as onetime bonus and some deal-related charges, etc. So if we see that number as a percentage of the money which you got from the deal almost coming to 10%, 11%, right? So if you can explain, is this the global norm of paying such high amount to employees as an incentive? Or why you have like paid such a high amount? If you can just throw some light?

Damayanti, first of all, that INR650 crores is not employee bonuses, okay? And it's not only deal cost. It combines a lot of different line items that Anurag mentioned. right? So -- but Anurag, go head.

Yes. So basically, Damayanti, employee bonuses are one part and which is in line with the biotech companies where you have to actually incentivize the R&D team and specifically to have them continue to build the pipeline in the future. So that is absolutely in line and we looked at various consultants inputs on this. And so that's one part of it. But besides that, it also includes the -- because we've done this deal in -- and most of the -- quite a big pharmas, most of the big pharmas entered the data room, we set up the data room, legal charges, due diligence charges, a lot of consultants were involved. So all this actually and specifically all this was actually done into the European geographies and U.S. geographies. So which is a very high cost in terms of the lawyers and other fees. So that's also included. And also include the LCDF closure charges bec ause regulatory -wise in these geographies, it's not easy to close the facilities, specifically to dispense a lot of liabilities. So it included all the settling of all the employee -related liabilities, local regulatory liabilities and everything. So this is not only that. So it's a combination of that. So with that, I think these numbers are very reasonable, I must say that.

Anurag, can you specify like as a percentage, what was the actual onetime paid and then there are other expenses that will be, I guess, more clear?

I think because of confidentiality reasons, Damayanti, it's impossible to talk about specific deal bonuses or any specific line items, right, on the call.

And it also included the IP and documentation transfer charges, which we have also had to do as part of the transfer of this ISB 2001. So all these have been actually booked on this.

Okay. My second question is on India business. So Glenn, again, I think we are looking for some clarity because GST came as a window. So if GST change didn't happen, you wouldn't have taken this write -off? Or you use this window as an opportunity to clean up the issues on distribution side? Because 2 years back also, you did this inventory write -off. And at that time, we thought it's like over -- it's a cleaned up base to start on?

So Damayanti, if you see my opening comments, right, we thought we had an optimal inventory level in the channel, right? However, the GST thing came as an unknown, right, for us, right? It was totally unexpected, right? And then the distributors, because of the differential, right, in the GST rates, right, they started reducing their inventories, right? And today, if you see, that is all for us, now they've reached inventory levels which are below the threshold, right? And you could see some amount of restocking. But this was completely unexpected from our side, right? So...

But Glenn if I may interrupt, I t hink this discussion on GST, et c., has been going on for some time, right? And I believe industry is also involved as a part of discussion?

But Glenmark has a unique distribution model, okay? We have a 3 -tier legacy distribution model. Most of the industry is already on C&F, okay? Their C&Fs. So that is making the big difference, okay, right, because of the 3 -tier distribution system that we have. And that is what is impacting -- has impacted us, and it's not impacted the rest of our peers. But it's -- again, it's a onetime thing, as I mentioned. From Q3 onwards, you should see sales coming back, and we've even guided to INR1,150 crores, INR1,200 crores from Q3 as well as next year, INR4,800 crores and above.

Okay. Just to be on the same page, if you can explain what is the third layer which is additional for you against?

We have a super stockist structure, okay, which is we have super stockist or distributors, right? Most of the other companies have a C&F model where the inventory and everything is on the company, right? So inventory and receivable collection from stockist is on the company, whereas for us, when we do the billing, the inventory is on the distributor and his responsibility to collect from the channel. So that's the uniqueness of the model.

The next question is from the line of Kunal Randeria from Axis Capital.

Sir firstly again on the India business, Glenn, in Q3 FY '24, you had undergone some kind of restructuring. And now we have restructuring in Q2 '26. So if you mind -- do you mind telling us what the difference was? And the extension to this question is sin ce you still have a state distribution structure, in future, if there are any certain changes from the government's end or from the industry's end, do you run a risk of something similar happening?

So Kunal, I explained the -- what currently happened, right? In terms of the future, look, the distributor inventories are now at very low levels, right? So automatically, in fact, we are expecting some restocking. Now in future, if there is any other chan ge that happens, it's impossible to predict, right? But I don't think in the future, we will be at a disadvantage because of the 3-tier system. So that is pretty clear for us, right, as of now, right, whatever we can see because the inventory levels have come down to very low levels now.

All right. But then again, in Q3 FY '24 also, I think there was some intention of getting the inventory down, right, if I'm not wrong?

That's correct. So that was an inventory -- we reduced the...

Yes. So Kunal, actually, at that point, as I think we explained that what we did is we basically consolidated some of our stock points because we -- while we had the 3-tier system, we actually had -- at a -- over a period of time, we have built some ineffi ciencies in terms of how many number of stock points we had across the country. And we just thought we will consolidate some of that business. And so that was a change that happened in Q3, I mean, 18, 24 months back. I think what has happened this time, Glenn has explained, and I think we spoke about the future as well.

Right. Right. Okay. Okay. And my second question, again, I think Anurag did explain the INR1,650 crores of working capital that's gone in the cash flow statement. To be honest, I can't really see it in the cash flow of the balance sheet. So my question is, if the inventories have now gone down, I mean, how is INR1,650 crores, if you can kind of split it between receivables because I think some payables would have also gone up or if you just can give the split?

So Kunal, if you see that there was inventory gone up by around INR250 crores on the face of the balance sheet and debtors was close to INR400 crores on the face of the balance sheet. But the underlying towards that is that we stopped the pre-collection. So that has actually increased the INR800 crores of the debt. So that's what the reconciliation. And inventory levels also it's all we'll have to -- as a going concern business, we'll have to keep building the inventories for the next H2 of the -- and to support the growth. So which is a normal inventory of INR3,300 crores today, we are carrying, which is 80 days of the -- just 80 days of the inventory levels.

And Kunal, just to clarify, I mean, we can connect offline as well. But if you see the cash flow, I mean, there is part of the $700 million, right, that where we received the cash, but the P&L booking will happen in subsequent quarters. So that is sitting in other current liabilities and other noncurrent liabilities. So I mean, that's why if you adjust for that in the cash flow statement, broadly you will get to the working capital increase that we are talking about. But we can explain, we can talk it offline also in separately.

So basically, the INR1,500 crores -- so if you see, out of INR6,000 crores gross number is that what we received, we have booked only INR4,500 crores in this P&L. So balance INR1,500 crores, what Utkarsh mentioned is sitting in other current liabilities. That's actually what the number is actually. So -- and we can give you the full reconciliation of that.

And since we've taken -- when we explained the cash, we took the full cash at the start, right, the entire INR5,950 crores. That's why we have to adjust -- we have to take the actual cash impact for the working capital increase.

Right. And just one more if I can. You have a net cash of INR1,500 crores, INR1,600 crores now. I believe you still need to pay the tax on the proceeds of this withdrawal and payment. So can you guide to what your number could be by the end of FY '26, the net cash number?

Okay. So net cash of -- right now, we are sitting is actually INR2,647 crores, exactly to be precise. And in terms of the taxation of this, we have actually really worked that very well in terms of -- and we have brought down despite the 3 level of taxation, which is Swiss taxation, U.S. taxation, India taxation on this money flow. We have actually brought it down to close to a $90 million of total cash outflow of the taxation. The charge will be higher, but because of various -- we have worked out with the various structure of absorbing the losses in the various entities. So this has come down to almost 12% to 13% of the total deal value of the cash outflow. So that will be there and it will be going -- I think large part will be going in H2, but I think balance will be going in the next year also. And this is completely has been built up in our cash flow planning. And as Glenn mentioned, with this, we are -- FY '26, we will be a gross debt zero surely of that.

And also, Kunal, the business will generate -- a significant cash will get generated in the second half, okay, right, from the business, right?

Expected to be much higher than H1. So I think -- as Glenn mentioned, it's almost INR8,000 crores of revenue, which is expected in H2. So that's actually also be a strong cash generation. So besides paying the full gross debt, we will still be a cash positive.

Got it sir. So you will be ending with at least this amount, if not more. That should be...

Amount I would -- Kunal, I would not say that. I think what I would guide is that our first target will be to have paid all the gross debt. And the second will be to actually support all the taxation and discharge all the liabilities in terms of contract. I think what this, I think it's only 2 quarters, so you have to be patient with that, but we will still be a cash positive.

The next question is from the line of Tarang from Old Bridge Asset Management.

Just on the India business, in terms of inventory rationalization, the channel unloading that you have done, what is the quantum of it? Is it close to about INR1,000 crores?

A little less than that, I'm guessing.

Yes, around INR1,000 crores. It's almost -- see, our targeted run rate, as Glenn mentioned, going forward is INR1,150 crores plus. So I think that's what -- I think if you remove that INR150 crores what we have booked, so close to INR1,000 crores and maybe a little higher than INR1,100 crores sort of number we could have hit this quarter.

Got it. Second, the INR830 crores IGI and onetime charges line item, it doesn't include the R&D associated with IGI in Q2, right, that...

No, it does not. It only included the onetime charge. It does not include the running expenses of R&D.

Okay. Glenn, just you have attributed a lot of your write -offs in this quarter and the previous quarters to your spend on innovation. But if you look at the last 12 quarters, right, the quantum of write-offs that the business has taken, it's actually a 1:1:1:1 split between Monroe, India, Zetia and other antitrust regulations. And the fourth one would perhaps be related to your intangibles or your R&D spends okay? The question really is -- and if you add them up, the quantum is pretty significant, and we can take the numbers offline. But really, the idea here is to look forward and try to get a sense on what are the kind of controls that you've instituted within the organization. And this is -- I mean, this is not specifically only to Glenn. It's really everyone who's listening to the call, the top management, the Board, the CFO rather, right? This can't keep happening, Monroe, litigation, India and obviously, the R&D, the IT innov ation spends. So just wanted to get a sense on how are you really fool-proofing it going forward? What are the checks and balances, the controls that you're doing? Are there additional committees that are being set up? Do you have someone who's really keeping a razor eye margin -- razor eye sight on what's really happening, please?

So Kunal...

No, this is Tarang.

So the first part, right, look, many of the things you mentioned, right, we had a difficult patch as an organization, right? There's no taking that away, right? Whether it's Monroe, right, all the FDA challenges we faced and the fact that the facility has not manufactured anything for the last 3, 4 years, and we continue to have that operating expenses. Intangibles a lot of the intangibles, we were able to take certain write -downs. Zetia, we booked the revenues. Unfortunately, we had these class action lawsuits where we had to pay back a lot of things. So I mean, these are not in anyone's control, okay? F rom an operational standpoint, it's impossible to predict any of these, right? Otherwise, we -- from an overall business perspective, right, we have very strong controls in place, right? We have a lot of governance committees that are formed now to look at the various aspects of the business. We have a great leadership team overseeing most of our businesses. But some of the 3, 4 points that you mentioned are clearly -- it's impossible to predict, right? The issues we faced in Monroe or the issues we faced with regards to the litigation costs that we ended up incurring. And even there, I mean, we have strong compliance committees now in place, right, to oversee some of the litigation aspects, right, to mak e sure we don't have those issues again. So I think as an organization, right, we've evolved significantly. But there's no taking away that the last 4, 5 years, right, prior to the 2001 deal were difficult years because we got hit with a lot of different things from different areas, right, be it litigation, be it Monroe, be it some of our other business challenges that we faced, right? And that, obviously, in my opening commentary itself, I mentioned, led to increase in the debt level and led to increase in certain things that we had to do, right? -- from a cash flow perspective, right? Today, we are in a very different place, okay, righ t? I mean today, the business is rock solid. The growth is very strong. Margin profile is strong. We are sitting on cash, and we will continue to sit on cash. We'll have no debt on the books. So there are lots of -- there's a lot of strength in the underlying business, okay, today, which we never -- which we struggled to keep in the past, right, or have in the past. So I think that gives us the confidence that the next decade will look very solid for us, right, given all that we've got going, plus we are unique in terms of innovation. Nobody else has a pipeline that we have. Nobody else has a platform that we have globally. So I think my personal view is the next 5 to 10 years should be transformational for Glenmark. And I've been doing this 25 years now, right? It's not -- and as I said in my opening comments, right, we've delivered significant returns to shareholders, 200x when you think about it, right, since IPO, right, in terms of shareholder value creation, revenues growth. So look, we are a fundamentally ve ry solid company, okay, right? We've had a phase -- certain phases, every organization goes through certain phases where there have been challenges, right? And unfortunately, we got hit with all this in the last 5 years. But now the 2001 deal and the kind of cash flows and the strength in the underlying business, right, overall, the next 5 to 10 years should look very strong for us.

Got it. Just -- yes. Glenn, just to retort to it. I think like you called out, right, the last decade, so to say, for the business has been quite challenging from the point of view of the kind of deployments that you did in your innovation business. And th e longevity of this business takes time. And in some sense, ISB 2001 has been a strong reminder of the ca pabilities that you've created. But what's also happened in the last 3, 4 years, so to say, with the business is that for reasons that are best known and for challenges and risks that are best being navigated by the business, the business has not been able to deliver on free cash flow. S o while -- and it somehow comes back ended with these write-offs coming through, and that's where probably our sort of concern stems from. So what's done is done and as you have called out and the teams called out that you are looking forward to the future, the only request here is that if you all could create a mechanism where there is actually some kind of tap in terms of trying to manage your free cash flows. And because as analysts tracking this business for the last 5 years at least, while you've been running it for the last 25 years, been tracking it for the last 5, 6 years, these write -offs are extremely difficult for us to also evaluate the longevity of the business going forward. So a sincere request if this is something that as much as it is under your control, obviously, you're running a business, there are risks associated with running a business. But as much as it's under your control, if you could really put a needle on it, it will be really, really helpful. Last question, over the next 2, 3 years, for all the cases that have been settled, the quantum of cash flows in the next 3 years would be in the ballpark of INR800 crores to INR1,000 crores. Does that number hold good? Or could -- is there an upside risk to that as well?

Sorry, can you repeat that? For all the cases that have been settled...

On the litigation spends for different cases that the business has undergone, right? Litigation spends, the cash outflow, while you'll have taken a provision for it, but you'll have cash outflows coming through some bit of it in '26, '27 and '28. The number that I'm building is about INR800 crores to INR1,000 crores. Is that the number or it's significantly l ower or higher? Will be helpful?

It's slightly lower than that. Okay, Tarang.

The next question is from the line of Bino Pathiparampil from Elara Capital.

Thanks for the cash flow reconciliation that Anurag offered at the consolidated level. Just wanted to understand at the subsidiary level, at the IGI level. So this entire $700 million, I assume came to IGI. And how much of it is still with IGI?

No. So IGI, as we outlined that as a capital allocation, we have said that IGI will be covered for next 3 years of their capex allocation, which is $70 million per annum. So almost $210 million to $225 million will be allocated to IGI. And most of them actually has been -- because IGI is a wholly owned subsidiary of Glenmark Holding. So most of that has been actually then come back as a thing. And then some of this will be because of the tax planning perspective. Some of this will be dividended out in the next year. So it will be a phased out dividend. But for IGI capital allocation, i t's only $210 million to $225 million, which is allocated for them.

So out of the $700 million, only $210 million, $220 million goes to IGI. The remaining came to some other entities of Glenmark. Is that right? Is my understanding right?

Yes, yes. Basically, that will flow through everything to Glenmark. And it will be parked in treasury surpluses.

Okay. So out of the current $700 million cash, which is on your consolidated books, almost entirely when you say $200 million, roughly 70%, 80% of that is sitting on IGI books now. Is that my understanding correct?

Not IGI books partly is actually as of September, but then we have transferred the money into October also then even if it's IGI, not physically sitting with IGI actually because then it's been actually crossed -- there was an intercompany debt which has been there. And because Glenmark has a better strength to earn the treasury income. So that has been now we are -- see in treasury, we are running on a consolidated basis. So that's how we are actually parking into treasury.

Sorry. So the entire money came into Glenmark, I mean, non -IGI Glenmark entities. Is that correct? Entire $700 million then?

Okay. And you will transfer $70 million a year to IGI for the expenses?

Right, absolutely. $35 million for this year, H2 and then $70 million every year as we committed.

Understood. And this $70 million will be fully expenses, will it pass through P&L as well because that is expense which is incurred by IGI, right?

Yes. So in P&L, you will see a revenue item of $70 million every year and corresponding expenses. So it will be neutralizing that.

The next question is from the line of Kartik Bane from Bajaj Life.

So my question is on the product. So 4 assets that we mentioned on the multi-specific platform, are they all trispecific antibodies or also various other antibody formats like bispecific, scFv, Fab, etc? And the second question is about the time line that you mentioned 5 years. Is this a time line for recognition of the revenue, out -licensing revenue from these 4 assets? Or is this a time line for these preclinical assets to enter the clinical Phase I?

So when we say multi-specific, right, all these are more than trispecific or more than trispecific, right? So they have multiple binding sites, right, on the antibody. So this is all next -generation programs that we are working on, right, which can be transformational just as we did ISB 2001. Regarding your question on time line, we said we will -- 2301 enters the clinics next year, FY '27, right, which again is a multi-specific. And then beyond that, as we go forward over the next 5 years, you'll see one by one of these assets coming into the clinics. Regarding time line to partner, we said we will continuously evaluate partnerships, right? And we will try and close partnerships in the next 5 years, right, as we go forward.

Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to Mr. Utkarsh Gandhi for his closing comments.

Yes. Thanks. I'll just hand it over to Glenn for his closing comments.

Yes. Thanks, Utkarsh. So just to close, right, I think, look, this is the best phase of Glenmark I have ever seen in the last 25 years as we are making an orbital change for Glenmark, which allows us to reflect the true potential of the company. In summary , my commitments to the shareholders in Glenmark 3.0 is to aim for sales of around 15% every year with an ascent on a higher branded portfolio. On the margin side, 23% EBITDA margin moving up to 25% in the years ahead, focus on strong free cash flow and maintaining a zero gross debt balance sheet going forward, improving our return on capital employed of 25% to 30% and continue to focus on improvi ng it further as we move towards a more innovative-led driven portfolio. Strive to create world-class cutting-edge innovative assets that will enhance value creation for Glenmark shareholders going forward and enhance the payout ratios with an increased free cash flow generation, which should happen in the years to come, starting FY '27. With that, I want to thank you all for joining the call today. If you have any follow-on questions, feel free to contact either Utkarsh or anyone from the management, Anurag or myself. Thank you very much.

Thanks, Lizanne. I think we can close the call. Thank you, everyone for joining.

Thank you, members of the management team. Ladies and gentlemen, on behalf of Glenmark Pharmaceuticals Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.