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Encouraging traction in Ryaltris across focus markets

* Glenmark Pharma (GNP)’s 1QFY24 operational performance beat our estimates, led by strong performance in EU/ROW markets. Lower R&D spending resulted in margin expansion YoY as well as QoQ.

* We raise our earnings estimates by 4%/3% for FY24/FY25, factoring in strong off-take in the respiratory portfolio in EU, increased traction in Ryaltris across focus markets, and healthy traction in the consumer care segment within the India business. We value GNP at 14x 12M forward earnings to arrive at a TP of INR780.

* Thanks to its consistent efforts, GNP’s growth prospects have improved in the API segment and in the EU/ROW markets and its market share has also improved in core therapies within the domestic formulation (DF) segment. The resolution of regulatory issues is vital for growth improvement in the US segment. We maintain our Neutral rating as we believe the valuation adequately factors in the earnings upside.

Lower opex drives margins YoY/QoQ

* Revenue grew 15% YoY to INR34.6b (our estimate of INR33b). North America revenue rose 22% YoY to INR8.1b (USD98m; 24% of sales). Europe generics revenue increased by 73.7% YoY to INR5.7b (17% of sales). RoW (RoW+LatAm) sales grew 30.4% YoY to INR5.5b (16% of sales). API sales were up 15.9% YoY at INR3.8b (11% of sales). The DF segment grew 2.8% YoY to INR10.6b (31% of sales).

* Gross margins (GM) expanded 30bp YoY to 63.9%. ? EBITDA margin expanded 150bp YoY to 18.6% (our estimate: 17.3%) as lower employee costs/R&D expenses (-150bp/-240 YoY as % of sales) were offset by higher other expenses (+270bp YoY as % of sales).

* EBITDA increased by 33.6% YoY to INR6.3b (our estimate: INR5.6b).

* 1Q earnings included an exceptional item related to remediation costs of INR520m for the Monroe facility and the Indian facility.

* Adjusting for the exceptional item, PAT grew 5.2% YoY to INR1.8b (our estimate: INR2b).

Highlights from the management commentary

* GNP has guided for YoY revenue growth of 10-11%.

* The overall margin guidance for FY24 is 19-20%.

* The company expects mid-single digit YoY growth in US sales for FY24.

* It expects the DF segment to grow 8% YoY (excl. divestment and NLEM impact) for FY24

* Ryaltris sales would be USD40-45m for FY24.

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