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Healthy show in India/EU/ROW offset by weak NA business

On the verge of achieving its FY22 key objectives

Glenmark Pharma (GNP)’s 3QFY22 operational performance was in line (adjusting for the upfront payment on agreement with Almirall). The robust growth in domestic formulation (DF)/ROW/EU businesses was offset by a dip in North America (NA)/API/LATAM businesses.

We cut our EPS by 6% for FY22E/FY23E/FY24E to factor in: a) an ongoing price erosion in the US generics, and b) a higher opex for promotional activities of new launches/major brands.

We value GNP at 13x 12M forward earnings to arrive at a TP of INR520. We maintain our Neutral rating due to the limited upside from current levels.

Inferior product mix drags earnings

Adjusting for the milestone payment (of EUR20.8m) received during the quarter, its revenue grew 7.7% YoY to INR30b (v/s our est. of INR29.2b).

RoW sales rose 24.3% YoY to INR4.2b (14% of sales). EU sales grew 21.5% YoY to INR3.8b (13% of sales) and DF revenue increased 14% YoY to INR10.1b (34% of sales). Conversely, NA revenue declined 3% YoY to INR7.6b (USD101m; 25% of sales). API sales dropped 5.3% YoY to INR3b (10% of sales) and LATAM sales dipped 9% YoY to INR1.2b (4% of sales).

Gross Margin (GM) contracted ~300bp YoY to 64.3% due to product mix.

EBITDA Margin contracted ~350bp YoY to 17.4% (our estimate: 18.9%), largely owing to lower GM. The higher other expense (+300bp YoY as % of sales) was offset by lower employee expense/R&D expense (+190bp/+90bp YoY as % of sales, respectively).

EBITDA declined 10% YoY to at INR5.2b (our estimate: INR5.5b)

Adjusted PAT declined 18% YoY to INR2.3b (our estimate: INR2.6b).

9MFY22 revenue/EBITDA/adj. PAT rose 13%/3%/4% YoY to INR91b/INR17b/INR7.8b, respectively.

Highlights from the management commentary

GNP maintained its guidance of 19% EBITDA margin for FY22. It achieved 18.5% EBITDA margin in 9MFY22.

The company intends to garner USD40m sales from Ryaltris at global level. This is excluding sales of Ryaltris via its partner, Hikma, for the US market.

The Non-COVID DF portfolio grew 15.5% for 3QFY22 v/s India Pharma market’s YoY growth of 11.7% during the same period.

Price erosion in the NA business stood at 6-7%. Further, the NA business was impacted partly due to recall of certain products from Monroe facility

FY24 would be interesting from the Monroe facility perspective given that there are products in the injectables/nebulizers space from that facility

The EU business growth is expected to remain robust driven by healthy traction of Ryaltris/Tiotropium as well as other base products

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