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Strong traction in ROW offset by weak India/US business

Confident about closing two out-licensing deals in FY22

* Glenmark Pharma (GNP) delivered an in-line 2QFY22 operational performance. Strong traction in ROW markets was offset by deceleration in the Domestic Formulation (DF) / US Generics segment. A change in the product mix and higher other operational costs (ex-R&D) led to flat earnings on YoY basis.

* We decrease our EPS estimate for FY22 and FY23 by 4% each, factoring in delays in niche launches in the US, coupled with higher price erosion in the base portfolio. We value GNP at 13x 12M forward earnings to arrive at Target Price of INR560. We maintain Neutral given the moderate 11% YoY growth in earnings over FY21–23 and that the valuation adequately factors in this potential upside in earnings.

Change Operationally in-line, but miss on earnings to Impact of inferior product mix offset by lower R&D spend

* Revenue grew 6.6% YoY to INR31.5b (est. INR30.8b). RoW grew 71.5% YoY to INR6.5b (21% of sales). Europe Generics grew 6.3% to INR3.4b (11% of sales). API sales grew 4.4% to INR3.4b (11% of sales). The US was flat YoY at INR7.5b (USD100m; 24% of sales), while LATAM declined 2.4% to INR960m (3% of sales) and DF contracted 8% to INR9.7b (31% of sales).

* The gross margin contracted ~100bp YoY to 63.7% due to the product mix.

* The EBITDA margin contracted at a lower rate of ~50bp YoY to 18.8% (est. 19%), with lower R&D spending and staff costs (down 190bp/190bp as a percentage of sales). This was partly offset by an increase in other expenses (up 320bp as a percentage of sales).

* EBITDA grew 3.6% YoY to INR5.9b (est. INR5.9b).

* Adjusted PAT grew modestly at 2% YoY to INR2.8b (est. INR2.9b).

* 1HFY22 revenue / EBITDA / adj. PAT grew 15%/11%/17% YoY to INR61b/INR11.6b/INR5.6b.

Highlights from management commentary

* GNP guided for revenue growth of 10–15% in FY22. YoY growth may be challenging on the high base in FY23, but the 3–5 year sales CAGR would be 10–15%.

* GNP guided for the EBITDA margin to sustain at 19% for FY22.

* GNP has two out-licensing agreements targeted at Ichnos in FY22.

* The capex guidance stands at INR6.5–7b for FY22, with INR3.5b spent in 1HFY22.

* GNP is working on Phase-III trials for Fabispray; the launch is expected by end-CY21.

* Price erosion in the US business is 6–7%.

* GNP expects to have 4–5 respiratory products in Europe over the next 2–3 years.

Valuation and view

* We decrease our EPS estimate for FY22/FY23 by 4% each, reflecting a) lower traction in the US Generics segment on the back of product-specific issues, b) ongoing pricing pressure on the existing portfolio, c) increased raw material costs, and d) higher logistic costs.

* We expect an 11% earnings CAGR, led by a 3%/5%/11% sales CAGR in the US/DF/Europe segment over FY21–23E. With stable EBITDA margins, we expect return ratios to remain in the mid-teens.

* We value GNP at 13x 12M forward earnings to arrive at TP of INR560. We maintain Neutral on a limited upside from current levels.

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