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Ryaltris drives traction across markets

Glenmark Pharma’s (Glenmark) Q4FY23 revenue growth of 12% YoY was driven by launch of Rylatris across the UK, Asia and RoW markets. Nevertheless, the company’s gross margins contracted 119bps YoY due to cost pressures in India and base price erosion in the US. Traction in Rylatris should aid growth and better margins across key export markets while brand divestments (Razel and derma brands) may taper down India growth. Gross debt surged 18% YoY to Rs43.4bn due to investments in Ichnos Sciences though, in the near term, Glenmark may pare down stake in key subsidiaries and out-license NCE assets to reduce debt. Retain REDUCE rating on the stock with a revised target price of Rs575/share (earlier: Rs540).

* Business review: Glenmark’s Q4FY23 revenues were up 12% YoY (down 3% QoQ) to Rs33.7bn, ahead of our estimate of Rs30.2bn, largely aided by strong growth in Europe and RoW markets. India business declined 6% YoY (-23% QoQ) to Rs8.3bn due to divestment of a few non-core brands, price cuts and returns of covid-related products. Adjusted for all this, the overall business grew 5.1%. Ex-divestments, company expects the domestic business to grow in high-single digit for FY24. US sales grew 4% QoQ to US$106mn. Glenmark intends to launch 12-15 products in the US in FY24, partially supported by anticipated clearance of the Monroe facility by H2FY24. RoW markets grew by a sharp 25% YoY to Rs6.9bn, driven by launch of Rylatris across Asia, Russia and CIS and strong momentum in Mexico and the Middle East. Europe grew 22% YoY to Rs6.2bn driven by Rylatris and generic launches in the UK. Ryaltris is expected to continue driving growth in the near term led by launches in additional geographies, with the company guiding towards doubling of revenues in FY24 (guidance of US$40mn45mn from current levels of ~US$20mn-25mn). API revenues grew 17% YoY to Rs3.8bn backed by a strong 30% growth in the CDMO business.

* Margins remain under pressure: Gross margin contracted by 119bps (down 167bps QoQ) to 64.7% due to cost pressures and unfavourable regional mix. Employee expenses were up 14% YoY (-13% QoQ). Other expenses ex-R&D declined 7% YoY (-10% QoQ) to Rs5.8bn. R&D expenses surged 22% QoQ (4% YoY) to Rs3.4bn and stood at 10% of sales vs 8% / 10.7% YoY in Q3FY23 / Q4FY22. In Q4FY23, Glenmark made a provision of ~Rs8bn for settlement of the Zetia litigation in the US. Adjusted for the provision, PAT was at Rs1.2bn, down 42% YoY (-50% QoQ).

* Outlook: We forecast 10.8% / 14.4% / 29.5% revenue / EBITDA / PAT CAGRs over FY23-FY25E respectively, with EBITDA margin at ~18-19%. Out-licensing of innovative products and further divestment of stake in the API business will help de-lever the balance sheet.

* Valuations and risks: We increase our revenue estimates by ~4-6% and our EPS estimates by ~1-5% over FY24E-FY25E to factor-in the healthy ramp-up in Ryaltris. At CMP of Rs606, the stock trades at 14.9x/12.3x its FY24E/FY25E EPS. Maintain REDUCE with a revised target price of Rs575/share based on 12x FY25E earnings (earlier: Rs540/share) Key downside risks: pricing pressures in the US, and regulatory hurdles

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