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Lower milestone income and ROW sales hurt earnings

Reviving strategic growth drivers is the key

* Gland Pharma (GLAND) reported a miss on its 1QFY25 earnings, largely due to lower milestone income for the quarter. Further, postponement of the off-take of products by European customers hit 1QFY25 performance to some extent. Having said this, management maintained its outlook for the base business as well as for Cenexi.

* We cut our estimates by 6%/2% for FY25/FY26 factoring a) maintenance shutdown at Cenexi facilities, b) muted outlook for India segment, and c) gradual improvement in outlook of business from China. We value GLAND at 30x 12M forward earnings to arrive at our TP of INR2,440.

* GLAND is implementing efforts towards: a) reviving the biologics-based contract manufacturing business, b) building a healthy product pipeline for the US market, and c) scaling as well as improving the profitability of Cenexi. In fact, the favorable regulatory developments at the industry level would enable better business prospects for GLAND as well. Reiterate BUY.

Product mix and reduced operating leverage drag margins YoY/QoQ

* GLAND’s 1QFY25 revenue grew 16% YoY to INR14b (est: INR15b). The base business (ex-Cenexi) rose 14% YoY to INR10b in 1QFY25. Core market sales grew 24% YoY to INR10.6b (76% of sales). RoW sales declined 4.9% YoY to INR2.7b (20% of sales). India sales fell 18.5% YoY to INR527m (4% of sales).

* Gross margin (GM) declined 280bp YoY to 59.7% due to change in product mix in base business offset by higher GM in Cenexi business.

* EBITDA margin contracted 550bp YoY to 18.9% (our estimate: 23.7%), led by higher employee costs (up 430bp YoY as % of sales), offset by lower other expenses of 160bp YoY as a % of sales. On ex-Cenexi basis, the EBITDA margin was 29% (-70bp YoY/- 770bp QoQ).

* Consequently, EBITDA declined 10% YoY to INR2.6b (our est: INR3.6b).

* Adj. PAT declined 26% YoY to INR1.4b (our estimate: INR2.1b) due to higher depreciation, and tax-related expenses.

Highlights from the management commentary

* GLAND maintained its guidance of mid-teens YoY growth in revenue (ExCenexi) for FY25.

* GLAND is witnessing traction in inquires at its biologics facility at Genome Valley for CDMO of monoclonal antibodies and novel plasma-based proteins. Further, it is discussion with large biologics companies for commercial CDMO and in licensing the molecules for key markets.

* The changing regulations in developed markets are enabling more inquiries from global pharma companies to outsource to Indian companies (including GLAND).

* Management guided ROW markets to grow at a healthy rate for the year.

* For the quarter, the milestone income was 9% vs. 16% in 4QFY24 (as a % of revenue; ex-Cenexi) and profit share was stable QoQ at 10% (ex-Cenexi).

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