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India business re-set drags earnings

Work-in progress to address the USFDA issues

* Glenmark Pharma (GNP) delivered a miss on its 3QFY24 earnings, largely due to the inventory reset in the domestic formulation (DF) business and an inferior show in the US generics segment. GNP has completed its remediation measures at Monroe and would be requesting the USFDA for a re-inspection.

* We cut our FY24/FY25/FY26 estimates by 94%/4%/4% to factor in: a) the significant reduction in the domestic formulation business due to stock consolidation and inventory rationalization, and b) a prolonged delay in ANDA approvals due to regulatory issues. This is partly offset by: a) robust traction in the EU business. We value GNP at 17x 12M forward earnings to arrive at our TP of INR820.

* GNP is implementing efforts to improve outlook in its core markets through: a) the new launches/operational efficiency in the DF segment, b) filing complex respiratory products in the US segment, and c) resolving regulatory issues at its manufacturing site. However, we reiterate our Neutral rating as the current valuation factors in the upside in the earnings.

Sharp operating deleverage drags margins

* GNP’s revenue declined 28% YoY to INR25b (our estimate of INR32b).

* India formulations (DF) declined 76% YoY to INR2.6b (9% of sales), NA revenue declined 9% YoY to INR7.6b (USD93m; 26% of sales), Europe generics revenue rose 29% YoY to INR6.4b (22% of sales), RoW (RoW+LatAm) sales increased 11% YoY to INR7.3b (24% of sales). API sales rose 10% YoY to INR4.1b (14% of sales).

* Gross margin (GM) contracted 750bp YoY to 58.8% due to higher RM costs. There was a forex loss of INR162m and a hyper-inflationary impact of INR480m in Argentina in 3QFY24.

* Adjusting for this, there was an operational loss of INR1.4b (our estimate: +INR5.4b) during the quarter.

* Additionally, there was an exceptional item, including the remediation cost of manufacturing sites in India and the US of INR767m.

* Adjusting for this, there was a loss after tax of INR3.5b (our estimate: INR2b).

Highlights from the management commentary

* GNP implemented changes in its overall distribution model through the consolidation of stock points and rationalization of channel inventories for the DF market. This has led to a one-time impact on sales.

* The US sales were hit in 3QFY24 due to the continued price erosion in the base business and a lack of significant new product launches in the preceding quarters.

* GNP launched seven ANDAs in 3QFY24. IT has five injectable products in the US market. The company has filed two ANDAs for generic nasal sprays.

* GNP is hoping to restart commercialization of further injectable products from the Monroe manufacturing site from FY25 onwards.

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