Buy Glenmark Pharmaceuticals Ltd for the Target Rs. 2,400 by Motilal Oswal Financial Services Ltd
Weak 1QFY26 performance
Strategic transformation underway
* Glenmark Pharma (GNP) reported a lower-than-expected performance in 1QFY26, as revenue/EBITDA/PAT came in 9%/14%/15% below our estimates. The miss was attributed to lower business in the domestic formulation (DF), EU and ROW segments. Moreover, higher opex dented margins.
* 1Q was an aberration in terms of YoY growth in EU and EM markets for GNP. Adverse seasonality impacted EM business and growth also moderated in EU. However, the branded business delivered robust growth.
* Given its strategy of rationalizing DF portfolio, GNP witnessed moderate YoY growth in this segment.
* We increase our earnings estimates for FY26/FY27 by 3%/8%, factoring in a) receipt of income from deal related to ISB2001, b) the recalibration of its DF portfolio, c) a moderation in EU/EM businesses, and d) regulatory constraints for the US business. We value GNP on the SoTP basis (27x 12M forward earnings for base business and add NPV related to ISB2001) to arrive at a TP of INR2,400.
* GNP has witnessed a significant transformation in its business, with the sale of its API business, the deal with Abbvie on ISB2001, and an increased focus on profitable growth. Subsequently, it is resetting its DF business, enhancing its offerings in injectables/respiratory space in the US market, and driving branded-led growth in the EU/EM markets. Maintain BUY.
Product mix benefits more than offset by lower operating leverage
* GNP’s 1QFY26 revenue was almost flat YoY at INR32.6b (our est. INR35.9b).
* Europe revenue declined by 4% YoY to INR6.7b (20% of sales). The Rest of World (RoW) segment also remained flat YoY at INR5.7b (18% of revenue).
* DF grew 3.7% YoY to INR12.4b (38% of sales). NA was stable YoY at INR7.8b (20% of revenue).
* Gross margin improved 310bp YoY to 68.9%, due to a better product mix.
* However, EBITDA margin contracted 100bp YoY to 17.8% (our est. 18.7%), due to higher opex (employee/other expenses up 150bp/300bp YoY as % of sales).
* EBITDA declined 4.9% YoY to INR5.8b (our est. INR6.7b).
* GNP made a provision for INR3.2bm related to a US litigation settlement.
* Adjusting for this provision, PAT stood at INR3.1b, down 12% YoY (our est. INR3.7b).
Highlights from the management commentary
* EBITDA margin is expected to pick up in 2HFY26, with GNP targeting 23% EBITDA margin in 3QFY26.
* GNP plans to file 1/5-6 ANDAs in 2QFY26/FY26 and targets to launch 10-12 products, including partnered products.
* The company has largely completed remediation work at Monroe and would be starting commercial soon.
* The proceeds from ISB2001 are expected to be received in Sep’25. From the upfront non-refundable payment of USD700m from Abbvie, GNP would set aside funds for three years of R&D expenses (~USD200m) and one-time payment from Abbvie on post-tax basis.
Highlights from the management commentary
* GNP is recalibrating its DF portfolio with a focus on high-margin products, which might impact near-term growth of the segment. Subsequently, the primary and secondary sales would also align. Specifically, new launches in diabetes and oncology therapy (Tevimbra/Brukinsa) would drive better growth prospects in this segment.
* GNP sustained its growth momentum in the consumer care segment with 20% YoY growth in 1Q.
* EU sales slowed in 1Q, though GNP expects double-digit sales growth in FY26.
* In EM markets, business was impacted by seasonality in certain geographies. GNP has guided for double-digit YoY growth in FY26 on CC basis.
* The increased inventory build-up for product launches in EU markets led to an increase in net debt to INR15b as of 1Q end.
* GNP launched Winlevi in the UK and would be launching in other markets of EU by FY26 end.
* R&D spending stood at 7.1% of sales, with 50% spent on the specialty portfolio.
* 1Q capex was INR1.8b, with 65% spent on tangible assets.
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