Glenmark Pharmaceuticals Stock Research Report

Overheads dent performance, bracing for a recovery ahead…..

Glenmark Pharmaceuticals’ (Glenmark) Q2FY25 result was dragged by a muted showing in US (-2.5% YoY) and sharp jump of ~67% YoY in other expenses (ex-R&D). Post inventory rationalisation in Q3FY24, Glenmark’s India biz has grown between 12–15% for the last three quarters and management is confident of growing its India sales between 10-15% in FY25. In US, Glenmark is aiming for 3–4 launches in Q3FY25 followed by respiratory and injectables products in FY26, which along with Rylatris, should boost growth in US. Resumption of operations at Monroe plant (USD 25-26mn of EBITDA loss p.a.), out-licensing of ISB 2001 and listing of Ichnos are a few near-term triggers. Management maintains FY25 revenue guidance of INR 135–140bn and margins of ~19%. We cut our FY25E/FY26E EPS by ~7% each to factor in higher overhead cost. Maintain REDUCE and a TP of INR 1,345 based on 22x (20x earlier) FY26E EPS.

India and EU maintain traction; overheads drag margin

Q2FY25 revenue grew 7.1% YoY/5.8% QoQ to INR 34.3bn (I-Sec: INR 34.9bn), driven by strong performance in India and Europe. Gross margin expanded 618bps YoY/305bps QoQ to 68.8% due to improvement in product mix. R&D expenses reduced a sharp 29.7% YoY/5.4% QoQ to INR 2.3bn and stood at 6.6% of sales vs. 7.4% in Q1FY25 and 10.1% in Q2FY25. EBITDA grew 19.1% YoY/fell 1.4% to INR 6bn (l-Sec: INR 6.5bn) while EBITDA margin expanded 178bps YoY/contracted 128 bps QoQ to 17.5% (I Sec:18.8%). Adj. PAT grew 156.2% YoY (flat QoQ) at INR 3.5bn (I-Sec: INR 3.7bn).

India biz accelerating; US growth likely uptick in H2FY25

India business grew 13.9% YoY/7.1% QoQ to INR 12.8bn driven by solid traction in cardiac and dermatology therapies. Consumer care sales grew 15% YoY in Q2FY25. Flagship brand, Candid Powder, continued to gain market share and recorded 57.4% for the month of Sep’24. On a low base, we expect India sales to grow at 21.6% CAGR over FY24-26E. US sales dropped 2.5% YoY/5.6% QoQ to USD 88mn due to price erosion and delay in scale up in recent launches. Management plans to launch 3–4 products in Q3FY25 and respiratory products in FY26, which could boost revenue growth in its US biz in the near term. Besides, it also plans to restart commercial production at Monroe plant by end-FY25. We expect its US biz to grow at 1.7% CAGR over FY24–26E. Europe grew 14.6% YoY (-1.2% QoQ) to INR 6.9bn led by healthy growth across key markets. RoW markets declined 4.1% YoY (+23.4% QoQ) to INR 7bn. Management sees global sales of Ryaltris at USD 80mn in FY25.

Valuation and risks

Lack of material new approvals from the USFDA has crippled growth at Glenmark’s US biz. In Q2FY25, it launched one product and has 3-4 products lined up for Q3FY25, which could aid growth in Q4FY25 and FY26. Pipeline contains respiratory and injectable products, for which management anticipates to secure approval in FY26. In India, growth has been healthy for the last couple of quarters. Glenmark’s liraglutide brand (GLP-1) Lirafit has been well-accepted by the market; however, the company is facing a supply crunch and expects to ramp up production from a CMO site in Q4FY25. Management is positive on the outcome of phase 1 trial of its novel biologic drug ISB 2001 for treatment of multiple myeloma. It may out license the drug next year post read out of phase 1 data at American Society of Hematology (ASH). Beside the company is considering separate listing of Ichnos, through which it may raise funds to fund its R&D.

The stock currently trades at valuations of 29.2x FY25E and 24.1x FY26E earnings, and EV/EBITDA multiples of 16.7x FY25E and 14.1x FY26E, respectively. We cut our revenue estimates for FY25/26E by ~1% and earnings estimate by ~7% each for FY25/26E. Enhanced free cash generation and maintaining a prudent balance sheet are essential avenues to be watched in the quarters ahead. On a low base, we expect 12.5%/53.6%/69.1% revenue/EBITDA/PAT CAGR over FY24–26E, with EBITDA margin at ~19% in FY26E. Key upside risks: Healthy launches, faster recovery in US.