Hold Glenmark Pharma: Q3 was in line though R&D costs hit Ebitda

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Published: February 25, 2019 2:58:32 AM

FY19-21e EPS down 6-10% given the challenges in US market; TP reduced to Rs 610

Gross margin at 66.3% expanded 173 bps y-o-y/38 bps q-o-q.

Q3 revenue (+16% YoY) was in line, but Ebitda (+35% y-o-y) was 4% below our estimate on higher R&D costs. PAT (adjusted for forex loss) was 9% below estimate. While US revenue grew 16% y-o-y, it was up only 3% q-o-q in USD terms as approvals and market share gains were offset by pricing erosion.

Glenmark expects single-digit growth in US in FY20 and operating margin to improve in FY20 on cost optimisation efforts. It’s Board of Directors has in-principle approved to spin-off its innovation R&D unit (into WOS) as it plans to monetise; it represents 40% of overall R&D spend, in our view. While it plans to reduce net debt (via out-licensing R&D assets), this remained largely flat q-o-q.

Given challenging US generics market, we cut FY19-21e EPS 6-10% with revised TP of Rs 610 (16x FY21e EPS) vs. Rs 640 (17x H1FY21e). Maintain Hold with monetisation of innovative pipeline as key catalyst.

In-line revenues: Revenue grew 16% y-o-y to Rs 25.6 bn, in line with our est., as US revenue (~33% of sales) grew 16% y-o-y/6% q-o-q to Rs 8.6 bn. India revenue (~26% of sales) grew 15% y-o-y to Rs 6.7 bn.
Lower Ebitda on higher R&D cost: Gross margin at 66.3% expanded 173 bps y-o-y/38 bps q-o-q. Despite lower staff and SG&A expenses, Ebitda was 4% below our estimates at Rs 4.3 bn (+35% y-o-y) due to higher R&D costs (+49% y-o-y/+13% q/q). Ebitda margin was at 17% (+237 bps y-o-y).


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