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Glenmark Pharma: Q3 Was in Line Though R&D Costs Hit EBITDA

Q3 revenue (+16 percent YoY) was in line, but EBITDA (+35 percent y-o-y) was 4 percent below our estimate on higher R&D costs. PAT (adjusted for forex loss) was 9 percent below estimate. While US revenue grew 16 percent y-o-y, it was up only 3 percent 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 percent 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 percent 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 percent y-o-y to Rs 25.6 bn, in line with our est., as US revenue (~33 percent of sales) grew 16 percent y-o-y/6 percent q-o-q to Rs 8.6 bn. India revenue (~26 percent of sales) grew 15 percent y-o-y to Rs 6.7 bn. Lower EBITDA on higher R&D cost: Gross margin at 66.3 percent expanded 173 bps y-o-y/38 bps q-o-q. Despite lower staff and SG&A expenses, EBITDA was 4 percent below our estimates at Rs 4.3 bn (+35 percent y-o-y) due to higher R&D costs (+49 percent y-o-y/+13 percent q/q). EBITDA margin was at 17 percent (+237 bps y-o-y). – Financial Express

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