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Gland Pharma- Generic Injectables

Gland Pharma Overview:

Company was incorporated in 1978 as ‘Gland Pharma Private Limited, Hyderabad. The business was started with single molecule, further expanded with other molecule. Due to some problem in business operation, the company shifted its operation to contract manufacturing.

Company is primarily in Business to Business Model in over 60 countries, including the United States, Europe, Canada, Australia, India and the Rest of the world.

The company has expanded from liquid parenteral to cover other elements of the injectables value chain, including contract development, own development, dossier preparation and filing, technology transfer and manufacturing across a range of delivery systems

After continuation of work, Shanghai-based Fosun acquired a 74% stake in Gland Pharma in 2017 for over $1.2 billion.

Key Insights of Gland Pharma:

  1. The IPO issued by the company is majorly for selling the stake of Fosun Pharma. Out of total issue only Rs 1250 crores are utilized in IPO. Company already has cash balance of more than 1000 crores.
  2. There are many other players entering in the injectables segment. Companies such as Zydus, Cadila Healthcare, Caplin Point Labs, Maksumn Biotech Pvt. Ltd, Bliss GVS Pharma, Strides Pharma. These are the potentially good competitors for the company.
  3. Company is almost debt free. No burden of debt and cash rich company.
  4. Working Capital requirement of the company is pretty high. Companies working capital needs are almost 50% of the sales.
  5. Inventory of the company is almost 35% of the sales, which is pretty high compared to the competitors.
  6. Most of the ownership is in the hands of Fosun Pharma. This can materially impact the listing price of the company.
  7. In year 2018 company has done buyback of which the price was way higher.

(Source: DRHP)

In year 2018 company did buyback of 9.5 lakh shares at price. The buyback total amount is 344 crores. As mentioned in the image. This makes the price of Rs 3,600 wit face value of 10 Rs. The current face value of the company is 1 Rs making the buyback price of more than Rs 360.

Assuming 360 Rs to be the fair value of the company and now after the buyback, the IPO price of 1400-1500 Rs seems to be much over value. Company didn’t gained that much in sales volume and PAT value to quote at the price of more than 4-5x than that of the current IPO price.

  1. The Injectables segment is eyeing for good growth.
  2. Recent vaccine news can increase the short term price in the market. Injectables, Logistics and cold storage is the basic necessity in the supply chain of COVID vaccine.
  3. Company imports more than 30% of the raw material from China, which can have material impact due to any import ban. However, the possibility of this in near future is very low.
  4. Top 5 customers in Fiscals 2018, 2019 and 2020 accounted for 49.92%, 47.86%, 48.86% respectively. Any material impact in the business of customer can significantly impact the revenue of the Gland Pharma. Each customers have a revenue share of more than 7-8%.
  5. No compliance issue in US plant since inception while that of competitor has constant compliance issue from US FDA.

About the Industry:

Company is in pharmaceutical sector, specializing itself in formulation delivery system which includes injectables form such as oral solids, injectables and other form.

The share of Oral Solids has been decreasing compared to that of injectables. Increase in share of injectables is mainly because of 6.3% increase in volume growth and 3.6% price growth from 2014. While the oral solids has seen volume degrowth of -2%, and price growth of 5.6%.

(Source: AR)

Factors leading to growth in Injectables form:

  • New Drug Delivery System (NDDS)- The development New Drug Delivery System has brought up major shift in the delivery mechanism. It includes device such as auto injectors, pen injectors, pre-filled syringes (“PFS”) and needle-free injectors. NDDS refers to formulation system and technology to transport medicine in the body in safely and therapeutic manner. Major of its advantage Decrease the side effects of the medicine
    • Reduces the time of recovery as NDDS directly works against the antibodies.
    • Complex manufacturing, but reduce the wastage of medicine compared to conventional method
    • Increase the efficiency of the medicine.
  • Pre-Filled Syringes: Patient receives the dosage according to their requirement. These includes the injection which are pre-filled with the medicine required to work against the antibodies.
  • Chronic Disease had lot more side effects and the medication of such disease required longer time to fight against the anti-bodies. (eg. Chemotherapy disease)
  • Fill and finish aspetic technology: Fill and finish is an advanced aseptic processing technology, which uses a continuous process to form, fill with drug or biologic and seal the container in a sterile environment. Most of the manufacturing partners specialising in injectables outsourcing are developing fill-finish capabilities to meet the growing needs of the market.

Porter Analysis on Industry:

With industry being divided in generic and formulation segment, it has been witnessed that global generics market was estimated to be US$393 billion in 2019, constituting approximately 36% of the global pharmaceutical market. According to IQVIA report, the market grew at a CAGR of approximately 5.0% from 2014 to 2019 and is estimated to grow at a CAGR of approximately 5.3% to reach US$508 billion by 2024.

(Read other players of Pharma Player here)

Global Generic Market:

Global Generic market of every region is increasing gradually over the period of time. Major demand is still coming from America and Europe Region. Growth is led by both Price and Volume growth.

Geographical Country Trends:

US Market: The injectable drug shortages in US has increased by approximately 23% in 2018 compared to 2014. The USFDA is particularly focusing on approving complex generics and generics where the reference listed product has no, or limited, competition. Injectables share in US has been increased from 33% in 2014 to 46% in 2019.

India: Indian market is expected to show double digit growth in pharmaceutical space over the period of few years. Generic formulations form a significant portion of the domestic market. India will have lead in export of generic medicine with increasing share in Europe and America region.

China: There has been shift from the generic demand of China to India. Generic formulations form a significant portion of the domestic market. Pricing pressure and quality assurance made the giant MNC to look for other player than China to remove the dependency from China.

Europe: Holding share in Europe is the upcoming target of many Indian Pharma players. Drivers in detail are mentioned in DRHP. (Source: DRHP)

(Source: DRHP)

Drug Shortages:

Over the years, the major reason for the drug shortages is the quality issues (holding 62% weight), following with increase in demand (holding 12% weight). Shortages of even generic molecule has been increasing, and below are current shortage molecule.

Patent Expiry Growth:

Value of lost patent in 2013 for period of 2014 to 2019 was US$32.8 billion.
Lost patent between 2020 and 2024 is US$61.3 billion. 2x increase in the size of patent expiry. According to the IQVIA Report, the value of small molecule injectables in 2019 expected to lose patent protection between 2020 and 2024 is US$ 7.9 billion.

About the Business:

Company has established portfolio of injectable products across various therapeutic areas and delivery systems. The company is present in sterile injectables, oncology and ophthalmics, and focus on complex injectables, NCE-1s, First-to-File products and 505(b)(2) filings.

Delivery system: The delivery system includes sterile injectables, oncology and ophthalmics, and focus on complex injectables, NCE-1s, First-to-File products and 505(b)(2) filings.

Gland Pharma Business Model:

Below is the cost model for the company

Gland Pharma cost model

Business Model Canvas

Gland Pharma business model canva

Gland Pharma Value Chain:

Gland Pharma value chain

Company has tried to become almost horizontally and vertically integrated, from manufacturing of API to Finished Product.

Vertical Integration allows company to achieve greater control over cost, manufacturing process, and setting up required standard, operational efficiencies.

Manufacturing Capacity:

Gland Pharma manufacturing capacity

3 API manufacturing facilities are USFDA approved; one is an R&D pilot plant and the other two have an annual capacity of 3,000 kg and 8,000 kg, respectively.

Expansion Plans:

  • Expansion is in progress in oncology segment.
  • Company is in line to built another injectables facility in Pashamylaram, Hyderabad and has increased the manufacturing capacity.
  • Company is further planning to set up new R&D building in Pashamylaram, Hyderabad

Product Fillings:

265 ANDA filings in the United States, of which 204 were approved and 61 were pending approval. The 265 ANDA filings comprise 189 ANDA filings for sterile injectables, 50 for oncology and 26 for ophthalmics related products. Out of these 265 ANDA filings, 100 represent ANDAs owned by company, of which 63 ANDA filings are approved and 37 are pending approval.

Product Registration: Along with partners company has total of 1,415 product registrations, comprising 368 product registrations in the United States, Europe, Canada and Australia, 54 in India and 993 in the Rest of the world.

Product Portfolio:

Research and Development:

Company has in – house team of approximately 250 personnel including PhDs, pharmacy post graduates and chemists with expertise in synthesis of low molecular weight injectables drugs, steroids and oncology drugs and in developing complex injectables such as lyophilized products, high-potent drugs and long-acting suspensions.

Quality Control:

Quality Control plays the major role in Pharmaceutical industry. Company manages to maintain quality standard across product development, formulation, packaging, storage and transportation.

Gland Pharma till now had no warning letters from USFDA since inception of the facility. Company has received WHO GMP certifications from the Drug Control Administration. Company is supported by a quality assurance and quality control which numbered 1,166 number of new employees.

Gland Pharma Quality Control

Sales and Marketing:

Company has total work force of over 200 employees and a countrywide distribution network in approximately 2,000 corporate hospitals. Company has already registered 66 trademark

Competition

Global Players who follow this segment:

B2C customer : Hikma, Fresenius Kabi, Amphastar, Sagent, American Reagent, Mylan, Teva and Sandoz.

B2B: Recipharm, Lonza and Piramal Pharma Solutions.

Large B2C pharmaceuticals companies also active in B2B market: Pfizer Centreone, Merck Bioreliance, Abbvie, Baxter, Ratio Pharma, Sanofi and GSK.

According to the IQVIA Report, principal competitors of company include Recipharm AB, Catalent, Inc., Lonza Group AG and Piramal Pharma Solutions.

The Indian listed players eyeing or already are in injectable segment are:

  • Zydus
  • Cadila Healthcare
  • Caplin Point Labs
  • Maksun Biotech Pvt Ltd
  • Bliss GVS Pharma Ltd
  • Strides Pharma

Key Personnel Management

Shrinivas Sadu: MD and CE. Holds Master’s degree in science from Long Island University, New York and a master’s degree in business administration from University of Baltimore. He also holds a post graduate certificate in finance and management from the London School of Business and Finance. Previously worked at Natco Pharma Limited at Hyderabad, India, and is presently a director on the board of Sadu Advisory Services Private Limited.

Yiu Kwan Stanley Lau: Chairman and Independent Director. Director on the board of directors Solasia Pharma K. K. and TaiLai Bioscience Ltd. Previously the chief executive officer of Amsino Medical Group, the chief operating officer of Eddingpharm Investment Co. Ltd, and the president of China Biologic Products, Inc

COVID Impact :

  • Delays in treatment of non-COVID-19 patients
  • Face-to-Face interactions minimised.
  • Upsurge in demand for medicines to alleviate COVID – 19 symptoms.
  • Impact on Innovation: Manufacturers may consider postponing their approach to new product launches. Lack of personnel could also result in delays to regulatory approvals and formulary listings.

Post COVID: In US, there has been longer prescriptions in retail pharmacies in terms of number of days of prescription so that renewals need to be more infrequent and this trend is also seen in other countries. The result will be a drop in the share of major chronic medication markets that is dynamic (i.e. new or switched prescriptions).

Financial and Valuation:

Revenue

Revenue from Operation is divided in Sale of Goods and Revenue from Service. Out of this Revenue from sale of goods constitute around 90% of the revenue while sale of service constitute around 10-12% of the revenue. Revenue from sale of service has increasing share in revenue from 8% to 12%.

Revenue from Service includes the CDMO, CMO revenue and Licencing fee

Gland Pharma

Expense Breakup:

Major of the expense includes the Cost of material which cost more than 60% of the total expense. While the other expense is around 10% of the expense, which includes the research and development cost and the quality assurance cost, depreciation cost.

Gland Pharma

PAT Margins of the business is continuously increasing since the past 3 years with increase in PAT margins. This is mainly because of price realisation and cost control due to backward integration.

Working Capital Requirement

Working Capital Days of the company is pretty high, but has been decreasing in the last 3 years. However the working capital requirement of the company is around 1000 crores, which is pretty high. Most of the inventory levels affects the working capital needs of the company.

Inventory days of the company in the current market is around 250 days. Receivable and Payables are both near to 80 days. This leads to continuous increase in the need of the working capital.

Company is almost debt free, and have debt of around 40 crores which is also interest free.

Geographical Revenue Share is increasing in every region with major increasing focus in rest of the world countries.

Revenue from Canada and Europe is increasing constantly with increase in focus. While company is also holding its share in US region with constant increase in sales by partnering with major players.

Order book of the company roughly stands at around 1-3% of the annual revenue, which is increasing gradually YoY.

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China’s regulatory authority accepts Fosun Pharma clinical trial application of mRNA vaccine candidate.

This is the same vaccine which Pfizer has licensed to Fosun pharma for china market…
And it may be possible that after successful trial in China, Fosun may outsource the vaccine from its Indian Arm Gland pharma. In fact Gland pharma can manufacture this vaccine not only for india but for other countries too.

Discl: Applied for IPO.

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Administering this vaccine in India would be almost impossible due to the logistics involved. These need to be stored at -70C.

Yes, whatever Covid19 vaccines come to India need to be stored at negative temperature…
So we need to work backwards…
Govt is definitely working on this…today I watched an interview with MD & CEO of Apollo hospital who was saying that they all are working with the Govt to ensure storage facilities for the vaccine.

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For the more advanced vaccines that Pfizer and moderna is working on, the distribution is simply impossible due to unavailability of the physical infrastructure required to store and distribute the vaccine.

The best hope for us are:

  1. AstraZeneca/Oxford
  2. Sputnik 5
  3. Covaxin

All of these can be stored either in refrigerator or in commercial freezers and hence can be easily distributed.

My limited point was that Pfizer vaccine would possibly not be distributed in India in any meaningful way. We should not count on it (unless there is explicit evidence to the contrary).

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We have 1380 million people in india…the vaccine requirement is mind boggling… My understanding is that new cold storage infrastructure needs to be created for Covid19 vaccines - what ever may be the make…
And Govt seems to be working towards that.!

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Thanks for a very exhaustive write-up. I am sharing some of my insights (which are not already covered in the post). All the figures are taken from the DHRP of Gland Pharma. The DHRP is a very good read to understand industry dynamics of injectable space.

Injectable business growth

Of the major forms of drug delivery method, injectable form has grown at a higher pace in the past 5 years compared to oral solids, mainly due to higher volume growth.

The growth has been strongest in US (both volume and price wise) followed by Europe.

In the previous 5-years, $34bn of injectables have gone off patent and in the next 5 years, $68bn of injectables will go off patent. This is the reason why a lot of Indian generic players are going big in the injectable market. The products currently manufactured by Gland addresses a market size of $8-9bn in US.

On drug shortages for injectables vs non-injectables over the last 5-years, there is no clear trend.

The penetration of generics injectables is lowest in US (at 73%) and the highest level of penetration is in China (at 89%). For context, the current generic penetration for oral solids is about 88% in US. This leaves a large scope for increase in generic injectables (both in terms of market share and market size because of $68bn of injectables going off patent in the next 5 years).

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What is the basic business model of Gland?

Gland is mostly a B2B supplier for injectables, akin to a contract manufacturer. They also run a B2C business in India which is growing very strongly. The basic business model is summarized in the figure below.

Revenue breakup:

  • Almost 100% sales come from injectables with 25-30% of revenues coming from profit sharing model
  • Sales breakup: B2B (own IP) ~ 69% (gross margin ~ 65%), B2B (tech transferred from another company) ~ 27% (gross margin ~ 55%) (link)
  • Blended gross margins are 58-59% vs 40% for peers due to vertical integration
  • A large part of revenues come from old products (rather than relying on new launches). Revenues from new product launches amounted to ₹3,492.61, ₹2,717.29, ₹2,292.27 and 733.80 million in Fiscals 2018, 2019, 2020 and the three months ended June 30, 2020, respectively.

The international B2B business generated majority of their revenues (96.27%/95.57%/95.99% in FY18/19/20 ). For the Indian B2C business, they have a sales force of 200 to serve Indian B2C market providing access to 2000 hospital, nursing homes, etc. Major brands: Hep 5, Hep 25, Cutenox, Synject.

What are their current capabilities?

  • Product profile: Sterile injectables, oncology and ophthalmics
  • Delivery systems: liquid vials, lyophilized vials, pre-filled syringes, ampoules, bags and drops

Expansion in capabilites

  • Looking to acquire technology infrastructure in areas of (1) steroidal hormonal products, (2) suspensions, (3) peptides, (4) anti-neoplastics, (5) nasal products, (6) inhalation products, (7) controlled substance, (8) anti-biotic plants, (9) complex injectables such as peptides and long-acting injectables, and (10) new drug delivery systems such as pens and cartridges
  • API: Acquire or partner with players that have niche capabilities in fermentation technology, corticosteroid APIs and hormonal APIs and also partner with companies with already approved FDA facilities (to reduce market entry time)
  • Want to focus on complex injectables, NCE-1s, First-to-File products and 505(b)(2) filings

The company wants to be an expert in complex process chemistry. I found this example in their DHRP pretty useful.

We have developed analytical tools that have enabled us to characterize complex molecules in our products and product candidates such as the synthesis and characterization of glycosaminoglycans, including heparin, low molecular weight heparins, chondroitin sulphate, hyaluronic acid and drug conjugates of glycosaminoglycans. We also possess the technology to develop complex steroids such as vecuronium, rocuronium, fulvestrant and vitamin D analogues. Our technology enables us to characterize other complex molecules, including protein based products. The development of peptide and protein drug products utilizes characterization technology as well as sterile API manufacturing technology. The sterile API technology has enabled us to successfully develop heterogeneous peptide, glatiramer acetate, betamethasone acetate, paliperidone palmitate, loteprednol etabonate and aripiprazole. We have also developed non-infringing polymorphic forms of APIs such as tigecycline and pemetrexed and glatiramer acetate and oncology APIs such as cabazitaxel, decitabine, azacitidine and pralatrexate

Apart from process specialization, they are also trying to get into new geographies. They want to leverage Fosun Pharma’s global presence to get into new markets of China and Africa. For the Chinese market, they currently (as on June 30, 2020) have filed six products which are under approval. For China, Fosun provides a partner that will help to

  • Navigate through the Chinese healthcare market
  • Gain better bargaining power to procure raw materials and equipment from China

For their Indian business, Gland has a strong presence in cardiac and pain management therapeutic areas. They have identified the infertility therapeutic area to further their domestic portfolio.

Major risks

  • There is a large raw material dependence on China (37%/52%/33% of total raw materials in FY18/19/20). Example of this is their key product Heparin where there is strong China dependency
  • API disruption example: Gland experienced an API supply disruption in FY15 for a given product where the API supplier (based out of India) received a warning letter from the FDA. As a result, Gland had to look for an alternative vendor and file supplementary ANDAs. The filing and approval process took almost 2 years resulting in the inability to manufacture the product for FY15 & FY16 for the US market. This product had sales revenue of 5.5cr. in FY14.
  • Any FDA warning letter can be a business killer as they are a CMO and companies want to partner with CMOs having a good compliance track record. However, until now Gland hasn’t got any OAI or warning letter from their start of operations.
  • A number of Indian generic players are going big into the injectable market which will lead to sharp price erosion over the next few years.
  • Fosun Pharma has had a patchy record in the past, with reported instances of the company chairman going missing (example) leading to decline in stock price of Fosun Pharma, allegation of them faking API production data (link), etc.

Disclosure: No investments in Fosun as on date.

6 Likes

Thanks for sharing this risk which I was not knowing
Disclosure: applied in IPO as there is possibility of 100% allotment (after psychological puzzle that it may be available in discount at listing day)

Geopolitical is biggest risk

As a long term investor what I like in compay
1 Opportunity size is big
(Not detailing it as it’s already posted from DRHP)
2 Profitability is fairly good (very high working capital requirements …in fact it may prevent new players to start venture as it takes time to scale and take advantage of operating leverage)

3 Fy 20 ROCE 20.74%

  1. Impeccable regulatory track record (no form 483 since long)

5 cash positive company in capital intensive sector so further growth capex possible with OCF

6.As it’s in B to B segment price errosion in US market may be less , possibility of more consistent and predictable numbers in future (personal beliefs)

Some management interviews

Thanks

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The buyback price would be Rs360 and not Rs36,000.

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I read somwhere that Satyam s Raju is promotor of the company . Please check before investing in this company

Raju (Satyam) stake already surrender to ED before IPO date
Thanks

There is a nice article from moneylife on ownership from Ramalinga Raju and his family (~60 lakh shares of face value 1). They are not promoter entities or related to promoters of Gland Pharma. These shares are held in an escrow account with the Enforcement Directorate.

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Ankush Buyback amount was in total of 344 crores, and the number of shares bought back was 9.5 lack shares.
So: 344,00,00,000 / 9,50,000 price would be 3621 Rs. Now this was with face value of 10Rs. Now the face value of the company is 1Rs. Hence every price would be then multiplied with 10. This gave the rough price estimation of around 36,000 Rs.

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You are getting this very wrong. When it is split from Rs 10 to Re 1, the number of shares increases 10 fold. 9.5 Lac shares become 95 lac shares. So 344,00,00,000 / 95.00.000=Rs 362.1/- Hope this clears your doubt.

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Thank you for correcting. Actually by mistake, I was taking it other way round.
Yeah its correct, the price should be 362. Will correct in the initial thread.

By the way this makes the company overvalue at the IPO price. As in well assuming the fair value of the company 2.5 years back was Rs 362 and now IPO at such high price. During this period even the sales and PAT are not increased that well to get at this price.

Was wondering, how all well known DII, MF, HNI’s have invested in this company at such a high value which is almost 5 times it’s true value.:grinning:
Or there is something hidden which we don’t know and those guys are aware of ?

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Wanted to add that Gland Pharma IPO is the biggest ever Pharma IPO Size Rs 6480Crores, which was oversubscribed by more than two times.
The response was lukewarm due to poor sentiments for a Chinese Promoter. However, in my opinion it is illogical as we all have invested heavily in Indian pharma story and the entire pharma industry is directly or indirectly depending on Chinese imports up to an extent of 70% …and we may continue to do so for another 6-10 years to fulfill our dream of Atma Nirbhar if we continue with our efforts . …today the most successful indian start-ups are funded by Chinese fund …Paytm & bigbasket and many more…
Very recently , right in Delhi, state owned DTC ( Delhi Transport corporation) has placed a huge order of 2500 electric buses to a company called PMI electro which is 100% funded by A Chinese company called Photon Motors. Neither Tata motors nor Leyland was able to meet the price quoted by Photon Motors…
So coming back to Gland pharma , if the promoter Fosun pharma wants to divest , we should encourage. Post IPO, the promoters holding comes down to 52% from 74%. May be Fosun may divest gradually and may exit totally after some time if the india china relationship does not improve.
After going through the thread posted by our very knowledgeable members, I find the company as such has good past record of meeting USFDA norms, good cash flows, exporting injectables to many MNC’s all over the world.
This is what I felt…if some of you feel it inappropriate, you may please delete it.

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I don’t think that Chinese ownership is the only reason why this stock has got lukewarm response. It was one of the main reasons but not the only one. The others are - its valuations are stretched (people were expecting IPO price at around 1000-1100 rupees) and so do not see major listing gains. Also there is a overhang on Satyam’s Ramalinga Raju as he himself holds shares and the current promoter PV Raju too is related to him…so, as you see there are multiple reasons

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Raju is not related to promoters and his shares are already transferred to ED.

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