Gland Pharma - Good Player in Injectables

Gland Pharma :

What l liked about company:

  • Operates in highly regulated space of injectables with clean track record of compliance with USFDA (US), MHRA (UK), ANVISA (Brazil), TGA (Australia) and BGV Hamburg (Germany)
  • Highly capable management with 4 decades of experience in injectable space and backed by parent Fosun Pharma
  • Mainly engaged in B2B model (B2B model revenue contribution 84%) where price erosion is relatively slow except for Indian market where they operate in B2C which contributes remaining 16% towards overall revenue
  • Well integrated player with in house API capability with management continuously looking to reduces dependency on inputs from China
  • Compliance with USFDA and other regulators along with regular client audits seems to be competitive moat as for competitors getting those approvals may take time

Financial Metrics Highlights

  • Debt Free
  • H1 FY22 EBITDA margin at 39% vs 43% in H1FY21. Management guided about 40% margin to sustain
  • H1 FY22 PAT margin at 28% vs 30% in H1FY21.
  • ROE – 28%
  • Elongated working capital cycle on the back inventory procurement but that seems to be getting normalized in medium term

What I didn’t liked about company:

Trading at high valuation with PE of 57 discounting all the positive triggers. Any negative triggers may result in de-rating of valuation.

Positive Triggers to look for:

  • Entry in China Market which is margin accretive compare to existing US & ROW market. Completed filling of 6 products and expecting the approval by Q4 and revenue contribution from next year
  • Timely execution of planned Capex of 800 Cr. With asset turn of 3x expected revenue to increase by circa 2400Cr.
  • Revenue Growth in ROW market driven by new launches and contribution to overall revenue. Management expecting revenue share to overall revenue to stabilize around 40% (10% China and 30% Others) in next 4/5 years so CAGR of 35 to 40% for ROW market.
  • Ability to cash biosimilar CDMO opportunity ($12/$13Bn opportunity) where company will look at leveraging their substance and fill finish capabilities. Biosimilar to be next growth engine where company is doing 300 Cr capex

Negative Triggers to look for:

  • ROW (excluding China) market being comparatively low margin and volume driven so leverage needs to kick to offset any drop in margins
  • Any USFDA warning letter will be big time spoiler. Though they haven’t got any since start of operations so management is confident on that part.
  • Any pricey M&A for inorganic growth.

Look out for competition in CDMO space as many players may enter driving down margins