Gland Pharma:

Gland Pharma is an Indian Pharmaceutical company that has initiated IPO proceedings (IPO opens on the 9th of November 2020). It is one of the largest Pharma IPOs to hit the Indian market (However, most of the shares being offered are via the OFS route).

Gland Pharma is primarily a Generic Injectables company and its largest promoter is Chinese Pharmaceutical giant, Shanghai Fosun Pharma.

Today we will attempt to understand the company’s structure and business model, followed by an intrinsic and relative valuation.

General Overview:

What are injectables?

Injectables is a drug delivery system that today accounts for over 39% of the global pharmaceutical market. It has witnessed robust growth which is likely to continue owing to its advantages over other dosage systems such as (Oral Solids, Others – Topical, Nasal, Rectal, Oral Liquid, Ophthalmic, Lung administration). It has grown at a CAGR of 10.1% over the past 5 years.

Advantages:

What are APIs and Finished Formulations?

APIs stands for Active Pharmaceutical Ingredients which are the key chemicals that define the drug and bring about the intended pharmacological effect.

Finished Formulations refers to the process in which different chemicals, including the APIs, are mixed in specific ratios to produce the drug.

What types of Business Models exist in this industry?

(Please note that there are further sub segments of each business model given below. I intend to keep this a lighter read and hence the omission)

B2C – The company (Gland Pharma) manufactures, and markets finished dose formulations to the final customers. End-to-End model (Sourcing->R&D and IP->Manufacturing->Marketing)

B2B – The company (Gland Pharma) operates as a manufacturing partner specializing in manufacturing complex and diverse injectables and providing other value-added services to another pharmaceutical company which will market the product (IP generally belongs to the other Pharmaceutical Company). This model encompasses CMO & CDMO models (CMO – Contract Manufacturing Organization, CDMO – Contract Development and Manufacturing Organization)

Generally, the B2B model is better than the B2C model due to the following reasons:

Now that we have laid down the basic ideas governing this business, let us talk about the company under consideration, Gland Pharma.

About Gland Pharma:

Areas of Operation:

7 manufacturing facilities in India (4 finished formulation facilities & 3 API facilities)

Product Domain: 265 ANDAs – 204 Approved, 61 Pending Approval

Drug Delivery Systems for their Products:

Use of IPO Proceeds as per the Company:

What is this IPO likely to enable?

Strengths of Gland Pharma:

Risks pertaining to Gland Pharma:

Revenue breakdown by Geography:

Valuation:

Revenue:

The injectables market held roughly 40.3% share (by value) of the global formulation market in 2020. I expect the injectables market to capture a market share of 45.47% (by value) by 2030.

Today, over 70% of the injectables market is controlled by the top half of all injectable pharma companies. There has been a trend of consolidation in this market with the larger companies getting bigger and the smaller companies either getting acquired or being pushed out.

This market tends to have fewer competing companies due to the following reasons:

Growth Drivers:

Gland Pharma is a highly profitable near debt-free company backed by a strong experienced promoter. I do not see them succumbing to their competitors.

Historically the company has witnessed Sales Growth of over 25% annually. Going forward, considering the growth drivers, I expect the company to continue being in high growth for the next few years. Gradually, growth rates will start reducing and will eventually reach steady state.

We have capitalized R&D expenses for the company. The operating income and invested capital have been adjusted accordingly.

Margins:

Margins have been maintained above 30% over the last few years. Going forward, I believe that margins will erode gradually towards 18% (80th Percentile of Pharmaceutical Companies).

Tax Rate:

We will use the marginal tax rate of 25.17% in our valuation.

Reinvestment:

The company currently has a Sales to Capital ratio of 0.79.

I expect the company to continue to reinvest heavily as this industry is characterized by high upfront capex costs. Eventually, the company will be able to live off its investments and will attain a Sales to Capital ratio of 1.21 (75th Percentile of Pharmaceutical Companies).

Terminal Year:

The cost of capital in the Terminal Year is 8.84%. Due to the characteristics of this industry, I believe that the company will earn a ROC of 10.84% in the stable period (3.45% growth)

Accordingly, the appropriate Reinvestment Rate is 31.83%.

Intrinsic Valuation:

The intrinsic value of Gland Pharma (as per the DCF model) is 782.09 INR.

The IPO price band is between 1490-1500 INR. Hence, the IPO seems to be overvalued by 91.79%.

To justify a price of INR 1500, the Cost of Capital needs to be 7.34% and the margins need to be 30% – 32% in the Terminal Year (Stable Growth Phase).

I feel that such a scenario is plausible, but the probability of it happening is quite low.

Relative Valuation:

I ran regressions across the Pharmaceutical industry for EV/EBIDTA and PE ratios while adjusting for differences. This industry has witnessed a sharp run up in prices (of over 60%) in the past 9 months. Hence, the entire sector trades at elevated EV/EBIDTA and PE ratios.

Gland Pharma MultipleCorresponding Value per Share
EV/EBIDTA32.672267.36 INR
PE38.271809.78 INR

Gland Pharma warrants multiples on the higher end due to better growth prospects as well as low risk of regulatory issues.

Conclusion:

The IPO price band of INR 1490-1500 is quite expensive and hence I would not subscribe to this issue based on my intrinsic valuation.

On the relative valuation front, Pharmaceutical companies have been the fancy of investors over the past few months and we may see the same momentum carry forward in the IPO.

Thus, based on my relative valuation, I would wait to see the response that the IPO receives and then take a decision.

Regardless of what happens with the IPO, Gland Pharma is a strong company fundamentally and would be a good candidate to invest in at the right valuations!

Post Listing Update:

Despite a poor response to the IPO, the stock opened at INR 1844 before closing at INR 2089.05 on the first day of listing. Today (as of 12/12/2020), the stock trades at INR 2241.6

Hence, it is quite clear that the stock is being ‘priced’ as is evident from our relative valuation numbers!

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