Gland Pharma IPO: Analysis!

Gland Pharma IPO to raise up to ₹6,480 crore opened for subscription today.  The issue will remain open till 11th Nov 2020, Wednesday.

About Gland Pharma

• Gland Pharma is a generic injectables-focused company. It sells its products primarily under a business to business (“B2B”) model in over 60 countries as of June 30, 2020, including the United States, Europe, Canada, Australia and India.
• The company makes and markets complex injectables with drugmakers including Sagent Pharmaceuticals Inc and Apotex Inc. 
• The company has seven manufacturing facilities in India. This includes four finished formulations facilities with a total of 22 production lines, and three API facilities. It has a presence in sterile injectables, oncology, and opthalmics. 
• Gland Pharma has 265 drug filings-- 189 filings for sterile injectables, 50 for oncology and 26 for ophthalmic-related products.

Peers

• Gland Pharma will become the first player from the pure formulations space to be listed in India. However, the company faces significant competition from global peers such as Recipharm AB, Catalent, Inc, Lonza Group AG.

Gland Pharma revenue break-up

• “The US is Gland Pharma’s largest market contributing more than 67% to its sales. Gland Pharma achieved revenues of about ₹467 crore in India, making up 18% of its total sales in FY20.”
• The company’s top five customers accounted for 49.9% of FY20 revenues.

Industry outlook

• Injectables are the second largest delivery form in the global pharmaceutical market (GPM) growing at a CAGR of ~ 9.8% over 2015-20 to reach ~US$445 billion (~40% share) in 2020, as per IQVIA report.
• The injectables pharmaceutical market is highly competitive. According to the IQVIA report, injectable manufacturers face high entry barriers such as high capital investments, operational costs, manufacturing complexities, stricter compliance requirement (because of the sterile nature of products) and high-quality standards resulting in limited competition in the market.
• The global formulation market grew at a CAGR of ~5.4% from 2014 to reach approximately $1,111 billion in 2020. The market is estimated to grow at a CAGR of ~4.4% to reach around $1,376 billion by 2025.

Financials

• “Gland Pharma has seen a healthy rise in its Revenues and Profits over the last three years. Revenue, EBITDA and PAT have grown at a CAGR of 27.4%, 33.6% and 55.2%, respectively, over FY18-20.”
• The company has maintained a healthy EBITDA margin of over 33% over this period.
• In 2017, Shanghai based Fosun Pharma had acquired 74% stake in the company for US$1.09 billion. Implied valuations of Gland (~ ₹9,456 crore) at the time of Fosun acquisition were at 6.2x FY17 sales and 22.87x net profit, according to estimates by ICICI Direct.

About the issue

• Issue period:  9th Nov 2020- 11 th Nov 2020 
• Price band ₹1,490-₹1,500
• Issue: Fresh Issue of ₹1,250 crore and 3.49 cr shares Offer For Sale
• Issue Size : ₹6,480 crore
• China-based Fosun Pharma Industrial Pte is offering to sell 1.9 crore equity shares, Gland Celsus Bio Chemicals is planning to sell 1 crore shares. The other two shareholders, Empower Discretionary Trust and Nilay Discretionary Trust, are offloading 35.73 lakh and 18.45 lakh shares, respectively.
• Bid lot: 10 shares. 35% of the issue is reserved for retail investors

INDmoney Analysis

While the company’s financials have shown robust growth, the issue is not bereft of risks. Some of the risks are detailed below: 

• The company’s top five customers accounted for nearly half of revenues in the last fiscal. Also, Gland Pharma generates significant portion of revenues (66.7% in FY20) from the US. There is heavy concentration risk. Any unfavorable shock in the demand will adversely affect the revenue, and profitability. 
• Any degradation in India-China political relations could lead to curbs or delays in imports from China to India. This will impact the raw material requirement for Gland Pharma. Further, the negative public sentiment within India toward Chinese-owned companies, could be another risk.
• About 3.87% is held by 10 companies belonging to Ramalinga Raju and family, involved in the Satyam scam. However, the company has re-assured that there is no risk in terms of Ramalinga Raju's shares, because they invested in Gland Pharma in the late 90s. And then they offloaded a few of the shares. Now, the Enforcement Directorate has asked Gland Pharma to transfer the family’s stake to an escrow account.

At the higher end of the price band of ₹1,500, Gland Pharma is available at a PE ratio of 31.7 (based on FY20 EPS). This is reasonable, given the company robust financials, positive business outlook and good return ratios. However, investors must bear in mind the risk of degradation in India-China relations, which could adversely impact the business. Hence, investors should Subscribe With Caution.