When I started to read about the company ‘Gland Pharma Ltd’, there was just one word ‘wow’ and the disbelief to know if such companies exist in India. The company has lethal combination of very high growth with very high profitability. The last 10 years revenue CAGR for them stood at ~20% while the profitability CAGR is over 24%.The company is debt free. Gland Pharma Ltd is focused on manufacturing generic injectables, which are then exported primarily to the US. Injectables are content that goes into the syringe & other drug delivery system.
In the current blog: Gland Pharma Ltd- Analysis, I will cover:
1. Sector overvew-Injectables
2. Entry Barriers
3. About the company
4. Business Model
5. Growth Drivers
6. Key strength
7. Chinese Ownership
8. Financials- last 10 years
9. My take
Gland Pharma Ltd- Analysis
Injectables
Drugs/Medicines are fed into our body through 2 primary mechanism: Oral Solids(Tablets) & Injectables(through Injections). Both these format captures around 80-85% of total market. In 2014, Oral solids had a market share of 50% & Injectables was at 32% but in 2019 injectables market share rose to 39% and that of oral solids declined to 45%. Implying injectables are growing faster than the other format.
Injectables beings sterile (should be free of pathological microorganism) products require stringent manufacturing processes across development, formulation, packaging, storage & transportation.
Injectables find application in treatment of various chronic diseases such as diabetes, oncology, rheumatoid arthritis, multiple scleorisis, auto immune disorders etc.
Because of the complexity & very high regulatory compliance required for the company, global injectables market is dominated by just a handful of players.
Benefits of injectables:
1. Immediate onset of action
2. Useful for comatose & unconscious patients
3. Development of self injection devices such as pen injectors & auto injectors has made taking drugs more easy for patients.
4. More impact than other forms of drug delivery system
Global generic injectables market size is roughly about $130Bn, of which US is $45bn in US. Generics injectable is just 30% of total injectables market, 70% is dominated by innovators. As the innovator’s patents expire that will open a huge market for generic manufacturers.
Generic injectables are expected to grow at a CAGR of 16.1% between 2019-24 due to innovator molecules losing exclusivity.
Generic Vs Innovator/branded drugs: Link
Various form of injectables
Gland Pharma Ltd- Analysis
Entry Barriers
Injectables are directly administered into our blood. So, the impact is quite rapid and accurate. Injectables have higher bioavailability compared to other forms of drug delivery system.
And hence if anything goes wrong, it can cause equal amount of damage. Therefore, the injectables need to be sterile.
USFDA, the regulatory body for approving drugs in the US has been making the approval process for injectables stricter by the day because of which there is a acute shortage of injectables in the US.
Characteristics of Sterile injectables market:
1. Low volume business
2. Complex manufacturing process with specialized technical capabilities
3. High capital costs
4. Required dedicated operational facilities
5. Strict quality standards
6. Very high compliance requirement with all regulatory bodies due to the product being sterile
7. Long gestation period
Gland Pharma Ltd- Analysis
About the company: Gland Pharma Ltd
Gland Pharma Ltd(GPL) was incorporated in the year 1978 in Hyderabad by PVN Raju and later scaled up by his son Ravi Penmetsa. The company has grown from being contract manufacturer of small volume liquid parenteral products to become one of the largest and fastest growing pure-play injectable-focused company.
Gland pharma derives derives more than 80% of its revenue from exports with a major chunk coming from the US(65%+ of the total revenue).
Sale of product constitutes 90% of sales while roughly 10% is from services(likely to be technology transfer fee and royalties). Top 5 customers contribute a little less than 50% of total sales. Looks like a concern but they have long term agreements with these clients which a minimum agreed order every year.
Company is B2B focused and B2B segment contributes more than 95% of total revenue. Gland pharma sells its products to pharma marketing companies who then sells it to the consumers, hospitals, nursing homes etc
All the products of the company are formulation drugs. Formulation products are at the top end of the value chain with higher margins.
As of March 31, 2020, the company along with its partners had 265 ANDA filings in the United States, of which 204 were approved and 61 pending approval. Out of these 265 ANDA filings, 100 represent ANDAs owned by Gland Pharma, of which 63 ANDA filings are approved. GPL has 368 product registration in US,EU, Canada & Australia; 54 in India and 993 in rest of the world, a total of 1415. Every year the company files 20-25 ANDAs.
The company manufactures most of their own API which goes into their end production i.e. formulations. This ensures quality & assured supply and lead to improved margins. Also, Completely focused on sterile injectables where the complexities are high and hence the margins. A third of company’s API is also imported from China.
As on 31st March 2020, Gland pharma had 3791 employees. Of which more than 31% was towards quality control & compliance.
GPL had 12 patent applications that have been granted and nine pending applications in India.
The company has no subsidiaries or joint venture. They also invest about 5-6% of revenue every year on R&D.
Co also has implemented track and trace system for their products.
KKR, the private equity giant invested close to ₹1400 in 2013 in Gland pharma to acquire a minority stake which helped the company accelerate growth by doubling up the capacity. In addition to primary capital infusion, the company bought out the stake held by another private equity fund Evolvence India Life Sciences Fund (EILSF) .
The company’s clients include pharma giants such as Fresenius Kabi, Apotex Inc ,Athnex, Sagent etc
Gland Pharma Ltd- Key Pointers
Gland Pharma Ltd- Key Pointers
Gland Pharma Ltd- Analysis
Business Model
Gland Pharma Ltd- Business Model
ALL THESE TERMS SPECIFIED BY GLAND PHARMA ON ITS MARKETING PARTNERS ARE SOMETHING ONE CAN DEMAND ONLY IF THEY HAVE STRONG IP. THIS IS QUITE SOMETHING UNHEARD OF BY ANY INDIAN COMPANY, atleast for the companies that I have researched till date.
The licensing fees that the company receives under IP led model are used to fund their investment inR&D and manufacturing activities.
Under the B2C model include Hep 5, Hep 25, Cutenox and Synject.
B2B IP led model generates gross margin of roughly 65% while the other B2B Tech transfer model has a gross margin of 55% as per the latest quarter. Usually there is a difference of gross margin of 10% between the two models.
Sales Segmentation- Gland Pharma
Plant & Capacity
Gland pharma has 7 manufacturing facilites.
Two sterile injectables facilities-Dundigal, Hyderabad and Pashamylaram, Hyderabad
One dedicated Penems facility –Pashamylaram,Hyderabad
One oncology facility– Vizag
Three API facilities– Dundigal, Hyderabad(R&D Pilot Plant); Vizag1 & Vizag2
Co. is in the process of commissioning additional capacity to support their future portfolio of complex injectables including suspensions, cartridges and hormonal products. Also expanding their oncology facility.
Gland Pharma Ltd- Analysis
Growth Drivers
The company is using the relationship with its parent company ‘Shanghai Fosun Pharma’ to grow their business in the China and develop China-specific products. They have filed six products in Fiscal 2020. Also looking to leverage its parents presence in Africa.
Gland pharma is looking to acquire API suppliers that complement their business with niche capabilities including fermentation technology, steroid APIs and hormonal APIs. All these are very niche APIs with lot of cost required to set up and technological complexities involved.
Biosimilar, the generic version of Biologics uses living organism such as bacteria instead of being chemically synthesized are usually large complex molecules compared to small molecules in chemically synthesized ones. Biosimilars need to be administered only via injectables.
Fosun has biosimilar portfolio which can be brought into Gland pharma’s platform
THERE IN AN ACUTE DRUG SHORTAGE IN THE US WITH MORE THAN HALF OF THESE SHORTAGES COMING FROM INJECTABLES. THIS GIVES COMPANIES INTO INJECTABLES A LOT OF PRICING POWER. MOST OF THIS SHORTAGES IS DUE TO QUALITY & COMPLIANCE LED ISSUES. This injectables shortage in US is going on for atleast more than a decade. And this Continued drug shortages have created a supportive price environment.
5. North America or US has the lowest penetration of injectables at 57% compared to China at 89% and India at 76%.(DRHP)
6. New Drug Delivery Systems (“NDDS”) like pen-injectors and auto-injectors improving convenience of administration for patients. Company is setting up plant for these NDDS.
US is a $45bn generic injectable market.
7. Gland pharma’s current product portfolio caters to just $8-9bn of the total market. Co. is planning to launch more products catering to the US market.
Gland Pharma Ltd- Analysis
Key Strength
Regulatory compliance: No warning letter by any regulatory body. The company has quality assurance and quality control team of 1,181 full time employees as of March 31, 2020, representing approximately 31.15% of total employees. I guess that seems to be one of the reason for the company being able to maintain such an exemplary track track. The company is a export oriented company has to deal with several regulatory bodies and they have the same record with everyone.
In addition to regulatory agencies, the company also gets lot of inspection by its clients. And the track record still holds.
Long term contracts(5-10 years) with clients/partners
The agreement of the company assures certain minimum purchase by its clients every year which is quite unheard of in the companies I have researched
Sterile manufacturing is quite complex and require lot of technology
Backward integrated manufacturing
Gland Pharma Ltd- Analysis
Chinese Ownership
Before the IPO, the Shanghai Fosun Pharma held 74% stake in the company through its Singapore subsidiary.
Shanghai Fosun Pharma holds 100% of the share capital of Fosun Industrial Co., Limited, which holds 100% of the share capital of Fosun Singapore. Fosun Singapore acquired stakes from Private Equity investor including KKR(38% stake since 2013) and promoters in 2017 at an valuation of $1.3Bn.
Fosun wanted to acquire a higher stake but due to regulatory hurdles could get only 74%. Also, the deal which was expected to get closed in 2 months took more than a year due to the acquirer being a Chinese co.
Apart from Fosun, Private equity buyout firm Advent and US pharma giant Baxter International was very keen on buying out Gland pharma and Advent was even willing to buy if due to regulatory challenges, the acquisition by Fosun fall out but that didnt happen.
As a part of deal terms of the transaction, Ravi Penmetsa, earlier MD belonging to the promoter group hand holded the firm till 2019. Post which the current MD took over.
Post IPO, Fosun Pharma’s stake will come to 58% from the current 74%.
Another issue is the 3.87 % stake held by tainted entrepreneur Ramalinga Raju’s family which they acquired in 1990s. This thing which happened much earlier when Ramalinga Raju was considered very honest, so it should not be a negative if someone is considering the company for investment.
Gland Pharma Ltd- Analysis
Financials
The DRHP of the company has the financials of just 3 years of the company. So, just to cross check if things were equally good in the past, I pulled up the financials since 2011. And things has always been improving.
I guess the reason for giving only 3 years financial is change in ownership and management post 2017.
Gland Pharma Ltd- Financial Analysis
The company is debt free. The debt of roughly 4 crores shown in the books is deferred sales tax which is treated as borrowings under IndAS.
Higher gross margin is possibly due to the company being backward integrated. The margins are higher than its competitors.
The revenue of Gland pharma has grown by roughly 20% CAGR over the period 2010-2020 i.e. a revenue multiplier of almost 6 times. Profitability has grown at a CAGR of 24% during the same time multiplying by 9 times.
Gland Pharma’s operating cash flow is also quite healthy.
Other income for the company includes export incentives, forex gains/loss.
Given the high profitability, the company has cash & equivalents of more than 1300cr.
Gland Pharma Ltd- Analysis
Things are so perfect that sometimes it seems unbelievable. But investment by various private equity players(KKR etc) and majority acquisition by pharma giant, Fosun must indicate that there is something really right going in the company.
Everything is just awesome about this company except the fact that their owners since 2017 is a Chinese pharma giant. There is a lot of negativity associated with anything to do with China. In all the concalls with various management, the first question asked by participants is if there is any dependence by that particular company on China.
Despite such amazing financials & entry barriers the IPO saw a tepid 2x bids owing to its China ties.
If there is good fall in prices post listing, I would be willing to buy hoping performance will sail over the other negativity(China). Even the current IPO valuation is conservative in my view given the IP, Growth, Profitability & clean track record of the company.
Further Reading:
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