Gland Pharma IPO: Expensive at a price tag of 30x the FY20 earnings

While prospects remain strong led by niche products and a differentiated business model, relatively rich valuations leave limited scope for upside in near-term

The Rs 6,400-crore initial public offering (IPO) by Hyderabad-based Gland Pharma is a play on the high-margin injectables space.

Injectables are difficult to manufacture and thus, face lower competitive intensity.

Gland Pharma, which is launching the country’s largest pharma IPO, has an extensive product range and track record of developing, manufacturing, and marketing complex injectables.

The company seeks to tap into the growth opportunity in the generic injectables segment, which is expected to see $68 billion worth of drugs go off patent between 2021 and 2025. 

While prospects in this niche segment are sound, the Street is not comfortable with the pricing that pegs valuations at 30x its FY20 EPS.

Ranvir Singh, analyst at Sunidhi Securities, says the offer price is expensive, even after considering its robust prospects. 

Most brokerages expect revenues to grow 20 per cent annually over FY20-23, with margins expanding 120 bps (21 per cent annual growth in earnings before interest, tax, depreciation, and amortisation). 

While IIFL analysts advise investors to subscribe thanks to the long-term growth potential, they highlight that relatively rich valuations (22.3x its FY22 estimated earnings after dilution) leave limited scope for an upside.

Growth potential is backed by the company’s track record in operating a business-to-business (B2B) model through partnerships with leading pharma players in the US, avoiding a high-cost marketing structure.

In India, however, it has its own marketing presence and follows a retail model (directly selling its products).

The two markets account for 77 per cent of revenues. The company is pursuing opportunities in China, India, Brazil, and the rest of the world.

In addition to a low-risk model, the other strength of the business is a manufacturing base, which is compliant with the US Food and Drug Administration regulations.

The company has seven manufacturing facilities in India, comprising four finished formulation facilities and three active pharmaceutical ingredient facilities.

Further, the vertically integrated injectables manufacturing capabilities with backward integration in key molecules support its margin profile, as does its differentiated business model. Given its non-exclusive contracts with multiple partners, the B2B model allows Gland to corner 25-30-per cent market share in several of its molecules.

Operating profit margins stood at 48.5 per cent in the April-June quarter (39.5 per cent in FY20), while it has seen operating profit growth of 36.9 per cent annually between FY18 and FY20. 

The firm has 52 products pending approval in the US (267 filings so far). While it had 45 and 51 new complex product launches in the US in FY19 and FY20, respectively, it has launched 18 new products during Q1FY21. 

Not surprising, it had a revenue growth rate of 27.4 per cent annually over FY18-20, and saw revenue growth of 31 per cent YoY in the June quarter, too.