Gland Pharma: What's Next After Twofold Surge For The Stock Since Debut

"Gland Pharma Ltd. has surpassed most analyst expectations with a more than twofold stock surge since its market debut a little over a year. And, analysts say, its long-term potential is intact.Brokerages cite an impeccable regulatory record, a unique business model and a pipeline of future products among factors that work in favour of the contract drug developer and manufacturer.Their faith in the company with 60% of the sales coming from the U.S. is contrary to the Indian pharma sector's fortunes in its biggest market. Years of pricing pressure have eroded margins for makers of generic drugs in the U.S., one of their most lucrative markets, prompting some of them to expand portfolios beyond copycat versions.Gland Pharma, controlled by China's Shanghai Fosun Pharmaceutical Group, is the only Indian contract developer and manufacturer of both injectables and formulations or final medicines, at a scale comparable with global peers. It makes products for companies in India and overseas..The business model largely insulates Gland Pharma from pricing pressure in the U.S., unlike other domestic pharmaceutical firms that manufacture and sell their own brands. The company generates just 4% of the top line from direct sales to customers.And while most contract manufacturing firms have lower margins, Gland Pharma has had healthy operating margins of 32-37%. The management expects to maintain that around 37-38%.The only other contract drug manufacturer of scale with a business model similar to Gland Pharma is Divi's Laboratories Ltd., which makes bulk drugs. Divis Labs maintains operating margins of 40-43%. Gland Pharma's margin narrowed in the third quarter ended December. And its revenue, operating income and net profit fell sequentially. That, according to the management, was because of an exceptional abbreviated new drug application filing fee. Adjusted for that, the margin was in line with historical trend..Since Gland Pharma manufactures and develops drugs for other companies, it's less exposed to pricing competition, and benefits from economies of scale.'As a B2B company, we absorb little pressure on that (margins), because it is mostly taken by our front-end partners,' Srinivas Sadu, managing director and chief executive officer of Gland Pharma had said earlier in a call with analysts.Vishal Manchanda, analyst at Nirmal Bang, said the company is the lowest-cost manufacturer among peers. That includes all big pharma companies that sell directly under their own brand name in the same markets as Gland Pharma, including the U.S.Still, input prices, including that of APIs and other key starting materials, have surged twofold since the quarter ended September as pollution curbs in China, the world's biggest producer of bulk drugs, disrupted the supply chain. Container shortage has increased logistic costs. Together, these have squeezed the industry's margins.Gland Pharma's management, however, said in the second-quarter earnings call that the company was able to absorb higher logistics, power and raw material costs because of the operational leverage and more selling units..Gland Pharma has seven facilities—four for finished formulation units and three for bulk drugs or active pharmaceutical ingredients. The U.S. Food and Drug Administration has not issued any warning letter since the inception of each facility. 'The company has a pristine track record on U.S. FDA audits and maintaining such compliance for injectables facilities has been a differentiator,' Jefferies said in a note.The U.S. regulator last inspected the facilities in September 2019. It is therefore due in 2022, said the management. Gland Pharma is not aware when the next round of check will happen, Nirmal Bang said..In the third quarter ended December, the company filed 18 ANDAs and three drug master files (seeking review and approval for sale), and received four approvals from the U.S. regulator.These included four ANDAs for complex injectables, increasingly being used in targeted treatment in chronic and life-threatening diseases. Three of these are hormonal products and one is a complex peptide. The total addressable market for these is $1 billion (around Rs 7,500 crore), the management said in the third-quarter earnings call. Jefferies said the management, citing its contract manufacturing model, doesn't expect competition from increased filings by generic players.Earlier, in the second-quarter earnings call, the company also revealed its plan to scale up business in China, the home of its controlling shareholder Fosum Group, and the rest of the world. According to a Jefferies note, with the new Pashamylaram, Telangana facility, Gland Pharma has adequate capacity to venture into new markets. The company has estimated a capex of Rs 300 crore towards investment in the Pashamylaram facility and is adding more API capacities for vertical integration, according to a note by Nirmal Bang.Gland Pharma has a biosimilar capacity of 10 kilolitres, and has already invested to double it. The company targets 60 kilolitres in the coming years. That's tied to its plan of developing and manufacturing biological equivalent of drugs on contract. The management said in the Q3 earnings call said that they revenue from the segment to flow in by the April-June quarter of 2023.The company, however, has not disclosed its long-term capacity expansion plans..Gland Pharma has an order to supply 22 crore of Sputnik Light and Sputnik V Covid-19 vaccine doses to the Russian Direct Investment Fund. While the price at which these will be purchased is undisclosed, it's still an opportunity to boost revenue.The management said that they have received the no-objection certificate for export of five crore doses during the quarter from Central Drugs Standard Control Organisation. The company is awaiting a manufacturing licence for Sputnik Light vaccine.While the doses may be manufactured in the ongoing quarter ending March, these may be dispatched in April-June, the management said in the third-quarter earnings call.Still, the opportunity comes with a risk of delay. That could result in competition from other vaccines hurting demand.Sputnik is not yet approved by the World Health Organization . Also, according to Nirmal Bang, the company has admitted the RFID won't have to pay a penalty even if it does not buy the committed quantity. .BloombergQuint's queries emailed queries to Gland Pharma remained unanswered..Any accelerated competition in the injectable business could impact Gland Pharma's demand, Nirmal Bang said.Gland Pharma is already seeing a single-digit price erosion, according to the brokerage. Competition and slowdown in business could impact sales associated with U.S. partnerships, it said. Any adverse U.S. FDA observations for any of its plants will hurt growth..Of the 17 analysts tracking Gland Pharma, 13 recommend a 'buy', one suggests 'hold' and three 'sell' on the stock, according to Bloomberg. The average of 12-month price targets, implies a potential upside of 19.3%.Gland Pharma trades at 46.75 times its earnings against 49.65 times for Divi's Labs."

Gland Pharma: What's Next After Twofold Surge For The Stock Since Debut

A little over a year since it's market debut, shares of Gland Pharma Ltd. have surged about 150% over the issue price.

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Gland Pharma: What's Next After Twofold Surge For The Stock Since Debut

A little over a year since it's market debut, shares of Gland Pharma Ltd. have surged about 150% over the issue price.

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