Hyderabad-based injectable-focused drugmaker Gland Pharma opened its maiden public issue for subscription on November 9 with issue price band at Rs 1,490-1,500 per share.
The company, which is backed by Chinese Fosun Pharma, is aimed to mop up Rs 6,480 crore via public offer, of which it has already raised Rs 1,944 crore from anchor investors last week ahead of IPO.
The company will receive funds from fresh issue of Rs 1,250 crore, but the rest of money, which will be raised through offer for sale of over 3.48 crore equity shares, will go to promoter and selling shareholders.
Majority of brokerage houses have bullish view on Gland Pharma and hence assigned 'subscribe' rating to the issue, given attractive valuations, healthy balance sheet, strong financials, high entry barriers in in complex injectables, strong product pipeline, solid business model, no comparable listed peer and positive outlook on pharma sector.
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"At the upper price band of Rs 1,500, Gland Pharma is available at a PE of 20x on an annualised basis, which appears attractive. With a solid business model, no listed peers and the positive outlook for pharma, we assign a subscribe rating for the issue," Geojit Financial Services said.
Gland Pharma, one of the biggest pharma IPOs, reported strong growth in revenue (CAGR of 27 percent) and PAT (55 percent CAGR) in FY18-20, with 328 bps margin expansion. It has minimal debt with debt/equity ratio at 0.01 in FY20.
The company has a focus on complex injectables which has high entry barriers and strategic partnerships to penetrate new markets like China which can prove to be a lucrative opportunity for the company, said GEPL Capital which also recommended a subscribe to the offer.
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With a strong product pipeline and more complex products under development, focus on B2B expansion and licensing and opportunities to enter more therapy areas, the offer looks attractive, the brokerage feels.
Gland Pharma sells its products primarily under a business to business (B2B) model in over 60 countries as of June 2020 including the United States, Europe, Canada, Australia, India and the Rest of the world.
As of June 2020, company along with its partners had 267 ANDA filings in the United States, of which 215 were approved and 52 were pending approval. It has consistent regulatory compliance track record and all facilities are approved by the USFDA, with no warning letters since the inception of each facility.
Nirali Shah, Senior Research Analyst at Samco Securities also feels this Shanghai's Fosun backed company has a number of factors working for it.
"Firstly, it will be the only listed player in the pure formulations space in India. Secondly, the company follows a B2B model with sales in 60 different countries and long-term contracts with various partners which provide a good forward looking pipeline in terms of sales. Its top 5 clients contribute over 40 percent to its revenue. Margins were around 39 percent in FY20 and its Q1FY21 margins were even more impressive at 48 percent," she reasoned.
Moreover, the company believes in utilizing internal cash for its working capital needs and future expansion plans which is clearly visible through its debt levels which are nil. Even before the IPO, Gland has sufficient cash on its books and post IPO, the management aims to look for inorganic growth opportunities to strengthen its vertical integration.
From a valuation perspective, too, on a P/E basis, Gland Pharma trades at a 30x multiple while its global peers such as Recipharm and Lonza trade much higher at 44x and 55x respectively, Nirali said. Hence, due to the abundant positives and tailwinds from the pharma sector in general, she feels this IPO is a good bet and can be subscribed to for the long term.
Considering niche player in the pharma space, superior business performance, healthy balance sheet, and complex nature of the business with a strong product pipeline, BP Equities also gave a subscribe rating on the issue for the medium to long term.
Gland has an extensive portfolio of complex products which are well supported by internal R&D, awaiting to be commercialised across markets. Gland has an experienced management team and is promoted by Shanghai Fosun Pharma. The B2B business constitutes around 96 percent of FY20 sales.
"This coupled with a focus on the injectables space and strong compliance track record are key plus points for Gland. Gland's financial performance over FY18 to FY20 is impressive. The return on equity (RoE) also has improved from 13.3 percent in FY2018 to 21.2 percent in FY20. Looking at the strong domain expertise, a sturdy and consistent earnings track record and healthy return ratios, the future looks good," Sharekhan said.
As of June 2020, 67 percent of the revenue is generated from US, 15 percent from India and rest from other countries. Top five customers in FY20 accounted for 49 percent of the total revenue from operations.
Going forward, the company is expected to benefit from its focus on high growth US markets (over 16 percent growth), launch of new products, expiry of patent protection on branded injectables (around USD 70 billion) etc, said Choice Broking which is the only brokerage saying subscribe with a caution.
"Coming to valuations, at higher price band, Gland Pharma is demanding a TTM P/E valuation of 31.7x (to its TTM EPS of Rs 47.3), which is in-line with pharma industry P/E of 32.3x, against international peers like Recipharm AB, Catalent Inc. and Lonza Group AG have average TTM P/E at 56.5x. However, considering valuation metrics in couple of M&A deals (like Aurobindo Pharma’s acquisition of certain business lines of Spectrum Pharma in 2019 and Recipharm acquisition of majority stake in Nitin Lifesciences in 2019) which happened in the recent past, the demanded valuation by Gland Pharma seems to be stretched. Thus, considering the strong fundamentals and stretched valuation, we assign a subscribe with caution rating of the issue," the brokerage explained.
Based on quick estimates, Choice Broking feels Gland Pharma is expected to report a 22.4 percent CAGR rise in topline over FY20-23, EBITDA margin is likely to improve by 84bps, while PAT margin is likely to contract by 81bps. RoIC and RoE are forecasted to improve by 216bps and 84bps to be at 15.3 percent and 16.6 percent, respectively, in FY23.
The shareholding of promoters - Fosun Singapore and Shanghai Fosun Pharma - in the company will be reduced to around 58 percent from 74 percent now.
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