by Aakash Athawasya

Over the past year, the importance of the Indian pharmaceutical industry has been emphasized like no other.

Covid-19, global lockdowns curtailing supply, and de-risking away from China have pushed global demand towards India. With Indian pharmaceutical companies importing close to 70% of active pharmaceutical ingredients (APIs) from China, this global movement has forced domestic drug makers like Divi’s Labs, Aarti Drugs, Jubilant Life Sciences, and Granules India to alter supply chains. At a time of such seismic shifts in the pharma industry, Gland Pharma, a Chinese-owned Indian pharmaceutical company is launching its IPO. 

The four-decade-old Hyderabad-based pharmaceutical company has seven manufacturing facilities throughout the country. Its finished dosage formulations (FDFs) facilities are located in Dundigal, Pashamylaram around Hyderabad, and the oncology facility in Visakhapatnam, while its active pharmaceutical ingredient (API) facilities are present in Visakhapatnam and Dundigal. The company’s manufacturing capacity for FDF products stood at 755 million units per annum at the close of the previous fiscal year.

Gland Pharma’s business is focused on generic injectables, operating under a B2B model in over 60 countries including in the United States, Canada, Australia, India, and several European countries. Domestically, the company operates via a B2B with its B2C model catering to hospitals, nursing homes, and government facilities. As of March 2020, Gland Pharma, with its partners, had 265 ANDAs (abbreviated new drug applications) pending in the US, with 204 approvals. Out of the 265 filings, 189 were for sterile injectables, 50 for oncology, and 26 for ophthalmics-related products. 

A major factor in this offering is the company’s promoter, which is putting up part of its stake in the company via the offer for sale. Fosun International, a Chinese conglomerate owns a majority stake in the company, which it acquired from private equity firm KKR in 2017 for $1.1 billion (~Rs. 6,980 crores), making Gland Pharma the first Chinese-backed Indian pharma company to launch an IPO.

With the larger market recovering, pharma companies revealing strong quarterly growth despite supply-side issues, and a global move to ‘de-risk’ away from China towards India, will this Chinese-promoter owned pharmaceutical company compliment the bullish pharma trend, or fall flat?

IPO Breakdown

Gland Pharma is set to be India’s largest pharma public offering, with an issue size of Rs. 6,479.5 crores. The IPO is broken down into a fresh issue of 83 lakh shares amounting to Rs. 1,250 crores and an offer for sale (OFS) of 3.4 crore equity shares by the promoters and other selling shareholders. 

The issue size is a total of 43.1 crore shares, at a price band of Rs. 1,490 to Rs. 1,500, which values the IPO at Rs. 6,436.3 crores to Rs. 6,479.5 crores at the lower and upper end of the price band, respectively. The qualified institutional buyers (QIBs)  quota is reserved at 50%, the retail investors’ quota at 35%, and the non-institutional investors quota at 15%.

The shareholding of the company before the IPO is as follows.

Data source: Gland Pharma, DRHP

The OFS of 3.4 crore shares is divided between the promoter and the selling shareholders as follows.

Data source: Gland Pharma, DRHP

Post the IPO, the promoter’s shareholding will drop to 58.4%, and the other shareholders will hold around 10.5% of the company.

The net proceeds from the offering will be used for two purposes -- Rs. 769.5 crores to fund incremental working capital requirements and Rs. 168 crores for CAPEX. The funds will be deployed as follows.

1. FY21: Rs. 434.8 crores (56.5%) on working capital requirements, and Rs. 57 crores (33.9%) on CAPEX
2. FY22: Rs. 334.6 crores (43.5%) on working capital requirements, and Rs. 111 crores (66.1%) on CAPEX

The book running lead managers (BRLMs) to the issue are Kotak Mahindra Capital, Citigroup Global Markets, Haitong Securities India, Nomura Financial Advisory and Securities, with Link Intime serving as the registrar to the offer.

Strengths:

1. Injectable manufacturing and commercialization: Sterile injectable facility obtained USFDA approval in 2003, and began domestic sales in 2015 and US sales in 2016. Penems facility received USFDA approval in 2016, the oncology facility received USFDA and GMP approval in 2014 and began US and Europe sales in 2016 and 2015 respectively.
    
2. Dual business models: Gland Pharma operates a B2B and B2C model domestically, and a B2B model overseas. The B2B model is divided as IP-led, a technology transfer model, and a CMO (contract manufacturing organization) model. Revenue from the domestic B2C model stood at 4% for FY20.
    
3. Strong revenue and margins: The company reported revenue at Rs. 2,633 crores for FY20, a rise of 28.8% against the previous year. EBITDA margin was 41.6%, rising by 280 basis points over the previous year. Net profit rose by 71% between FY19 to FY20.
    
4. Experienced management and parent company: Top-management including the CEO, CFO, and CTO have been with the company for over two decades. Shanghai Fosun Pharma, the company’s promoter, has experience in manufacturing, distribution, and R&D, with presence in China and Africa, key growth markets for Gland Pharma.
    
5. Internal R&D and new product revenue: Operates a centralized R&D laboratory in Dundigal with new product launches bringing in revenue worth Rs. 229.2 crores for FY20 or 8.7% of annual revenue.

Risk Factors:

1. Third-party dependent: The company’s overseas operations in 60 locations including the US, Europe, Canada, Australia, Brazil, China, and Africa, under a B2B model for licensing, manufacturing, and supply with third-party marketing partners.
    
2. Concentration of revenue: The company is heavily dependent on the US market, contributing two-thirds of annual revenue (66.7%), and top-5 customers contributing 48.8% of total revenue in FY20.
    
3. Manufacturing facilities closely located: The company’s seven manufacturing facilities (four FDF facilities and three API facilities) are all located in Andhra Pradesh and Telangana.
    
4. Supply chain concentration: In FY20, over a third (33.2%) of the company’s raw materials were sourced from China. However, this is down from 52.2% raw materials sourced from China in FY19. In Q1 and Q2, several domestic pharmaceutical companies have taken steps to de-risk away from Chinese supply chains by identifying alternate suppliers, and import substitutes, and backward-integrate manufacturing. Further, two-thirds of the company’s revenue is dependent on the US market, any adverse trade policies between the US and China could impact the company.
    
5. Government contracts: The company has contracts with government authorities, hospitals, and other central agencies, which if terminated could impact cash flows.
    
6. Working capital crunch: The company’s working capital cycle is high (150+ days) owing to high inventory. However, the company has stated that this is intentional as almost all inventory pertains to raw materials as the injectable business is known for product shortages. 

Data source: Gland Pharma, DRHP

Data source: Gland Pharma, DRHP

Data source: Gland Pharma, DRHP

Board of directors

Financials and valuation

Gland Pharma’s total income for FY20 stood at Rs. 2,633 crores, a growth of 29% on a yearly basis. In FY18 and FY19, its total income stood at Rs. 1,620 crores and Rs. 2,044 crores, respectively. The revenue for the first quarter of the current fiscal year grew by 31% to Rs. 884 crores. EBITDA for FY20 stood at Rs. 955 crores, growing by 35% from FY19, while EBITDA margin was 36.3%. For Q1FY21, EBITDA stood at Rs. 413 crores and the quarterly EBITDA margin was 46.7%.

Profit after tax (PAT) has more than doubled between FY18 to FY20, with a CAGR of 55.1%. FY20 closed with a PAT of Rs. 772 crores, and in the first quarter of FY21 the company generated PAT of Rs. 314 crores, a 71% growth against the year-ago period.

Data source: Gland Pharma, DRHP

The earnings per share (EPS) of the company stood at Rs. 49.8 per share for FY20, a rise of 71.1% from the previous year’s EPS of Rs. 29.1 per share. However, taking the fresh issue of 83 lakh shares into account, the EPS for FY20 stands at Rs. 47.3 per share, and the EPS for Q1FY21 at Rs. 19.2 per share.

With the IPO’s upper price band of Rs. 1,500 per share, and the EPS for the latest completed fiscal year i.e Rs. 47.3 per share (15.5 crore equity shares and 83 lakh fresh issue), Gland Pharma’s P/E ratio comes to 31.7 times. 

Here’s how Gland Pharma’s valuation compares to listed pharmaceutical peers.

Industry overview

The global formulation market grew at a CAGR of 5.8% between 2014 to 2019 to $1,096 billion (Rs. 81.5 lakh crores) but is estimated to grow at a CAGR of 4.4% by 2024 to $1,359 billion (Rs. 101 lakh crores). Around 47% of this growth is expected to come from North America, while India and China will contribute 2% and 9% respectively.

The injectable market, in which Gland Pharma finds its niche, is the second-largest form of drug delivery, accounting for 39% of the global pharmaceutical market value in 2019, up from 32% in 2014. In that time, the injectable market has grown at a CAGR of 10.1%, to $432 billion (Rs. 32.1 lakh crores). North America contributed 55% of the injectable market, followed by Europe (20%), China (11%), India (1%), and the remaining 13% from the rest of the world (most prominently Japan, Russia, South Korea, and Russia).