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Gland Pharma IPO: Information Analysis

Backed by a Chinese promoter, this leading generic injectables manufacturer has come up with its IPO. What's there for investors? Here is our analysis

Gland Pharma IPO: Information Analysis

Gland Pharma IPO: Information Analysis

A leading manufacturer of generic injectables, Gland Pharma was established in Hyderabad in 1978. Although having a presence in sterile injectables, oncology and ophthalmics, it mainly focuses on complex injectables and first-to-file opportunities. The company follows a business-to-business (B2B) model wherein it enters into contracts with pharmaceutical companies to manufacture their products. These contracts are of different types, including profit share, milestones achieved or royalty payment. This model enables the company to sign long-term contracts with pharmaceutical-marketing companies, which result in stable and predictable cash flows, better operating profits owing to low administrative expenses, lower R&D expenses and low working capital requirements.

As on June 30, 2020, the company had 267 abbreviated new drug application (ANDA) filings in the United States, of which 215 were approved and 52 were pending approval. Out of these 267, 101 ANDA filings are owned by the company, of which 71 filings are approved and 30 are pending approval.

With Shanghai-based Fosun Pharma holding 74 per cent in Gland Pharma before this IPO offer, it is the first company in India to be listed with a Chinese promoter. Through the IPO, the company plans to raise close to Rs 6,500 crore, which is the largest IPO in the pharma sector.

Strength

  • Diversified B2B model: This model enables the company to grow its market share by signing contracts with pharmaceutical companies around the globe to manufacture their products.
  • High entry barriers: When it comes to manufacturing injectable medicines, the process is a bit complex. This is because products are directly injected into the bloodstream of patients. Hence, the entire manufacturing process requires stricter regulatory compliances and high-quality standards, which lead to high-capital investments and manufacturing complexities. And all these things act as high entry barriers in the industry.
  • Large presence: Its products are exported to 60 countries, including the US, which alone accounted for more than 66 per cent of the total revenues in FY20. In the US, there is a growing demand for generic medicines, which is a good sign for the company.
  • Increasing demand for pharmaceutical products: COVID-19 has led to an increase in awareness and demand for better healthcare facilities. People are more cautious about their health than ever before. This, coupled with the growing demand for health insurance and an ageing population in the company's key market, can be a growth driver for the company.

Risks/Concerns

  • High regulatory requirements: Pharmaceutical companies need to adhere to high regulatory approvals from regulators of the countries where they export their products. This requires a lot of time and incurs costs as well.
  • High dependence on pharmaceuticals-marketing companies: As the company primarily follows a B2B model, it depends on other pharmaceutical companies for orders.
  • High dependence on key customers: The top five customers accounted for 49 per cent of the total revenues in FY20, which makes the company dependent on its key customers.
  • India-China relations: The company imports its key raw material from China, which accounted for almost 37 per cent of its total purchase in FY 20. Thus, increasing political tension between the two countries can adversely affect the company's operations.

Total IPO size: Rs 6,445-6,480 crore
Purpose of issue: Disinvestment of the stake by Fosun Singapore, Gland Celsus, Empower Trust and Nilay Trust
Fresh issue: Rs 1,250 crore
Offer for sale: Rs 5,195-5,230 crore

Additional details
Price band: Rs 1,490-15,00
Subscription dates: November 9-11
ROE (FY20): 23.8 per cent
Revenue (FY20): Rs 2,633 crore
Profit after tax (FY20): Rs. 773 crore
Post-IPO, promoter holding: 58.3 per cent
Post-IPO, market cap: Rs 24,337-24,492 crore
Total debt: 4.9 crore
Net worth (Post IPO): Rs 4,088 crore (as on June 30, 2020)
Price/earnings ratio: 27.1 (TTM as on June 30,2020)
Price/book ratio: 4.7
Retail allocation: 35 per cent

IPO Questions

Company / Business
1. Are the company's earnings before tax more than Rs 50 cr in the last twelve months?
Yes, the company's profit before tax stood at Rs 993 crore in FY20.

2. Will the company be able to scale up its business?
Yes, ageing population and growing demand for generics in its key markets, along with growing awareness and demand for health insurance, will boost the demand for the company's products.

3. Does the company have recognisable brand/s, truly valued by its customers?
Yes, the company operates in an industry (generic injectables) with high barriers to entry and its B2B model accounts for 96 per cent of its sales in FY20.

4. Does the company have high repeat customer usage?
Yes, as stated above, the B2B model allows the company to enter into long-term contracts with pharmaceuticals companies having large distribution networks to market its product.

5. Does the company have a credible moat?
No, though the company operates in a highly regulated market, it still faces competition from other pharmaceutical companies and manufacturers.

6. Is the company sufficiently robust to major regulatory or geopolitical risks?
No, the pharma sector regularly faces a lot of regulatory issues from local and global regulators.

7. Is the business of the company immune from easy replication by new players?
No. Although the entry barriers are high in generic injectable business, the company can face stiff competition from large pharmaceutical companies and generic drug companies.

8. Is the company's product able to withstand being easily substituted or outdated?
No, pharma products routinely become outdated when better products or new treatments enter the market. However, low cost is the backbone of the Indian pharma sector, which implies that new products and treatment must also be affordable to substitute the existing products.

9. Are the customers of the company devoid of significant bargaining power?
No, the top five customers of the company accounted for around 49 per cent of the revenues in FY 20, which shows the company's dependence on its key customers.

10. Are the suppliers of the company devoid of significant bargaining power?
Yes, raw materials are sourced from multiple vendors. However, the majority of its suppliers are based in China which faces increasing pressure from the Indian government, owing to the increasing political tension between the two countries. China accounted for 33 per cent of the total raw material purchases in FY20.

11. Is the level of competition the company faces relatively low?
No, there are several players in the generic pharma space, which leads to intense price competition.

Management

12. Does any of the founders of the company still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
Yes, the promoters hold 74 per cent in the company Per-IPO and 58.3 per cent post-IPO.

13. Do the top three managers have more than 15 years of combined leadership at the company?
Yes, Mr Srinivas Sadu is the MD and CEO of the company and has been associated for more than 20 years.

14. Is the management trustworthy? Is it transparent in its disclosures, which are consistent with Sebi guidelines?
Yes, we have no information which suggests otherwise.

15. Is the company free of litigation in court or with the regulator that casts doubts on the intention of the management?
Yes, there is no material litigation going on against the company.

16. Is the company's accounting policy stable?
Yes, we have no reason to believe otherwise.

17. Is the company free of promoter pledging of its shares?
Yes, the promoter's shares are free of any pledging.

Financial

18. Did the company generate the current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Yes, the company's average ROE and ROCE were 19.5 per cent and 27.5 per cent, respectively, in the last five years. In FY20, its ROE and ROCE stood at 23.7 per cent and 30.7 per cent, respectively.

19. Was the company's operating cash flow-positive during the previous year and at least four out of the last five years?

Yes, the company's operating cash flows were positive in the last five years.

20. Did the company increase its revenue by 10 per cent CAGR in the last five years?
Yes, the company's revenue grew at a rate of 21.3 per cent in the last five years.

21. Is the company's net debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?

Yes, the company was net-debt free as on June 30, 2020.

22. Is the company free from reliance on huge working capital for day-to-day affairs?

Yes, the company's balance sheet is rich with cash and cash equivalents, which puts it in a comfortable position to manage its working capital requirements.

23. Can the company run its business without relying on external funding in the next three years?

Yes, the company is generating positive operating cash flows and has more than Rs 1,528 crore cash on its books as on June 30, 2020. It can safely run its business without relying on external funding in the next three years.

24. Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?

Yes, the company is net-debt free.

25. Is the company free from meaningful contingent liabilities?

Yes, contingent liabilities account for less than 1 per cent of the equity.

The Stock/Valuation

26. Does the stock offer operating earnings yield of more than 8 per cent on its enterprise value?
No, the stock will offer a yield of 4.4 per cent post IPO based on March 2020 numbers.

27. Is the stock's price to earnings less than its peers' median level?
N/A, there is no listed company that is solely engaged in the manufacturing of generic injectable.

28. Is the stock's price-to-book value less than its peers' average level?
N/A, there is no listed company that is solely engaged in the manufacturing of generic injectable.

BRLM- Kotak Mahindra Capital, Citigroup Global Markets, Haitong Securities, and Nomura Financial Advisory.