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Earnings growth momentum in sustainable mode

On track to build complex product pipeline

* Gland Pharma (GLAND) delivered a slight miss on 3QFY22 earnings. Overall, 3QFY22 performance was driven by the India/ROW market. GLAND is on track to build its product pipeline as well as invest in manufacturing infrastructure in the complex categories of Peptides / Long-acting Injectables / Suspensions / Hormonal Products.

.* We lower our EPS estimate by 5% for FY22/FY23, largely to factor in further delays in the export realization of Sputnik and supply disruption related to COVID. We remain positive on GLAND on the back of a) volume-led growth in existing molecules, b) new launches in the complex space, c) its entry into the Biotech segment through the CDMO route, and d) sufficient cash on the balance sheet for inorganic growth. We value GLAND at 35x 12M forward earnings to arrive at Target Price of INR4,240. Reiterate Buy.

India/ROW – better operating leverage drives earnings

* 3QFY22 revenues grew 24% YoY to INR10.6b (our est: INR10.5b).

* RoW sales grew 88% YoY to INR2b (19% of sales). India sales were up 31% YoY to INR2b (18% of sales).

* Sales in the core markets (the US, EU, Canada, and Australia) grew 10.5% YoY to INR6.7b (63% of sales).

* The gross margin (GM) remained flat YoY at 52.7% on a stable product mix.

* The EBITDA margin expanded 210bp YoY to 32.8% (our estimate: 35.1%) owing to lower employee costs (down 190bp YoY as a % of sales) and lower other expenses (down 20bp YoY as % of sales).

* EBITDA was up 32% YoY to INR3.5b (our est: INR3.7b).

* Adj. PAT grew at a higher rate of ~34% YoY to INR2.7b (our estimate: INR2.9b), aided by higher other income.

* 9MFY22 sales/EBITDA/PAT grew 28%/19%/26% YoY to INR32.9b/INR11.6b/INR9.3b.

Highlights from management commentary

* Gland filed four complex injectables in 3QFY22, including three hormonal products and one complex peptide. The overall addressable market size is USD980m. These filings may not trigger an inspection from regulatory agencies as the facilities are already compliant.

* The typical ANDA approval timeline is ~2 years post the filing.

* Gland indicated 1QFY23 would be the timeline for the Sputnik commercialization benefit, given the time required for documentation, production, and subsequent sample testing.

* Product approval is pending for the China market, subject to inspection, either virtual or physical.

* Profit share during the quarter has been 10%/8% in 3QFY22/9MFY22.

Valuation and view

* We reduce our EPS estimate by 5% for FY22/FY23, largely to factor in the deferment of the Sputnik V vaccine on account of regulatory hurdles and COVIDrelated supply chain issues.

* We expect a 29% earnings CAGR over FY22–24, led by a sales CAGR of 16% in the core markets, 23% in India, and 43% in ROW – supported by 200bp margin expansion over FY22–24E. We estimate INR1.8b vaccine sales for FY23 and INR3b in biologics sales in FY24.

* We value GLAND at 35x 12M forward P/E to arrive at Target Price of INR4,240. We remain positive on GLAND on the basis of a) its niche product pipeline in injectables, b) volume gains in existing products, c) wider market operations for its portfolio, d) a strong cash cushion for inorganic growth, and e) its consistent compliance.

* The benefits of complex product launches in the US and the biologics CDMO that are expected to be realized beyond FY23 would provide a further upside to our estimates.

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