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NDR takeaways: The ‘flywheel effect’ in motion

* We hosted Gland Pharma management for a two-day non-deal roadshow in Mumbai to meet investors. Management commentary boosted our confidence in its unique business model, which is expected to benefit from increasing competition in generic injectables.

* While the company steadily increases its portfolio offerings to existing customers such as Apotex, Fresenius Kabi and Pfizer (Hospira), it is also gaining traction with recent entrants into the US generic injectables market such as Alembic Pharma.

* Management views the biologics business as a natural extension of its injectables capabilities. While the company might have to depend on parent Fosun Pharma initially, it expects to leverage its current client relationships to build an accretive business.

* We remain positive on Gland Pharma on the back of strong growth and visibility into profitability. We estimate revenue/EBITDA/net profit CAGRs of 25%/25%/27% (FY21- 24e). Strong growth should also boost Gland’s industry-leading return ratios further.

Volume growth in existing products a differentiator: Management expects to maintain high single-digit volume growth in existing products in the US market as it onboards new partners. For example, the company has onboarded Fresenius Kabi for Enoxaparin and added a couple of partners for penems. The sheer focus on the injectables business helps the company attain cost leadership through economies of scale and operational efficiencies.

Solid growth and profitability visibility: The company retained its soft growth guidance (CAGR in mid-twenties), driven by mid to high-teens growth in the US. US growth will be driven by new products and existing products equally. RoW is expected to grow faster than US as the company enters new markets and expands its portfolio in existing markets. EBITDA margin is expected to remain at current levels. Strong growth visibility is fueling capex, with a total planned capex of ~Rs8bn in FY22 and FY23. This includes additional Lyophillizers in the Penem facility, and hormones, suspension and microsphere lines at Parshamaylaram.

Biologics foray makes the company future ready: Biologics CDMO market is growing at a 13-15% CAGR with limited growth in capacities. The company remains upbeat about utilizing its initial capacity of 10KL in collaboration with Fosun’s subsidiary Shanghai Henlius, which has 19 biosimilars under development. A manufacturing contract for 2-3 biosimilars is expected in the next 12-18 months. The company is already planning for a 50KL capacity expansion. The operating margin in this business is expected to be in mid-thirties.

Reiterate Buy at a TP of Rs5,000: Our DCF-based valuation suggests a TP of Rs5,000. Our TP includes base business value of Rs4,150/share, biologics value of Rs780/share and Sputnik upside of Rs70/share. Link to our initiation report: Injectables wheelhouse with a moat

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