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Hemmo to step up peptide skills in CDMO segment

* Hemmo Pharmaceuticals’ acquisition by Piramal Pharma (PP) would add the capability to develop and manufacture complex peptide APIs to the latter’s portfolio.

* It further complements services such as drug discovery solutions, process development services, clinical trial-to-commercial supplies of APIs, and formulations.

* The valuation of 6x EV/FY21 sales (estimated at INR1.2b) is attractive as it is at a ~50% discount to leading CDMO players such as DIVI.

* We raise the Pharma segment EBITDA of Piramal Enterprises (PIEL) by 5%/6% for FY22/FY23E after factoring in the acquisition.

* Accordingly, we raise PIEL’s SOTP-based target price to INR2,210. We remain positive on PIEL on the back of superior execution in the Contract Development and Manufacturing (CDMO), complex hospital generics (CHG), and India Consumer Products (ICP) segments of Pharma and an enhanced retail-focused lending book. Reiterate Buy.

Acquisition details

PP has entered an agreement to acquire a 100% stake in Hemmo Pharmaceuticals (Hemmo) for an upfront consideration of INR7.7b and earnouts based on the achievement of milestones. Hemmo posted 20%+ YoY growth in 11MFY21 on FY20 sales. This implies 11MFY21 sales at INR1.1b. PP has guided to achieve 3x FY20 revenue over the next few years. The profitability of PP’s overall Pharma segment would improve given the Hemmo business is at a higher level than PP’s company-level margins in the Pharma segment.

Hemmo leads addition of peptide-related chemistry skill set to PP’s

CDMO offerings 44 peptide molecules have been commercialized to date at the industry level. However, the utilization of peptides as therapeutics has evolved over time and continues to evolve with changes in drug development and treatment paradigms. Accordingly, there are a huge number of peptide-based products under clinical stages, which provides strong opportunity in the CDMO space. The Peptide API industry is expected to grow 6–8% YoY over the next 3–4 years from the current size of USD2b. Hemmo’s large knowledge base in development and manufacturing would considerably support CDMO offerings by PP to its customers globally.

Valuation and view

We believe that a) the enhanced offerings in services related to R&D as well as commercial manufacturing, b) niche portfolio of hospital products, c) strong brand portfolio, and d) expanding field force / distribution reach across India would drive a 19% sales CAGR and 27% EBITDA CAGR in the Pharma business of PIEL. We have raised the Pharma segment EBITDA of PIEL by 5%/6% for FY22/FY23E after factoring in the acquisition.

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