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Pharma day highlights

Piramal Enterprises (PEL) has uniquely positioned itself in the pharma business to not only leverage from its niche business model but also capitalise the upcoming organic and inorganic opportunities that augurs well for future growth. PEL organised a virtual conference to discuss the pharma business in great depth and we have encapsulated the key highlights from that discussion below.

* CDMO – PEL is the 13th largest player in the global CDMO market with an approximate target market size of US$55-70bn. Company generates most of its revenues from commercial manufacturing and development services by servicing clients across the spectrum (big pharma, generics, emerging biopharma, etc). It has about ~80 active projects with ~30 being in the ph-3 stage spanning across complex product verticals (ADC, HPAPI, API, OSD, fill finish, etc). Company has a strong order book across the globe it is particularly strong in US and UK where it is able to provide integrated services for complex products. It is also justified by the fact that ~75% of the revenue is contributed from developed markets. Company is confident of growing faster in the next five years as compared to the previous five years with gradual margin improvement. We expect CDMO to CAGR at 12.0% over FY21E-FY23E.

* Complex hospital generics (CHG) – PEL is the 4th largest player (3rd ex-China) in the global Complex hospital generics market with an approximate target market size of >US$50bn. Inhalation anesthesia is the largest revenue contributor for PEL (~55%) followed by injectable anesthesia & pain management and intrathecal therapy with each contributing ~20-25%. However, the industry size for injectables is much larger than that of inhalation and company believes that this will be the faster growing segment in the future led by new products and entry into newer geographies. PEL has locked an order from Vizient, one of the largest GPO in US for a new product which will be launched soon. Desflurane is under review with USFDA and its launch is expected in next fiscal. We expect CHG to CAGR at 13.0% over FY21E-FY23E.

* Consumer healthcare – PEL is ranked 11th in the Indian OTC segment with an approximate target market size of US$6-10bn. Currently, company has a basket of 21 products with core brands (Saridon, Supradyn, Lacto Calamine, I-pill and Little’s) contributing ~60% to the revenue. Its top three product categories (Analgesics, Skin care and Vitamins) generate ~70% of the revenue. PEL utilizes a multi-channel approach to increase its reach across the country. Apart from e-commerce, PEL has a physical reach across more than 200,000 outlets with a ground force of ~1,200 in ~1,500 towns. We expect OTC to CAGR at 12.5% over FY21E-FY23E with sharp margin improvement.

* PEL will explore the PLI scheme and apply if its beneficial.

* Valuation and risks: PEL has reduced its net debt in the pharma business from US$545mn to US$359mn in 9MFY21 supported by the 20% equity dilution to Carlyle (completed in Oct’20). We value the Global Pharma business at 13xMar'23 EV/EBITDA and the India consumer products business at 3xMar'23 EV/Sales. Maintain BUY with SoTP-based revised target price of Rs2,265 (earlier: Rs2,059). Key downside risks are: delay in product approvals and launch, regulatory hurdles, and forex volatility.

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