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Working on many fronts to better outlook and return ratios

We attended GNP’s investor day to understand the management’s strategies across major business segments over the next four-to-five years.

* GNP aims to boost RoCE (EBIT/capital employed) to 22% by FY27 (from 17% in FY22), with an increased share of the branded generics business, controlled R&D spends towards the NCE portfolio, and sustained improvement in operating leverage.

* It also aims to have zero net debt by FY26. 

* We value GNP at 10x 12M forward earnings to arrive at our TP of INR420. We remain Neutral on the stock, given its 5% earnings CAGR over FY18-22. We expect earnings CAGR to be moderate over FY22-24 (9%). The benefit from complex product filings is expected from FY25,subject to timely approval. Asset utilization at Monroe for the US market is also subject to successful resolution of regulatory issues.

Key takeaways from the management interaction

Launches, focus on key therapies, and switch towards OTC to sustain growth in India

* The management intends to enhance its exiting brand franchise by focusing on core therapies like Dermatology, Respiratory, Cardiac, and Anti-Diabetes.

* Growth will also be supported by launches. In Domestic Formulation, 4-5% of growth will be led by launches. Some of its successful launches have been Remo-V, Nindanib, Ryaltriz-AZ, Fabiflu, and Vilor-F.

* GNP is also working on switching from prescription (Rx) to over-the-counter (OTC) to further monetize these brands. It has garnered INR1.8b sales in FY22 (~3x over FY19-22 levels).

* In the Domestic Formulation segment, it has delivered 13% sales CAGR to INR40b over FY18-22. Considering the COVID-led high base of FY22, we expect 6% sales CAGR over FY22-24.

WIP on niche filings and resolving regulatory issues at its Monroe and Baddi facilities for the US business

* The top five/10 products contributed 21%/32% to GNP’s FY22 sales, implying a well-diversified portfolio for the US market.

* In addition to the 46 ANDAs awaiting approval, it is working on eight-to-10 injectables, two-to-three drug device combinations, and three-to-four generics in the Respiratory portfolio.

* It expects to file g-Flovent and one g-Metered dose inhaler (g-MDI) in CY23.

* GNP needs to resolve the OAI classification issued to its Monroe site and import alert issued to its Baddi facility by the USFDA. Injectable commercialization is hinged on successful compliance at Monroe. It has invested ~USD200m at Monroe till date.

Monetizing ‘Ryaltris’ through partnership and market expansion

* GNP intends to scale-up revenue from Ryaltris to USD100-150m by FY27 (from USD30m in FY22). It has launched Ryaltris in 21 countries and plans to launch the same in 13 countries.

* It has leading market share in certain geographies like Australia, South Africa, and the Czech Republic.

A focused portfolio approach to drive growth in the Europe business

* GNP garners ~73% of its FY22 Europe sales from branded generics.

* It covers around four out of six major Europe markets directly, and has an established marketing network in these markets.

* Through an in-house pipeline as well as strategic in-licensing, it has a portfolio approach to maximize its business prospects in the European market.

* It has delivered 14% sales CAGR in Europe over FY18-22. We expect 11% sales CAGR to INR18.7b over FY22-24. However, adverse currency movement is affecting its growth prospects in the near term.

Improving the scope of monetization in Ichnos via a capital raise and partnership

* GNP has a near-term target of completing the proof of concept study for ISB1342 and ISB1442 before Mar’23. The successful clinical trials will enable it to launch in CY26 and CY27, respectively.

* It also intends to close one Oncology partnership before the end of FY23.

* It plans to file an Investigational new drug (IND) for ISB2001 before Mar’23.

* GNP has optimized its R&D spent at Ichnos to USD85m over the last four years from ~USD125m annually. It aims to reduce the same to USD60m in FY24.

Extending benefits from core therapies in RoW market as well

* GNP has delivered 10% sales CAGR to INR21.7b over FY18-22 in RoW markets, with a focus on Russia, Asia, LatAm, and MEA countries.

* It has outperformed the industry in respective market and has a leadership in core therapies.

* With an established brand franchise, it intends to expand its portfolio through in- and out-licensing of key products and gain market share in existing products.

To consistently improve profitability and reduce net debt to zero by FY26

* It aims to achieve overall sales CAGR of 10-12% over the next four years.

* The management is targeting an EBITDA margin of 23% by FY27, and R&D spends of 8.5-9% of sales from FY24 (v/s 10.4% in 1HFY23).

* It also aims to reduce its net debt to zero by FY26.

Valuation and view

* We expect a 9% earnings CAGR over FY22-24, led by: a) superior execution in the Branded Generics market of India, Europe, and RoW; and b) controlled R&D spends. The increased price erosion in the US and higher OPEX, related to marketing and logistics, is expected to keep EBITDA margin under check.

* We value GNP at 10x 12M forward earnings to arrive at our TP of INR420. Considering the moderate earnings growth over the next two years, regulatory hurdles at Monroe and Baddi, and commercial opportunities from niche products to be more back-ended (FY25 onwards), we maintain our Neutral stance on the stock.

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