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Performance in revival mode; valuation attractive

* Gland Pharma (GLAND) has seen an encouraging revival in its business performance in 9MFY24 after a weak FY23.

* The revival in sales in the company’s core markets has been driven by new launches and the relaunch of certain products. With the resolution of supply chain issues, we believe that GLAND is expected to clock a 16% CAGR in sales to INR33b compared to a modest 2% sales CAGR over FY22-24.

* The company is also working on new registrations and adding new markets in the ROW segment.

* Further, GLAND is also adding new areas of growth through the M&A and organic routes. We value GLAND at 27x 12M forward earnings to arrive at a TP of INR2,240. Considering a 20% earnings CAGR over FY24-26, significant underperformance on absolute basis (5% appreciation in past 6M) as well as on relative basis (vs. BSE Healthcare Index), and attractive valuation at 24x FY26E EPS, we reiterate our BUY rating on the stock.

Core markets: Back on growth path

* After delivering a strong performance in core markets over FY18-22 (24% sales CAGR), GLAND witnessed significant challenges in FY23.

* Sales were impacted by excess inventory in the system, financial distress of key customer, Athenex, and the re-prioritization of portfolio strategy by another customer. Further, the situation was worsened by supply shortages of stoppers, resulting in an 11% YoY decline in sales in FY23 to INR24b.

* However, the company has seen strong launches (including re-launches) in the past nine months, resulting in 8.5% YoY growth in sales. GLAND has also added new customers. Considering that major issues are now behind, we expect an 11% CAGR in sales over FY24-26 to INR40b in core markets as GLAND has a robust product pipeline.

RoW markets/India: Work-in-progress to revive outlook

* Over FY18-22, RoW sales witnessed a 79% CAGR, led by robust traction in key products. However, during FY23/9MFY24, sales declined 18%/5% YoY due to supply chain issues, shutdown of facilities and reduced sales of low-margin products.

* GLAND is working on new registrations and is adding new markets.

* Accordingly, we expect ROW sales to reach INR6.9b at an 11% CAGR over FY24-26.In FY23, India sales declined 60% YoY due to supply shortages, including products in NLEM, and shutdown of its insulin facility. However, during 9MFY24, India sales revived and grew by 11.4% YoY.

* While GLAND has reiterated that it would reduce investment in the Indian segment however the company would look for some growth opportunities. Accordingly, we expect a 13% CAGR in India sales over FY24-26.

Building more levers to improve growth prospects

* In addition to its base business, GLAND is building additional levers to improve growth prospects. The company has expanded its CDMO offerings in the European market through the Cenexi acquisition.

* Access to niche technologies and a robust customer base would enable GLAND to establish its presence in the CDMO space. Additionally, GLAND has invested in developing capabilities in the biosimilar space to expand differentiated offerings.

* Further, the company continues to file products and has gained access to the China market as well.

* Overall, GLAND has invested INR13b in these new areas of growth so far, which is yet to provide meaningful benefits.

Valuation and view

* We expect GLAND to deliver a 20% earnings CAGR over FY24-26 on the back of superior performance in core markets of US/EU/Canada/Australia and ROW markets, supported by improving Cenexi operations. We value GLAND at 27x 12M forward earnings to arrive at a TP of INR2,240. After YoY earnings decline in FY23 and stable FY24, we expect earnings growth to improve over the next two years. Reiterate BUY.

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