The bottomline is: Even mighty Sun Pharma and Strides Pharma are unable to enter this juicy generic injectable business indicates that what Gland have built over period of decades is difficult to replicate, hence it’s moat is widening !
Let us analyse Q1 FY22 numbers first !!
Revenue
Up 31% YoY & 30% QoQ
EBITDA & EBITDA Margin (%)
PAT is up 12% YoY
Market wise performance
QoQ Growth in market segments
Core market
Core Market i.e. USA, Canada, Australia have seen 16% year-on-year growth in revenue for the quarter.
The growth was contributed from mix of launch of new products and volume growth in existing products, including Micafungin, Enoxaparin, Heparin and Dexmedetomidine
It had several key launches during the quarter, and it was also an important milestone for the company to launch first set of Penem products for the U.S. market.
Revenue contribution from core market has decreased from 69% to 61 % . This shift is a result of conscious decision to diversify revenues in the RoW markets. GLAND expects US sales to grow by 18-20% YoY in FY22
Rest of World
Conscious strategy to increase contribution from RoW
Sales up 55% YOY driven by new partnerships and increased penetration geographically, especially for key markets such as Brazil, Chile, and Saudi Arabia.
India
Ramped up supply of essential drugs like Remdesivir and Enoxaparin considering the requirement for Indian patients during Covid
Must Watch Video
KEY DEVELOPMENTS
You can watch detail fundamental analysis of Gland in 2 episodes:
Incorporated in 1987, Gland Pharma Limited is large cap pharma stock with Rs 52000 cr market cap. This company is one of the fastest growing Generic Injectable co in the world. GLAND stands out in the pharma universe with solid track record of developing and commercializing complex products in the injectables space supported by R&D and regulatory capabilities.
GLAND is progressing well on building a complex product pipeline, backward integration, and gaining market share in commercialized limited-competition products. GLAND have generated Superior return ratios (5 yr avg ROCE: 29%) at minimum leverage and have been steadily growing Asset Turns leading to value unlocking.
The gradual shift from solid oral inhalation to injections/infusions is also a growth generator for the sector hence the company. Gland grew at CAGR of ~ 38% from 2014 to 2019. The company generates most of its revenue from outside India as its Key market is USA & Canada.
More about injectable market dynamics is detailed in this video:
It was the fastest growing small molecule generic injectables company in its core market i.e. United States market .
Key Triggers for growth of this stocks are below:
The company is riding tailwinds of unmet demand due to shortage of injectables in its Key market -USA. As it is well-placed to benefit from products under shortage list : The US market has seen the shortage of 125+ products every year over CY14–19. There are at least 12 products in Gland’s existing, filed, and tentative product portfolios in shortage in the US, with an addressable market size of USD450m+
Overall US forms strong base; ROW to build further momentum and the China is a lever which will be played with the help of the promoter (Fosun – A Chinese Pharma major) in coming 2 -3 years
Backward Integration : In addition to 4 formulations plants, Gland has 3 API plants located in Hyderabad and Visakhapatnam. The API plants have received approvals from USFDA (US), & Drug authorities of UK, Brazil, Australia, Germany)
Impeccable compliance track record with no EIR/ observations from USFDA indicating low regulatory risk
Covid Triggers: Gland is one good example of Antifragile business model as :
1. This pharma co have ramped up remdesivir injection supply for Indian market
2. Entered into Take of Pay manufacturing contract for Over 252 mn doses supply with RDIF (Russian Direct Investment Fund) for SputnikV (The Russian Covid-19 Vaccine)
The stock is currently available at 52 close to its peer (Divi’s Lab) valuation multiple of 56, however the growth driver for this company are long as it has much room to grow. The company is in the similar stage where Divi’s lab was before 2 years (May 2019). But if we compare the 3 year Profit growth rate then Gland with 46% is well ahead of 31% of Divi’s Lab. It is expected to generate a 15-20% of return over medium term considering the triggers and tailwinds.
This is the 3rd article of the series on Pharma Sector Analysis by Sadhan. During this 5-weeks course series, we target to capture the following modules:
Top 4 Pharma Stocks
Watch our video detailing financial analysis of the sector
You can check out The First 2 Modules videos below:
Moving on with Module 3 of this course, This blog intends to present you the financial overview of the sector. We shall also be using Magic Formula of Joel Greenblatt .
Let us first have a financial overview first:
Pharma Sector : Financial Overview
Pharmaceuticals is a huge industry with hundreds of listed stocks , so for the ease of analysis Sadhan have picked Top 10 Pharma companies by Market Capitalisation as the universe for presenting this financial analysis . Also these 10 Stocks constitute Nifty Pharma Index.
Stock
Market Cap (Rs cr)
Sun Pharma
1,20,747
Divi’s Labs
92,094
Dr Reddys Labs
77,671
Cipla
59,669
Biocon
50,394
Aurobindo Pharma
48,832
Torrent Pharma
44,165
Cadila Health
43,591
Lupin
39,829
Alkem Lab
32,033
This is the pecking order by market cap with Sun Pharma leading the bandwagon.
Let us look at companies by highest Sales then we find the list as below:
Stock
Sales (Rs cr)
Sun Pharma
32,478
Aurobindo Pharma
24,461
Dr Reddys Labs
18,183
Cipla
18,131
Lupin
14,977
CadilaHealth
14,850
Alkem Lab
8,597
Biocon
6,745
Torrent Pharma
6,329
Divi’s Labs
6,265
While Sun maintains its market cp rank with Highest Sales also whereas No 2 co by Market cap i.e. Divi’s Lab is in the bottom of the list.
Price/Sales or Market Cap/Sales
If we tally the 2 above mentioned table then can calculate Market Capitalisation/Sales for all these top 10 pharma stocks. Price /Sales or Market Cap/Sales shows how much investors are willing to pay per Rupee of sales for a stock.
Key finding here is: Divi’s Lab and Biocon share moves higher/faster for incremental sales than other large cap pharma majors.
ROCE
We consider ROCE as a paramount ratio for analysing the capital efficiency of the co so we have calculated the ROCE for all 10 stocks and the result is below:
Stock
ROCE ( %)
Alkem Labs
29%
Divis Labs
19%
Cipla
15%
Biocon
13%
Lupin
12.%
CadilaHealth
11.8%
Dr Reddys Labs
11.1%
Torrent Pharma
11%
Sun Pharma
9%
Aurobindo Pharma
9%
Companies with Large share of EBITDA from India (e.g. ALKEM) have reported better ROCE against export-oriented companies (e.g. Aurobindo, Sun, DRL) during last 5 years
EBITDA Margin
EBITDA Margin tell us a lot about the business model of these Pharma companies below:
DIVI’S Lab score high with 40% EBITDA Margin as it earns 41% Revenue form custom synthesis business where it enjoys strong relationships with big pharma
Mr. Joel Greenblatt a legendary Investor had written a small book (76 pages if I am not wrong) named “The Little Book That Beats the Market” and had propagated the idea /framework he calls “Magic Formula Investing”. The performance of this portfolio has been stellar as shown below:
The Value of $10,000 invested using magic Formula after 20 year shows the magic
What is Magic Formula?
We have broken down this framework in 5 easy steps:
First we define the universe : As we have seen that by market cap, all top 10 companies are formulation companies, so we have expanded the universe by adding Top 10 API manufacturers in the list so that we get a balanced view and representation . Here goes our list:
Step 1:Calculate ROCE
Step 1 is calculating ROCE using above mentioned formula
Step 2: Rank High ROCE Cos
Rank the Stock with highest ROCE as 1 and others similarly. So the list looks like this:
High ROCE ensures efficient business management & fund utilization
Step 3: Calculate Earning Yield
Calculate Earning yield using above mentioned formula
Step 4: Rank basis high Earning Yield
Rank the Stock with highest Earning Yield as 1 and others similarly.High Earning Yield means that the company is undervalued
Step 5: RankSum i.e. Best of both world
Add both the Ranks and Arrange the stocks in increasing Rank Sum order as below:
So the endgame is finding 2 winners and sell 2 losers if it is in your portfolio and calibrate the portfolio after 1 year by repeating all 5 steps again. Period. The Magic Formula can be applied to any set of stocks.
Hope you liked the content.Please share and follow us at Twitter. Stay Tuned for more such easy to understand industry analysis videos by Subscribing our Youtube Channel
This is the second article of the 5 articles series on Pharma Sector Analysis by Sadhan. During this 5-weeks course series, we target to capture the following modules:
Pharma Industry: The Regulatory Dynamics
Watch a brief explainer videoon CIR, Warning Letter, OAI, ANDA, NDA, Drug Price Control
Moving on, let us start with the topic of this article which is Regulatory Structure of Pharmaceutical Industry. This article will cover India as well as US from regulations from Investor’s point of view.
Let us first understand
Indian Pharma Regulatory Framework
Pre- Manufacturing is governed by rulebooks of Central Drugs Standard Control Organization (CDSCO) while manufacturing and Sales & Distribution is governed by their state counterparts called State Drug Regulatory Authorities (SDRA).
You might have heard of or read on the labels of a drug that “This a Scheduled Drug…”, So it is important for us to understand this classification as depicted below:
Scheduled vs Non Scheduled drug
This classification is done by
which is a regulator, whose main responsibility is to make a schedule of essential medicines . The medicine under this Schedule are called Scheduled Drugs.
NPPA was formed in 1997 and primarily controls the Ceiling Price of a schedule drug. The methodology of fixing the Ceiling Price is below:
First working out the simple average of price to retailer in respect of all branded-generic and generic versions of that particular drug formulation having a market share of 1 % and above
Then adding a notional retailer margin of 16 percent to it.
Companies are allowed to hike prices of such drugs by only up to 10% in a year.
NPPA sorts the drugs on Formulation basis i.e. If they banned a drug then they list out the size for example: 20 mcg, 50 mcg etc versions .
No of formulations under control is growing in past 6 years.
Truth of Drug Price Control
•NPPA can only control prices of devices and products that are defined as Drug under the Drugs & Cosmetics Act.
Case: Remedesivir,
It is the anti viral medicine (Popularly used in Covid treatment) whose prices in India could not be regulated as it is not defined as “Drug” but “Therapy” in india. This benefited manufacturers of Remedesivir as they could charge as high as 10x of before Pandemic price of the drug.
•Pharma firms response to Price Control: Evergreening
Case: Workhardt
Some of the formulation of Workhardt drugs were under Schedule however they made cosmetic changes in the formulations applied to NDA hence these new formulation of same drug became exempt from NPPA. This is widely held practice in Pharma world and is called Evergreening.
•Launch of Different Formulations evading price ban
Case: Thyronorm (Abbott)
Thyroxine sodium (Trade name Thyronorm by Abbott lab) is used in the treatment of hypothyroidism, a condition in which patients are affected by low levels of thyroid hormone. Currently thyroxine sodium 50 mcg and 100 mcg dosages are under price control. Other strengths of the molecule such as 12.5 mcg, 25 mcg, 62.5 mcg, 75 mcg, 88 mcg, 112 mcg, 125 mcg, 150 mcg have been kept out of NLEM, thus their prices are higher than 50 mcg and 100 mcg dosages.
In conclusion, NPPA is not a powerful regulator as USFDA hence that situation allow pharma companies getting their way around the price control.
Let us look at
Global Pharma Market
Clearly, USA pharma market is ~25 times bigger than Indian Pharma market, hence the fortunes of Indian drug companies are intertwined with US regulations, Therefore you should be knowing basic regulations including key terminology of US pharma industry.
few reasons why US & India pharma are so much inter dependent is summarized below:
Regulatory Aspects of Drug Approval In USA
Typical Timelines
In US new drug approval process is accomplished in two phases: clinical trials (CT) and new drug application (NDA) approval.
What is NDA?
New Drug Application (NDA): When a pharmaceutical company creates a new drug, the company must contact the FDA and demonstrate that the new drug has a particular quality and that the drug is safe and effective.
The review is a comprehensive analysis of clinical trial data and other information prepared by the FDA drug application reviewers.
What is ANDA?
Abbreviated New Drug Application (ANDA):
Submitted for generic drug products. Generic drug applications are called “abbreviated” because they are not required to include preclinical (animal) and clinical (human) data to establish safety and effectiveness.
Instead, a generic applicant must scientifically demonstrate that its product is bio equivalent (i.e., performs in the same manner as the original drug).
Once approved, an applicant may manufacture and market the generic drug product to provide a safe, effective, low cost alternative to the public
Let us have ANDA filing in to a business perspective. This charts explains
Indian Drug cos account for 35% of the US ANDA approvals
With US $ 140 bn drugs going off patent the US generic market is going to be growing from the similar pace as in the recent past.
Inspections
The USFDA is known for being a nosy regulator as they keep smelling all plants in value chain including APIs, Formulations. You might have seen Indian Pharma sector investors fearing this world called :EIR
Let us know the implication of Official Action Initiated (OAI) & Warning letters below:
If you are reading these lines then congratulations to you as Now you have understood the intricacies of the Pharma regulations (both Global as well as Local). Stay Tuned for more such easy to understand industry analysis videos by Subscribing our Youtube Channel
Bonus Watch
To consolidate your understanding of the sector I recommend you to watch these videos while setting the newly acquired industry knowledge in motion:
Alkem Labs:Fundamental Analysis
Learn the hidden platform of 800 brands in less than 15 min
Solara Active: Fundamental Analysis
Watch our 15 min Analysis Video to find out about a Dependable API manufacturer
Advanced Enzyme:Fundamental Analysis
Watch why we think Advanced Enzyme could be Motherson Sumi of Pharma
Sadhan 