Gland Pharma

Global player in injectables

Solid track record in a niche segment, with relatively high entry barriers, and unique busines model are positives, but the Chinese ownership is a dampener

CM RATING

45/100

Established in Hyderabad, India in 1978, Gland Pharma has grown over the years from a contract manufacturer of small volume liquid parenteral products, to cover other elements of the injectables value chain, including contract development, own development, dossier preparation and filing, technology transfer and manufacturing across a range of delivery systems. 

Fosun Singapore and Shanghai Fosun Pharma are the promoters of company. Fosun Singapore holds 114,662,620 equity shares, including equity shares each held by Fosun Industrial Co., Ample Up, Regal Gesture and Lustrous Star for the benefit of Fosun Singapore, which aggregates to 74.00% of the pre-offer, issued, subscribed and paid-up equity share capital of company. Shanghai Fosun Pharma holds 100% of the share capital of Fosun Industrial Co., Limited, which holds 100% of the share capital of Fosun Singapore. Shanghai Fosun Pharma does not directly hold any of the pre-offer, issued, subscribed and paid-up equity share capital of the company. 

The company sells its products primarily under a business to business (B2B) model in over 60 countries as of June 30, 2020 including the United States, Europe, Canada, Australia, India and the Rest of the world. It has a consistent compliance track record with a range of regulatory regimes across these markets. It also has an extensive track record in complex injectables development, manufacturing and marketing and a close understanding of the related sophisticated scientific, technical and regulatory processes. 

The company is one of the fastest growing generic injectables-focused companies by revenue in the United States from 2014 to 2019 

It has established a portfolio of injectable products across various therapeutic areas and delivery systems. It is present in sterile injectables, oncology and ophthalmics, with focus on complex injectables, NCE-1s, First-to-File products and 505(b)(2) filings. Its delivery systems include liquid vials, lyophilized vials, pre-filled syringes, ampoules, bags and drops. The company is expanding its development and manufacturing capabilities in complex injectables such as peptides, long-acting injectables, suspensions and hormonal products as well as new delivery systems such as pens and cartridges. 

The company has seven manufacturing facilities in India, comprising four finished formulations facilities with a total of 22 production lines and three API (Active Pharmaceutical Ingredient) facilities. As of June 30, 2020, it has manufacturing capacity for finished formulations of approximately 755 million units per annum. The company's API facilities provide it with in-house manufacturing capabilities for critical APIs, enabling it to control costs and quality and mitigate supply chain related risks around its key products. Its capabilities as a vertically integrated company include internal research and development (R&D) expertise, robust manufacturing capabilities, a strict quality assurance system, extensive regulatory experience and established marketing and distribution relationships. 

Raw materials essential to business are procured in the ordinary course of business from numerous suppliers, including domestic and international suppliers. The raw materials that it purchase include APIs that are not produced in-house by them, intermediates, primary packaging materials, such as glass ampoules, vials, glass bottles, PVC (Polyvinyl chloride) and non-PVC bags or films, rubber stoppers, and secondary packaging materials. The company sources the raw materials and packaging materials for its products from vendors who provide materials of suitable quality in accordance with applicable requirements in the relevant markets. 

As of June 30, 2020, Gland Pharma along with its partners had 267 ANDA (Abbreviated New Drug Application) filings in the United States, of which 215 were approved and 52 were pending approval. The 267 ANDA filings comprise 191 ANDA filings for sterile injectables, 50 for oncology and 26 for ophthalmics related products. Out of these 267 ANDA filings, 101 represent ANDAs owned by them, of which 71 ANDA filings are approved and 30 are pending approval.  

As of June 30, 2020, the company along with its partners had a total of 1,427 product registrations, comprising 371 product registrations in the United States, Europe, Canada and Australia, 54 in India and 1,002 in the Rest of the world. It has a consistent regulatory compliance track record and all its facilities are approved by the USFDA from whom it has no warning letters since the inception of each facility. Other key regulatory agencies for which certain of its facilities have approvals include MHRA (Medicines and Healthcare Products Regulatory Agency) (UK), TGA (Therapeutic Goods Administration) (Australia), ANVISA (Brazilian Health Surveillance Agency) (Brazil), AGES (Austrian Agency for Health and Food Safety) (Austria) and BGV Hamburg (Germany). 

At the end of Mar'20 revenue from United States formed 66.74% of total revenues while India revenues stood at 18.97% of total revenues, Europe 4.44%, Canada 1.44%, Australia 0.5% and Rest of World 8.8%. Revenue from sale of goods constituted 88.18% of its total revenue from operations and its revenue from sale of services constituted 9.49% of its total revenue from operations in Fiscal 2020. Its top five customers in Fiscals 2018, 2019 and 2020 and the three months ended June 30, 2020 accounted for 49.92%, 47.86%, 48.86%, and 44.45%% respectively. 

The company primary business model is B2B, covering IP-led, technology transfer and contract manufacturing models, complemented by a B2C model in home market of India. It adopts the B2B IP-led model primarily for marketing its portfolio of products. Under this model, it enters into long-term development, licensing and manufacturing and supply agreements with leading pharmaceutical companies with strong and independent sales and distribution networks under which it receives licensing fees together with milestone payments tied to completion of specific product development stages. Under the B2C model, it engages in direct marketing solely in India which leverages its brands in this market to drive focus on injectables. 

The company intends to maintain its strategic emphasis on the United States, Europe, Canada and Australia, while continuing to pursue growth opportunities in China, India, Brazil and the Rest of the world.The company intends to leverage Shanghai Fosun Pharma's existing infrastructure and global presence to access new markets, including the Chinese and African markets. Its relationship with Shanghai Fosun Pharma has enabled it to initiate product filings in China, with first filing completed for the Chinese market in 2019. As of June 30, 2020, its product filings for six products in China were under approval.

The offer comprises of a fresh issue of 83,33,333 equity shares at upper price band of Rs 1500 and 83,89,262 equity shares at lower price band of Rs 1490 aggregating up to Rs 1250 crore by the company and an offer for sale of up to 34863635 equity shares, aggregating to Rs 5230 crore at upper price of Rs 1500 and Rs 5195 crore at the lower price band of Rs 1490 by the selling shareholders. The company will not receive any proceeds from the offer for sale. 

The offer for sale comprises up to 19,368,686 equity shares by Fosun Pharma Industrial Pte. Ltd ("promoter selling shareholder") and up to 10,047,435 equity shares by Gland Celsus Bio Chemicals Private Limited, up to 3,573,014 equity shares By Empower Discretionary Trust, and up to 1,874,500 equity shares by Nilay Discretionary Trust.  

The net proceeds of the fresh Issue are proposed to be utilized in funding incremental working capital requirements of the company amounting Rs 769.5 crore, funding capital expenditure requirements of Rs 168 crore and balance towards general corporate purposes 

The company aims to continue investing in existing manufacturing technologies to build new capabilities to support the production of its portfolio of complex injectables, primarily for the U.S. market. As part of such investment, it will require various equipment such as (i) production and packing equipment; (ii) electrical panel and fitting equipment; (iii) Heating, Ventilation and Air Conditioning (HVAC) equipment; (iv) lab equipment; (v) R&D equipment; (vi) utilities equipment; and (vii) warehouse equipment.. 

Strengths

The global injectable market was estimated to be US$432 billion in 2019, growing at a CAGR of approximately 10.1% from 2014 to 2019. Injectable is the second largest form of drug delivery and it has grown faster than the global pharma market, increasing its share from 32% (by value) in 2014 to 39% (by value) in 2019.Injectables in the United States constituted the largest format of drug delivery systems, accounting for approximately 46% by value of the United States pharmaceutical market in 2019. The United States injectable market was estimated to be US$230 billion in 2019, growing at a CAGR of approximately 13.6% from 2014 to 2019, faster than the other segments.

The company manufacturing facilities have established a consistent record of regulatory compliance with the USFDA highlighting its focus on quality assurance and quality control. It is certified as GMP compliant at all of its manufacturing facilities by the USFDA ( United States Food and Drug Administration ) and certain facilities by the MHRA (UK), ANVISA (Brazil), AGES (Austria), TGA (Australia) and BGV Hamburg (Germany). It had no warning letters from the USFDA (whether as a result of facility inspections or otherwise) since the inception of each facility. It has also received WHO GMP certifications for its facilities from the Drugs Control Administration (Governments of Telangana and Andhra Pradesh, India) (DCA) and has three ISO certifications as of June 30, 2020 for quality management, environment management and occupational health and safety management systems 

The company is vertically integrated company with demonstrated ability to advance a product from the R&D stage through commercialization. Its capabilities include internal research and development expertise, robust manufacturing capabilities (including the ability to synthesize and manufacture critical APIs in-house), a strict quality assurance system, extensive regulatory experience and established marketing and distribution relationships. As of June 30, 2020, it had a total workforce of 3,766 excluding contract labourers across these business divisions, including an in-house R&D team for product development, regulatory affairs for obtaining product registrations, manufacturing, supply chain management, and sales and marketing.The company's ability to manufacture its own API enhances its vertical integration strategy, particularly for APIs which are difficult to source, and allows them to develop products that other companies may not focus on due to their uncertainty of API supply. Gland Pharma's three API manufacturing facilities are USFDA approved; one is an R&D pilot plant and the other two have an annual capacity of 3,000 kg and 8,000 kg, respectively. It has several ANDAs which are vertically integrated, coupled with a substantial portion of pipeline supported by its in-house APIs. The key APIs that it manufacture include Atracurium Besylate, Cis- Atracurium Besylate, Dexrazoxane, Enoxaparin Sodium, Heparin Sodium and Rocuronium Bromide 

Injectable manufacturers enjoy high entry barriers such as high capital investments, operational costs, manufacturing complexities, stricter compliance requirement (because of the sterile nature of products) and high-quality standards resulting in limited competition in the market.

The majority of its suppliers of raw materials are based in China. It did face supply disruptions due to Covid-related lockdowns in China. It can also face supply disruptions in the future arising from India-China political relations which are evolving in the wake of the June 2020 border confrontation between the two countries. Raw materials imported from China constituted 37.26% of its total raw material purchases in Fiscal 2018, 52.27% of total raw material purchases in Fiscal 2019 and 33.27% of total raw material purchases in Fiscal 2020. 

It has experienced 14 cases of product recalls in the last ten calendar years, including as a result of drug impurity, adverse side effects to customers and physical dimensional incompatibility with syringe devices. 10 instances have occurred in the last three calendar years. In nine of these 10 cases, the reason for the recall was attributed to the partners of the Company, hence the Company did not experience any financial impact. In one instance in 2018, where the reason for the recall was attributed to the Company, the financial impact has been estimated at approximately USD 17,226 (equivalent to Rs 13 lakh) towards recall expenses. Moreover, since many of its products are directly injected into the blood-stream of the person, the consequences of expired or faulty pharmaceutical products are significantly more harmful for human health. In foreign jurisdictions, such as the United States, in which it has a major presence and intends to expand further for future sale and distribution of products, precedents show that the quantum of damages, especially punitive, awarded in cases of product liability is extremely high.  

Currently 60,00,000 equity shares held by 10 companies set up by B. Ramalinga Raju and his family members have been attached by Directorate of Enforcement in connection with Satyam Computers fraud case. The Attached shares represent 3.87% of the company's pre-Offer paid up equity share capital

Revenues rose 29% to Rs 2633.24 crore and net profit rose 71% to Rs 772.86 crore in year ended March 2020.Revenues rose31% to Rs 884.21 crore in Q1FY21. Operating margins jumped 770 bps to 46.7% resulting into 57% increase in operating profits to Rs 412.62 crore. Net profit was up 71% to Rs 313.59 crore. 

At the higher price band of Rs 1500, the offer is made at around 31.7 times its FY 2020 EPS of Rs 47.4 on a post-issue equity share capital of Rs 16.33 crore of face value of Rs 1 each. There is no comparable listed player with mirror business.While, it is not unusual for a growing pharma company to command such valuations, the Chinese ownership may not be received well by the market, given the strong anti-China sentiments within India.