Gland Pharma’s (Gland)‘s Q2FY24 results reported on November 6 indicate a recovery from the troubles it faced two quarters back. The stock gained 5 per cent on Tuesday post results. More importantly it has recovered by a massive 85 per cent since the lows it touched in May 2023 after reporting weak Q4 FY23 results. The company has a lot of ground to cover before it generates strong growth in all regions, but going by the commentary, it may have started on the path.

Blip and recovery

In the fourth quarter of FY23, the company faced a significant decline in Heparin and Enoxaparin markets worldwide, which contributed to around ₹1,200 crore in FY22, or a third of the revenue. This was on account of Chinese competition and price erosion. A client shifted away from Gland, adding to its troubles. At the time, the more manageable headwinds related to high price erosion spreading to injectable generics in the US, and high channel inventory. In Q4FY23, the company reported a 28 per cent revenue decline, and EBITDA margins that hovered around 32 per cent in FY22, had shrunk to 21 per cent.

However, in Q2FY24 the company reported 5 per cent YoY growth in its main market, the US (70 per cent of Q2FY24 revenues). New launches, base volume growth in existing products, and more stable price erosion in the low single digits aided the recovery, indicating a stable market outlook. The company is relaunching products from the discontinued client, which should ensure a high run rate of new product launches. Shortage of injectables continues in the US, which should add infrequent lump-sum opportunities as well. The decline in Heparin/ Enoxaparin has been absorbed in the base for US business, but is still a drag in RoW markets.

The RoW segment (17 per cent of revenues) reported a 23 per cent YoY decline owing to timing differences in purchases. Gland Pharma revenues, excluding the acquisition, declined by 3 per cent in Q2FY24, with recovery expected from volume traction and new product launches in the next few quarters. The pricing environment is also expected to hold up in low single digit erosion, especially in injectable generics.

Overall, consolidated revenue growth was at 32 per cent, driven primarily by acquisition. Cenexi, Europe-based CDMO operations, was acquired in Q4FY23, and has contributed ₹358 crore in this quarter (26 per cent of revenues). The acquired company delivered on expected lines, between EUR 50-55 million per quarter (₹445-490 crore), adjusted for a pre-announced shutdown of a month. Gland will invest EUR 60 million towards capex/ working capital in Cenexi, which should improve the synergies/ efficiencies of the company, and realise the long runway of CDMO projects the company has.

Margins and valuation

Ex-Cenexi, EBITDA margins scaled upto 34 per cent in Q2FY24, from 21 per cent in Q4FY23. The company expects to report above 32 per cent margins in the current environment, aided by low price erosion and a strong new product basket. Cenexi reported gross margins of 77 per cent, compared to 62 per cent for Gland in the quarter. But owing to the planned shutdown, Cenexi operations reported -7 per cent EBITDA margins. Pre-acquisition, Cenexi maintained 10-11 per cent EBITDA margins. With synergies and transfer of production to India, Gland can improve the margin base as well. Overall, the company reported EBITDA margins of 24 per cent, which is a 210 bps improvement from Q4FY23.

At 26 times one-year forward earnings, Gland Pharma is trading at a 12 per cent discount to its last three-year average. The multiple is still at a premium to the generic pharma PE range of 22-25 times earnings. The injectables operations, with scope in the CDMO space, can justify the premium. The company can expand into CDMO projects, China (is in the early stage of portfolio), and the biosimilar space it is currently expanding into are optional values. The business in US injectable generics, with stable outlook, bodes well for the recovery in base business growth in the interim.

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