Gland Pharma: Analyzing customer concentration risk

26 May 2023 , 11:18 AM

Recommendation: Reduce

Target Price: Rs. 1,000

Sagent Pharma, Athenex and Eversana accounted for 20% of Gland’s overall shipments in FY23, where there could be risk of further business loss as Sagent/Athenex have been undergoing challenges and/or have gone bankrupt. Further loss of business from these customers would pose a downside risk to IIFL’s assumption of 11-12% revenue CAGR and 28-30% EBITDA margins for Gland’s base business over FY23-26. The stock is trading at 15x FY25 PE which is fair (not cheap), given the inherent volatility in export businesses and structural downward reset in Gland’s growth rates from 20% to 11-12%, post the Cenexi acquisition.

Sagent acquired by Gland’s ex-promoter while Athenex is under bankruptcy

Gland’s export shipments to Sagent averaged USD44 million over FY20-22, but have declined to USD22 million in FY23 as Sagent has been ongoing through operational challenges and was recently acquired by Gland’s ex-promoter. Undergoing Chapter-11 bankruptcy, Athenex accounted for USD22 million of Gland’s export shipments in FY23. While management has indicated that they expect to retain business from these customers, Sagent & Athenex together contributed 13% to Gland’s FY23 exports (versus 16-17% in FY21/22), which could potentially be at risk.

Eversana becomes a big customer in FY23, but not much info available

Gland’s shipments to Eversana were USD1-3 million over FY20-22 but increased to USD20 million in FY23, and sustainability of this needs to be watched out. Analysts at IIFL Capital Services were not able to find much info on Eversana except that it is a Managed Services provider for Life Sciences companies and that Eversana used to manage Athenex’s US product distribution/customer engagement. Hence, given Eversana’s relationship with Athenex, Gland’s revenue from the latter could exceed its direct exposure of USD22 million.

Sagent, Athenex and Eversana contributed 20% to Gland’s exports

Further revenue loss from these customers is not factored into IIFL’s estimates and will pose downside risks to their assumption of 11-12% revenue CAGR and 28-30% margins for Gland’s base business over FY23-26.