Q1FY24 Review: Gland Pharma: Gradual path to normalization

8 Aug 2023 , 12:28 PM

Although Gland’s YoY performance was still muted in Q1 with 4% YoY revenue growth (ex-Cenexi), US sales increased QoQ from USD58m to USD72m driven by 15 product re-launches to new customers, and base business Ebitda margins improved to 30% in Q1 vs 28/22% in FY23/Q4FY23. The sequential improvement in margins was in-line with analysts’ of IIFL Capital Services expectations and they were already assuming USD75-82m of quarterly US sales over Q2-Q4FY24, which leads us to largely maintain their FY24-26 Ebitda estimates for Gland. With RoW growth undershooting their expectations in Q1 and meaningful complex injectable launches expected to begin in the US only from Q4FY24/Q1FY25, they expect Gland’s base business revenue to grow only 6% in FY24 and thereafter improve to 13% p.a. growth in FY25/26. Lower contribution of profit share in coming quarters could also drive volatility in base business margins and consequently analysts of IIFL Capital Services find valuations to be full at ~21x FY25 EPS. They maintain their REDUCE rating with a TP of Rs1,300. 

US sales will continue to improve gradually QoQ: 

Mgmt indicated that 23% QoQ growth in the US business was driven by 15-16% contribution from new launches (8 new products + 15 re-launches) and 4% volume growth in the base business. With volume growth in the base portfolio, normalization of business with 2 erstwhile bankrupt customers, and scale-up expected in Enoxaparin supplies from Q2FY24 post the inventory correction, Gland expects US sales to continue to improve gradually QoQ. 

Complex launches and synergies from Cenexi acquisition to provide growth triggers in FY25: 

Gland has already filed 7 complex injectables in the US, with 4/8 more complex filings expected in FY24/25 resp., and a material complex launch expected in Q4FY24/Q1FY25. While Cenexi’s portfolio grew only 10% YoY in May+Jun23, Gland intends to eke out revenue synergies from Cenexi’s capabilities in oncology PFS, sterile gels, coloured products and by cross-selling Gland’s product portfolio to Cenexi’s customers. Cenexi also recently won a CDMO contract for a Liposomal product. 

Ebitda margins could again come under pressure, as profit share is expected to sustain at 8-10% range vs 11% in Q1 (and 7% in Q4), which had led to Gland’s base business GMs expanding QoQ from 54% to 58%. Additionally, 4-weeks of plant shutdown for Cenexi in Q2FY24 will lead to margin pressures given Cenexi’s revenue will be flat QoQ in Q2, while Gland will have to recognize 1-month of additional expenses for Cenexi in Q2.