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Gland Pharma IPO: All You Need to Know

Editor, TRANSFIN.
Nov 11, 2020 4:51 AM 4 min read
Editorial

Hyderabad-based Gland Pharma, a maker of generic injectables, opened its Initial Public Offer (IPO) today with its subscription open till Wednesday (November 11th).

The company is looking to raise ₹6,480cr ($871m) through the issue of 43.2 million shares, which would make it the largest IPO in India’s pharmaceutical sector.

It would also make it the second-biggest listing so far this year, since the $1.44bn SBI Card offer back in March.

Some Fast Facts

  • The IPO involves a mix of both fresh shares - worth ₹1,250cr ($168.8m) - and an Offer of Sale (OFS) of nearly 35 million existing shares, translating into the remainder ₹5,230cr ($706m).
  • Yes...most of the money raised won’t go to the company but to selling shareholders.
  • The price band is in the ₹1,490-1,500 ($20.12-20.25) range.
  • Investors can bid in a lot of 10 equity shares and multiples thereof.
  • The OFS includes shares held by Fosun Pharma, Gland Celsus Bio Chemicals, Empower Discretionary Trust and Nilay Discretionary Trust.
  • The company has already raised ₹1,944cr ($262.5m) from 70 anchor investors at the price of ₹1,500 ($20.25) per equity share.

 

Fast Facts About Gland Pharma

Founded in 1978 by PVN Raju, Gland Pharma develops, manufactures and markets complex injectables.

It has a largely B2B business model and has a market in over 60 countries, with its exports to the US commanding the lion’s share (67%) of its revenue. It also has a few B2C operations in India, but 96% of its revenues are contributed by B2B.

In 2017, Shanghai-based Fosun Pharmaceutical bought a 74% stake in Gland for $1.1bn - the largest acquisition of an Indian firm by a Chinese company. Ipso facto, the Gland’s public offering would also be the largest IPO by a Chinese-owned Indian company. (FYI: After Fosun’s OFS, its promoter shareholding is expected to fall to 58%.)

Speaking of Fosun...

 

Gland’s China Angle

Analysts view Gland’s Chinese ownership as a possible liability, given the global backlash against China due to COVID-19 + the delicate border situation between India and China.

What’s more, Gland’s business may have a Chinese Achilles’ heel. Like most Indian pharma cos, it is heavily dependent on our northern neighbour for Active Pharmaceutical Ingredients (APIs).

In fact, in its draft offer document filed with SEBI, the company listed interruption or failure to produce or procure APIs as one of the factors that “could cause actual results to differ materially from our expectations”. (More on Indian pharma’s reliance on Chinese APIs here.)

 

Opportunities

Since its inception, Gland Pharma has pursued a relatively safe and conservative strategy. Never indulging in acquisitions, always cutting down on costs, being risk-averse, and growing its business organically.

This has enabled it to have a healthy balance sheet, with low debt, double-digit EBITDA margins and high cash flow generation. Over the last three years, revenues grew at a CAGR of 27% while net profits rose by 55%. EBITDA margins have been north of 30%. At the end of FY20, the company had cash and cash equivalents amounting to ₹1,325cr ($179m) on the balance sheet, representing almost 32% of total assets.

Gland’s B2B model is surely interesting. They make most of their money by selling “formulations” i.e. The form in which drugs are actually consumed by people.

For that, the company combines APIs with “excipients” i.e. The inactive stuff, to make the requisite formulation, then sells it to other pharma companies (branded generics and/or generic drug sellers) who brand, market and sell them to the end user. With them, Gland enters into long-term development, licensing, manufacturing and supply contracts. These five to ten year long arrangements tend to ensure recurring income...always an attractive feature for investors.

Going forward, the company is looking to expand into the Chinese market which, being valued at $92bn in 2019, is the second-largest pharma market in the world. And 53% of Chinese pharma comprises injectable drugs.

This makes the company’s China angle a double-edged sword. China’s markets have notoriously high entry barriers; being promoted by a powerful Chinese firm like Fosun would work in Gland’s favour.

Of course, if India-China relations sour further, being too steeped in the latter’s market may turn into a costly liability. Which brings us to...

 

Risks

We’ve already touched upon Gland’s API dependency and China exposure. Moving on...

For any pharma company - especially one manufacturing injectables - the biggest risk involves quality-compliance. Gland’s record on this front has so far been spotless - none of its manufacturing plants have been red-flagged by US regulators. But this clean record would have to be sustained, since quality-control problems may disrupt business operations, damage reputation and expose the firm to potential litigation.

Second, Gland Pharma’s revenues are heavily dependent on its US business. And given its B2B model, its top five customers have accounted for nearly half of its total revenue from operations in the last three fiscals. So, diversification on these two fronts may help the company stand on more solid ground.

Third, the coronavirus has disrupted normal operations for all businesses, and there is no saying how the pandemic will play out in the near-term until a vaccine is finalised and distributed.

While the pharma industry is one of the few that have benefited from the public health crisis (Nifty Pharma is up 45% year-to-date), the industry’s prospects are still tied to how the pandemic evolves - and how long it would take before normalcy returns.

Given Gland Pharma’s solid numbers and growth prospects, we can expect strong investor interest in the IPO. But the China exposure, pandemic overhang, and just the fact that the IPO looks more like an exit event for existing shareholders than an invitation for fresh capital implies it won’t be an easy sell.

Gland’s low end of day subscription amounting to 4% of the total issue is a case-in-point.

ICYMI: We did similar Top Picks on other recent IPOs - here are the links: Happiest Minds Technologies, Computer Age Management Services (CAMS) and UTI AMC.

FIN.

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