Gland Pharma shares fall 4% on Cenexi acquisition report; should you buy, hold or sell?

Gland Pharma’s Singapore subsidiary Gland Pharma International PTE has entered into an agreement to acquire 100% of France-based contract development & manufacturing organisation (CDMO) Cenexi Group for an equity value not exceeding 120 million euros.

Gland Pharma shares fall 4% on Cenexi acquisition report; should you buy, hold or sell?
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Gland Pharma share price tanked over 4 per cent on Wednesday after the pharma company through its wholly-owned subsidiary, Gland Pharma International PTE. Ltd, Singapore, entered into a Put Option Agreement to acquire 100% of Cenexi Group for an equity value of up to 120 million euros. Post this acquisition, Gland Pharma will become one of the leading sterile-focused CDMO globally with further ability to support investments in developing Cenexi’s European platform. It would also provide the company with the technical know-how in sterile forms, including ophthalmic gel, needleless injectors, and hormones, according to analysts. Gland Pharma will now get access to four manufacturing facilities which are capable of manufacturing ophthalmic gel and needleless injectors fill & finish formulations, and it will benefit Gland as it currently lacks such capability.

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Gland Pharma’s overall offerings to expand

Analysts at Motilal Oswal believe that considering the need for local presence to gain business in European markets, this acquisition would help Gland Pharma strengthen its business prospects in these markets. Also, given that Cenexi has capabilities in processing substances such as hormones, suspensions, and controlled substances, it would expand Gland Pharma’s overall offerings to its customers. However, the acquisition would adversely impact the overall profitability, they said. “EBITDA margin has improved to 19% in 1HCY22 from 9.7% in CY19. However, management indicated that 1HCY22 margins are not the normalized rate of EBITDA margin. Also, it remains lower than Gland’s EBITDA margin of 31.5% for 1HCY22,” they said.

Should you buy, hold or sell Gland Pharma shares?

Motilal Oswal: Buy
Target price: Rs 2,470

Considering equity value/enterprise value of EUR120m/EUR230m, respectively, the EV/sales is about ~1.2x CY21/CY22E. The EV/EBITDA is about 10x CY21 and 8x CY22E. Given the generics product portfolio, the valuation is fair and in line with peers in the space, according to Motilal Oswal analysts. They raised their FY24 EPS estimate by 3% to factor in additional business from Cenex. The ROE of the business is expected to be at 10%. “Accordingly, we reduce the PE multiple to 28x from 31x on a 12-month forward earnings basis to arrive at a price target of Rs 2,470. Also, the sharp correction over the past six months has made valuation attractive at 21x/18x FY24/FY25 earnings, respectively,” they said. Given the gradual
improvement in the core business, the brokerage reiterated buy rating on Gland Pharma stock.

Morgan Stanley: Overweight
Target price: Rs 2,558

Morgan Stanley maintains an overweight stance on Gland Pharma with a target price of Rs 2558. The deal appears complementary to Gland in terms of EU market access, branded pharma customer base and some technologies, the brokerage said. “We see the scope of meaningful value unlocking, subject to synergy execution,” it said in the note.

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Elara Capital: Buy
Target price: Rs 2,300

According to analysts, at 10x CY21 EV/EBITDA, the acquisition seems to be reasonably priced and may be funded via cash (Sep-22 cash balance ~ Rs 38bn). Cenexi has entered into contracts with three companies for biologics products, which could fasten Gland’s foray in biologics, they said. “Gland is targeting to bring operational synergies by shifting manufacturing of low-margin business to its plants in India, and via tech transfer from Europe to India. Owing to near-term earnings strain, we cut FY24E earnings estimates 4%. We maintain Buy but pare our TP to Rs 2,300 (Rs 2,500 earlier), on 24x FY25 P/E (earlier 30x on FY24 P/E),” the brokerage said.

(The stock recommendations in this story are by the respective research analysts and brokerage firms. does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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