Key takeaway: We hosted Gland Pharma for a UK/EU roadshow recently. Management guided to growth visibility in all key markets with 20-25% revenue CAGR in the medium term. Margins are expected to be steady with volume growth countering gross margin dilution. We have a ‘buy’ on Gland and it’s our top pick in pharma and healthcare. Gland was represented by MD and CEO Srinivas Sadu for a day. Other meetings were held by CFO Ravi Shekhar Mitra and IR Sumanta Bajpayee.
Fosun ownership is helpful to them in many ways: Fosun Pharma have helped them identify injectable products for China and will also help in sales and distribution. Group companies have also shared know-how, specifically in the complex area of biosimilars. Gland is still run as an independent company managing its own quality, operations, and client interface. As a parent company, Fosun participates in capital allocation decisions and helps identify strategic gaps, which can be filled by M&A. Since Fosun is run as a conglomerate, they come across many more M&A opportunities, which they can run past Gland for suitability. Of all pharma businesses that Fosun owns, Gland has been mandated to service developed markets.
Sustainability of growth: Gland management guided that they see each key territory growing over the next five years, including regulated markets including the US, the rest of the world (emerging markets ex-India, ex-China), India, and China. In five years, the company expects Reg markets, including US:RoW:India:China contributing 50:30:10:10% of total sales. Overall revenue growth should be in a 20-25% range in the medium term. Gland management said they have a healthy pipeline for the next five years. Growth in the US will be driven by base business volume-driven growth and new product launches. Gland has a relatively limited launched portfolio in the Rest-of-World Market and India, which will expand to provide growth opportunities.
China growth opportunity: Gland has filed seven products in the China market with addressable market size of $500 million. Average competition for these seven is low with just two-three competitors. Gland is also working on an independent China portfolio that is faster to execute vs retrofitting US filings for China. Developing products independently for China makes economic sense since management believes that China’s margins are quite attractive, and it also sees a gap in China market as the government seeks to increase the availability of GMP grade injectable products for which there are only a few suppliers.
Stable margin outlook: Management guided that fixed costs are 80% of total operating costs, and higher volumes drive improved enitda margins. Gland’s Rest-of-World business is at lower gross margins vs regulated markets. As Gland’s Rest-of-World business becomes more salient, gross margins are expected to decline. However, higher overall volumes and a largely fixed cost base imply steady ebitda margins for the company.