Gland Pharma Shares Fall On Q3 Profit Miss, Analysts Cut Ratings

Shares of Gland Pharma Ltd. fell after the third-quarter profit missed estimates. The company's stock price fell 58% in the past year.

Some analysts also downgraded ratings and cut price targets for the generic injectables maker due to persistent supply chain issues, inventory rationalisation at client levels, and increased competition.

While the syringe supply is normalised, the company is awaiting approval from the U.S. FDA for an alternate supplier for stoppers for heparin, an anticoagulant.

Gland Pharma's third-quarter profit fell 15% year-on-year to Rs 232 crore in the three months through December.

Gland Pharma Q3 Results 2022-23: Key Highlights (YoY)

• Revenue down 12% at Rs 938 crore

• Operating profit down 17% at Rs 290 crore

• Operating margin at 30.9% vs 32.8% a year ago

Shares of the Hyderabad-based pharma company fell 2.11% to Rs 1,348.25 apiece as of 10:51 a.m., compared to 0.30% rise in the benchmark BSE Sensex.

Of the 19 analysts tracking the company, 12 maintain a ‘buy’ rating, two suggest a ‘hold’ and five recommend a ‘sell’, according to Bloomberg data. The average 12-month consensus price target implies an upside of 31.1%.

Brokerages' take on Gland Pharma's quarterly results:

• Maintains a ‘buy’ rating with a downward-revised price of Rs 1,700 apiece, implying an upside of 23%.

• The Q3 FY23 performance was below expectations.

• It was affected by lower sales across key markets due to inventory rationalization by customers and prolonged supply chain issues.

• Ebidta margins contracted due to inferior operating leverage (employee cost/other expenses up 310bp/66bp year-on-year as % of sales)

• Management said that while Gland Pharma has largely resolved syringe-related issues, stopper-related issues still continue to hurt the business, particularly that of Heparin.

• With respect to the stopper for Heparin, Gland Pharma has filed CB-30 with an alternate supplier with the USFDA.

• Production delays in the core market also affected the Q3FY23 performance on a quarter-on-quarter basis.

• The company has signed a share purchase agreement with Cenexi in Jan. 2023 and is on track for necessary regulatory approvals for the acquisition

• Cut estimates to factor in;

  1) lower off-take of Enoxaparin;

  2) the gestation period on account of getting approval for an alternate supplier of a stopper for Heparin,

  3) production delays,

  4) a reduction in business of low-margin products, and

  5) lower pricing of Heparin in India.

• The 58% fall in the stock price in the past year already factors in the deterioration in the business outlook.

• Expect a 17% earnings CAGR over FY23–25 with the resolution of issues, a better business outlook for biologics and China, and the addition of Cenexi’s business.

• Downgrades to 'accumulate' from 'buy' with a target price of Rs 1,472 apiece, implying an upside of 7%.

• Missed estimates due to persistent supply chain constraints and a slowdown in demand, which led to a rationalisation of inventories at the client level.

• As per the management, these issues are likely to affect near-term performance.

• Increased competition, especially in the US, may affect margins.

• But management is confident of maintaining margins even at the cost of growth.

• The brokerage expects margins to remain in the range of 30% to 31.5%.

• Q3 revenue declined mainly due to subdued growth across geographies.

• Ebidta margins contracted due to higher employee and energy costs, which were partially offset by a better mix.

• Stopper issue for heparin is still persisting, and the company is waiting for approval for an alternative source.

• There was a 2-week shutdown for line upgradation at Pashamylaram.

• The company has received an EIR from the USFDA for the Dundigal facility.

• Cenexi's acquisition is expected to be completed by March 2023.

• This acquisition would help the company capture Europe's CDMO business.

• Some products were transferred to Gland due to adverse USFDA remarks about some competitors.

• Brokerage has been cautious due to persistent supply chain issues, inventory rationalisation at the client level, and increased competition, hence downgrading stock.

• Normalization of supply chain issues and improvement in growth (mainly due to complex launches) are likely to rerate the stock going forward.

• However, if competition intensifies and margins also abate, then stocks may be further downgraded.

• Maintains ‘reduce’ with a target price of Rs 1,375 apiece, down from Rs 1,660, implying no upside.

• While the supply situation is gradually resolving, the demand environment is challenging.

• Increased competitive intensity in the US being a key concern.

• Expect Gland’s growth and margins to reset downward to a new normal owing to multiple challenges.

• A significant increase in working capital further impacted return ratios.

• The company’s focus is now on sustaining and improving margins.

• This is irrespective of the resultant impact on growth by staying away from low-margin businesses.

• Competition for Gland’s key products has escalated over the past few quarters.

• Traction for new launches has been muted.

• Gland, with its spotless record, could potentially benefit from regulatory issues faced by other injectable manufacturers.

• Reiterate that any material sales recovery is likely only in FY25, driven by complex US launches as well as traction in biologics CDMOs and China.

• Brokerage has not yet incorporated Cenexi acquisition in estimates.

• A change in Gland Pharma's ownership will have a mixed impact.

• Without Fosun’s support, Gland Pharma's foray into China could stutter.

• Do not expect any impact on API supplies from Fosun to Gland.

• Gland Pharma’s ability to acquire assets in India and the US could be enhanced with a non-Chinese promoter.