Gland Pharma stock declined 20 per cent on May 19, post results that shocked investors. With issues ranging from one-time to structural, it reported an all-round miss in Q4FY23, falling short of revenue and EPS estimates by 21 per cent and 70 per cent respectively. The company’s revenue declined by 28 per cent — in the quarter from ₹1,103 crore in Q4FY22 to ₹785 crore this quarter. The lower revenue base impacted EBITDA margins, which declined from 32 per cent in Q4FY22 to 21 per cent in Q4FY23. In post results commentary, from the range of issues, only a few could be termed ‘one-time’ or short-term impact. The other issues may range from medium-term impact to structural.

Amidst such uncertainty, Friday’s stock correction does not imply a buying opportunity despite valuation of 14 times trailing EV/EBITDA compared to an average 22 times last year. Prior to this result as well, the company’s performance in 9MFY23 (14 per cent revenue decline) was not encouraging. The stock has now declined by 68 per cent from April 2022.

Competition in complex portfolio

Gland has developed a portfolio of complex sterile products for US markets. Competition and hard price erosion, even in this segment, continue to impact the company. In Q4FY23, new launches’ contribution of 3 per cent was inadequate to counter the 23 per cent YoY decline in US markets (70 per cent revenue contribution).

Heparin and Enoxaparin, which contributed to around ₹1,200 crore in FY22, declined to ₹980 crore this year as competition from Chinese players intensified in the two products. There was a loss of exclusivity of anti-fungal Micafungin to the tune of ₹375 crore in FY23 for Gland which, along with higher competition in base products, may impact FY24 performance as well.

The company has been witnessing liquidation of high inventory in US channels impacting sales pick-up, which is yet to normalise. The company pointed to high interest cost as reason for sales channel reducing product inventory, but the pick-up in normal sales is yet to be visible. The high inventory of finished products at Gland in anticipation of sales resuming has also been attributed to the same.

One customer shifted 14-15 products from Gland in the quarter. A new customer has been allotted and is expected to aid recovery in Q1FY24. Apart from this, one customer with a yearly exposure of ₹200 crore has filed for bankruptcy in the US. The proceedings and asset sale will ascertain the flow of this revenue stream, which the company is confident of recovering. In the current quarter, one production line was also shut down to add an additional line which impacted sales by ₹40 crore — but is up and running now.

The company indicated tender postponement for decline in RoW markets (10 per cent YoY decline and 22 per cent of revenues). The curtailed sales of Heparin on lower margin impacted RoW and in Indian markets it was included in price control (NLEM). Indian market, which accounted for 18 per cent in Q4FY22, declined 68 per cent in Q4FY23 and now contributed 8 per cent to revenues. The Covid sales of last year seem to have contributed a larger portion last year compared to peers (2-11 per cent for other pharma companies), which impacted the domestic performance.

From the current position, Gland may gradually normalise from the impact of loss of Micafungin exclusivity, recover loss of sales to customers, tenders in RoW and even inventory rationalisation in the medium term. But the impact of higher competition in US steriles is yet unknown.  

Amidst the spate of negative impacts, the quarter also reported a few positive developments for the company. The company has acquired Europe-based Cenexi (EUR184 million revenue in FY21). This provides an opportunity to expand the contract development operations to Europe, along with incremental technologies (ophthal, pre-filled and oncology). The company has invested more than ₹300 crore on Biosimilar contract development arm, which has signed its first contract. In three years, the two streams can potentially add incremental value to existing operations. However, for now, the negatives outweigh the positives.