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Equity Research: Piramal Pharma Ltd.
Piramal Pharma trades at 14.8x/12.6x Ev/Ebitda multiple on FY24/FY25 basis which is at a significant discount to Indian peers.
Piramal entered the pharma space through the acquisition of Nicholas Laboratories in 1988. Over the next two decades, PPL created business verticals like domestic formulations, diagnostics, OTC, pharma solutions and critical care. PPL divested its domestic formulations and diagnostics business in 2010/2011 and built a diversified financial services business over the decade. In 2020, Carlyle invested USD490m in the pharma business for 20% stake valuing the company at an EV of USD2.7bn vs company's current EV at USD2.2bn. In Oct 2021, Piramal announced the de-merger of the financial services and pharma business and the pharma business was listed separately on Indian stock exchanges in Nov 2022. PPL has three business verticals 1) CDMO (Contract Drug Manufacturing Organization) which comprises drug discovery (4%), development (26%) and commercial manufacturing (70%), 2) CHG (Complex Hospital Generics) which includes inhalation anesthesia and injectables, and 3) ICH (India Consumer Healthcare) which has a portfolio of OTC products. It also has a JV with Allergan for ophthalmology branded products for India for which it is the market leader. PPL has chosen the three business verticals for their large addressable markets coupled with long revenue streams. Strong core business, strategic M&A (16 acquisitions in the past 11 years) and a clean regulatory track record enabled PPL to achieve a revenue Cagr of 13% and Ebitda Cagr (incl other income) of 24% over FY12-22. The Ebitda margin (which includes other income) has expanded from 7.3% to 18% in the past ten years. PPL's CDMO business (~60% of FY22 revenue) comprises drug discovery & development (30%) and manufacturing (70%). CDMO faced execution challenges, high attrition at overseas sites and margin impact from higher raw material cost over the last 12-18 months. This has led to a sharp decline in the stock since listing. Raw material supplies have normalised, people have been rehired and trained, customer audits have resumed and new capex coming on stream in FY24 indicate that these issues are getting resolved. Strong YoY revenue traction starting 2HFY23 (seasonally strong vs 1H) should drive operating leverage benefit. Over the longer run, PPL's niche capabilities and flexible manufacturing infrastructure should strengthen its pipeline of under patent projects (currently 12% of CDMO sales) which have a steady revenue growth profile along with superior margins.
Shareholding:
Industry Analysis:
Indian pharmaceutical sector supplies over 50% of the global demand for various vaccines, 40% of the generic demand for US and 25% of all medicines for UK. According to the Indian Economic Survey 2023, the domestic market is expected to grow 3x in the next decade. India’s domestic pharmaceutical market stood at US$ 56 billion in 2023 and is likely to reach US$ 65 billion by 2024 and further expand to reach US$ 120-130 billion by 2030. In terms of overall revenue, the Indian pharmaceutical market increased by 15.9% in January 2023. India is the largest producer of vaccines worldwide, accounting for ~60% of the total vaccines, as of 2021. It is expected India's pharmaceutical business to develop at an annual rate of 11% over the next two years, to reach more than US$ 60 billion in value. The Indian Pharmaceuticals sector has seen some major developments, investments and support from the government in the recent past. The FDI inflows in the Indian drugs and pharmaceuticals sector reached US$ 29.90 billion between April 2000-Mar 2023. Indian drug & pharmaceutical exports stood at US$ 2,796.32 million in Mar 2023. Medical Device industry is expected to reach US$ 50 billion by 2030 growing at a CAGR of 15%. Over the next five years, India's medical spending is expected to increase by 9–12% placing it among the top 10 nations worldwide. The ability of companies to orient their product portfolio towards chronic therapies for diseases like cardiovascular, anti-diabetes, anti-depressant, which are on the rise, will also play a role in future domestic sales growth. Speedy introduction of generic drugs into the market has remained in focus and is expected to benefit the Indian pharmaceutical companies.
Pharma outsourcing is a large and growing industry:
Pharma companies outsource a part of their operations during any of the stages of discovering, developing and manufacturing pharma drugs/molecules. Pharma outsourcing can be due to a variety of reasons like lack of in-house capabilities, higher in-house cost structures, reducing time lags, capacity constraints. Pharma outsourcing is primarily done by companies involved in novel drug innovation but generics firms also outsource frequently.
CRO (Contract Research Organization): These firms help in drug research and clinical trials. They are primarily involved in drug candidate selection/filtering, bio-equivalence studies, conducting various safety and toxicology studies, other pre-clinical work, clinical trial recruitment, undertaking clinical trials, regulatory filings and data analysis. Most of the outsourcing to CRO companies is predominantly done by innovators or emerging biotech as generic drug manufacturers are largely involved in bio-equivalence and regulatory filing work.
CMO/CDMO (Contract Manufacturing Organization/ Contract Development and Manufacturing Organization): CMO/ CDMO companies help in scaling up manufacturing and optimizing process to develop drugs and engage in contract manufacturing. CDMOs get business from both generics and innovators, but business from the latter is more resilient and has higher profitability.
CROs and CDMOs present cost advantages to their customers as they do the same business for multiple clients which brings cost efficiencies for them. This becomes very prominent in manufacturing where efficiencies of scale are much more visible. Contract research firms help innovators to not only reduce overall cost but even R&D timelines are lower up to 40% vs time taken by in-house teams. CRO/CDMO companies not just benefit from their expertise and scale, but even location arbitrage comes in play as many CRO/CDMO companies are based out of low- cost locations in Asia and Europe. The rise of small/emerging pharma/bio-tech has made CRO/ CDMO indispensable as these new-age firms do not have all the required capabilities under the roof and are razor focused on certain segments of the pharma value chain.
Indian companies with niche offering stand to gain from the outsourcing wave:
Outsourcing to CROs/CDMOs has been on the rise over the last decade and this trend is expected to sustain. China has evolved as a major hub for R&D outsourcing over the last decade thanks to establishment of an R&D driven ecosystem in the country. However, as geopolitical tensions rise, Western firms are looking at an alternative to China. We believe select Indian companies with niche capabilities and a global footprint stand to gain from these trends. Interestingly, the outsourcing market is highly fragmented and only 1% of CDMO have annual revenue of over USD500m. Within the listed space, key Indian companies operating in this space are Divi's Labs, Syngene, Laurus Labs, Piramal Pharma and Suven Pharma. These companies have created a niche for themselves in areas like antibody drug conjugates, peptide APIs and biologics via organic and inorganic route.
PPLs CDMO offers niche capabilities along with flexible manufacturing:
For FY22, PPL derived 4% of its revenue from discovery services and 26% of its revenue from development services. The balance 70% of its revenue came from manufacturing which includes: a) USD56m revenue (12% of CDMO revenue) comes from products under patent and b) 58% comes from generics (own API supplies, supplies to customers including innovators for off- patent products and supplies of vitamins and minerals ingredients and premixes for Human Nutrition and Animal Nutrition). PPL's CDMO business registered 13% revenue Cagr over the last 10 years to reach revenue of INR39.6bn.
PPL's CDMO division has been struggling for growth over the past 6 quarters with varied reasons. Initially it was hit by high raw material cost during pandemic followed by execution challenges and high talent attrition at overseas sites as demand for biologics related products went up sharply. In addition, customer audits were deferred due to Covid related travel restrictions which led to slower offtake in new business. High inventory at customer end also led to softness in recent quarterly performance for CDMO. It is believed that some issues faced by the CDMO division may get resolved in the near term. Our channel checks suggest that raw material prices have been fairly stable of late while there has been some cooling off in logistics and freight cost. PPL has been able to replace personnel at overseas sites and with inventory levels normalising/customer audits started, there could be a strong YoY jump in revenue with significant improvement in profitability for 2HFY23 as CDMO is largely a fixed cost business.
Its flexible manufacturing structure is an advantage:
Unlike other Indian CRO/CDMOs, PPL has manufacturing plants in India as well as overseas countries like the USA, Canada and the UK. This allows PPL to tap customers who are reluctant to source from India or other emerging markets fearing IPR violations. While this strategy does impact the operating margin profile of PPL as it is not able to fully leverage the India cost advantage, it allows PPL to work closely with the customer and makes them eligible for marquee contracts in the future. In addition, PPL has cleared 36 USFDA inspections, 269 other regulatory inspections and 1,377 customer audits since FY12. It has a strong regulatory track record with zero official actions indicated (OAI) during any USFDA audits. The company also undergoes customer audits, making it better prepared for stringent regulatory audits. The company has progressed from 'Quality for Compliance' to 'Quality as a Culture', focusing on systems, processes, technology and people. The quality function works independently and directly reports to a board member at the company. A key focus area for PPL is driving regulatory and quality systems' automation across locations.
PPL has strengthened CDMO offering organically and through M&A:
Over the last few years, PPL has strengthened its CDMO capabilities through organic route and acquisitions. It acquired 100% stake in Hemmo Pharmaceuticals, enabling expansion into USD2bn global peptide API market. It also acquired 33% stake in Yapan Bio, thereby expanding capabilities for the CDMO business. PPL now offers peptide APIs, potent sterile injectables, High potent API (HP API), Hormonal OSD, biologic and vaccines and antibody drug conjugates (ADC) to its customers. PPL has a pipeline 188 molecules in various stages of development out of which 36 are in Phase 3 clinical trials. Historically 50% of the phase 3 molecules have reached commercial stage and PPL is banking to bag these contracts to increase contribution of 'on-patent' products and reduce dependence on generics. In FY22, sales from differentiated services contributed 21% of its revenue and the company expects to expand its capacity at several of its high demand and niche capabilities in next 2 years. These products have predictable revenue stream along with high profitability. PPL offers peptide APIs, potent sterile injectables, HP API, Hormonal OSD, biologics, ADCs services to clients.
CDMO business to witness faster Ebitda growth:
The company’s CDMO revenue should grow at a 10% Cagr to INR52.6bn over FY22-25E, double the market's growth rate. This will be driven by a strong order book, more than 30 late-stage projects, capacity addition at the Riverview and Aurora sites and the recent acquisition of Hemmo Pharmaceuticals, which specializes in peptide API development and manufacturing capabilities. As revenue traction improves and the contribution of 'on-patent' products increases, we expect the profitability of the CDMO business to rise sharply in the coming years. PPLs Complex Hospital Generics (CHG) division is its most profitable segment in our view. In this segment, PPL has presence in inhalation anesthesia, injectable anesthesia & pain management, injectable intrathecal therapy and other injectables. Many of these products have limited competition, are difficult to manufacture and have high entry barriers. PPL's strength is its comprehensive product portfolio and distribution network in over 100 countries and 6,000 hospitals in the US. There are four main product categories that are manufactured under this division, Inhalation Anesthesia (67% of CHG sales), injectable anesthesia and pain management (19% of sales), intrathecal (5%), others (5%). Injectable anesthesia & pain management portfolio was acquired from Janssen while intrathecal portfolio came from Mallinckrodt.
In inhalation anesthesia, PPL is currently 4th largest player globally and is industry leader in markets of US, UK, Mexico, South Africa and Brazil. Sevoflurane and Isoflurane are the largest products for PPL. The products are difficult to manufacture and require dedicated facility due to use of toxic raw materials. Global inhalation anesthesia market is worth USD1bn, and Sevoflurane constitutes 70-80% of the market, other products in this category are Isoflurane, desflurane, Halothane etc. US accounts for ~40% of the global inhalation anesthesia market and PPL has leadership in two key products Isoflurane and Sevoflurane. Its US market share for Sevoflurance is 43% as of Oct-22 and its key competitors are Baxter (31%), Abbvie (23%) and Sandoz (2%). In Isoflurane, PPLs US market share stands at 73% while Baxter (27%) is the only other player in the market. PPL is vertically integrated in Sevoflurane post the acquisition of Convergence Chemicals from Navin Fluorine. The injectable products have an addressable market size of USD53bn mainly comprising anesthesia, pain management, anti-infective, cardiovascular etc. The intrathecal and pain management portfolio was acquired from Janssen in 2016 and as per the agreement PPL had to continue with then CMO partner for next 5 years. The 5 years period for manufacturing with the CMO partner is over and PPL has switched to a new CMO which is lower cost producer.
PPL has total of 36 SKUs in the pipeline for CHG of which 11 are approved and yet to be launched. While the inhalation anesthesia portfolio will have steady high single-digit growth, we expect the injectable products to grow faster as PPL launches new products in the US and other developed markets leveraging its core strengths. In addition, new capacities should also boost growth from FY25. PPL manufactures Sevoflurane in its US facility at Bethlehem while Isoflurane and Halothane are manufactured at Digwal, India. For the past few quarters, PPL has been facing capacity constraint at its US facility due to which the business has not realised its true potential. PPL is now building a new facility for manufacturing Sevoflurane in India which will be ready by 3QFY24. Overall it is expected to achieve 14% revenue CAGR to INR32bn over FY22-25E for CHG business with a fairly steady margin profile. PPLs India Consumer Healthcare (ICH) is the 11th largest consumer healthcare business in India. The company has several renowned brands including Saridon, Supradyn, I-Pill, Tetmosol, Lacto and Little's. PPLoperates in the categories of Skin health, Women's health, analgesics, digestives and Vitamins, Minerals and Supplements. Piramal has six brands that feature in the top 100 OTC brands of India. These are called power brands and contributed 57% to its FY2 revenue. The company has a Pan-India footprint serving 200,000+ outlets across 2,000+ towns with the help of 1,250 sales force. PPL has carried out four acquisitions in this segment in the last five years. The addressable market size for PPL in ICH is USD5.5Bn with respective categories growing in the range of 6-12.5% annually. Typical gross margins for the addressable market are in the range of 60-80%, except for analgesics where margins are typically higher than 80%. PPL derived 22% of revenues in this segment from its largest brand, Saridon, which is an analgesic. The company's approach when it comes to addressable market segments involves going deeper in each of the categories it is present in through product introductions as well as brand extensions. In Analgesics, besides Saridon, Piramal has Sloan's and QuikKool gel. Similarly, in Skin care, Lacto calamine is the leading brand, supported by Tetmosol, Neko and Caladryl. Likewise, in Vitamins, Minerals and Supplements category Supradyn is aided by Ourdaily, Ferradol, Becozyme-C. In this manner, over time, the company believes it can continue to penetrate deeper in respective categories. The company's continued investments in brand building as well as sales force capability building continues to offer growth visibility. PPL has made efforts to build a robust infrastructure to service E-commerce channel and plans to launch E-commerce specific products/brand on a continued basis. Acquisitions will remain a long-term growth driver for PPL in this segment.
It is estimated that PPLs Ebitda (ex other income) will grow at a 24% Cagr during FY22 -25 to INR19.6bn by FY25. PPL's CDMO Ebitda should grow the fastest as the company leverages capacity expansion and executes orders. CHG Ebitda is likely to grow at a 16% Cagr driven by market share gains in new injectable product launches and capacity expansion. The ICH business should turn profitable by FY24 as it crosses the INR11bn revenue mark in FY24. We expect the most significant margin improvement for the CDMO business, followed by ICH as CHG has steady margin profile. Overall, we estimate a 6ppts margin (ex other income) improvement to 19% by FY25E. Over the next three to five years, PPL has guided Ebitda margins of 28-30% (which also includes other income), which is possible if CDMO margins improve sharply.
Key Management Persons:
Peter DeYoung: Peter DeYoung is the CEO of Piramal Global Pharma, Piramal Pharma Limited, and a member of the Piramal Pharma Limited Board. In his current role, Mr. DeYoung is responsible for steering strategy and driving profitable growth of the businesses. He has also previously handled leadership mandates as the CEO of Piramal Critical Care and President of Piramal Life Sciences.
Stuart Needlemen: Stuart Needleman is the Chief Commercial Officer at Piramal Pharma Solutions (PPS), where he leads all global business development activities. Delivering a portfolio of services that spans discovery to clinical and commercial supply of both drug substances and drug products, Mr. Needleman has guided the business development team to record results during his tenure. He has a track record of driving sustainable growth at attractive margins and has experience in developing seamless, integrated drug development and manufacturing solutions.
Herve Berdou: Herve Berdou is the Chief Operating Officer at Piramal Pharma Solutions (PPS). He is responsible for Operations and Research & Development (R&D) across all PPS sites in North America, Europe, and Asia.
Rashida Nazmi: Rashida Najmi heads the Corporate Quality and Pharmacovigilance function at Piramal Pharma Solutions (PPS). She is responsible for establishing and implementing related quality standards, handling inspections and maintaining regulatory track records of various regulatory agencies like FDA, MHRA and PMD.
Christopher Leahy: Chris Leahy heads the Global Finance function for Piramal Pharma Solutions (PPS) across North America, Europe and India. In his current role, Mr. Leahy is responsible for long term financial strategy, driving profitable growth for the business as well as financial reporting, analysis and internal controls. He has played an active role in M&A transactions, ensuring high returns on various growth capex investments, and helped secure the private equity investment into PPL in 2020.
Vikram Duggal: Vikram Duggal heads the Human Resources function at Piramal Pharma Solutions (PPS). He has over two decades of experience in the field of designing and implementing organization transformation interventions, talent sourcing, talent management and employee relations in pharma manufacturing and financial services.
Financials:
Profit & Loss:
Balance Sheet:
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Valuation:
PPL CDMO business trades at 12x Ebitda multiple, which is at a 24% discount to average multiple of peers and a 64% discount to Indian peers like Divi's. The Complex Hospital Generics (CHG) business is valued4at 12x Ebitda multiple which is in-line with global peers as it is a mature business with a steady margin profile. PPL trades at 14.8x/12.6x Ev/Ebitda multiple on FY24/FY25 basis which is at a significant discount to Indian peers.
Key Risks:
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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