Gland Pharma confident of margin recovery despite near-term dilution

Drugmaker Gland Pharma Ltd., which is acquiring one of the large European   contract pharma development and manufacturing company--Cenexi Group,  believes that the acquisition could be margin dilutive in the near term. However, the management expressed confidence about improving the margin profile over a longer time frame.

In an interaction with CNBC-TV18, Gland Pharma's Srinivas Sadu said that there is a lot of scope to improve revenue and profitability for Cenexi. For the Hyderabad-based Gland Pharma, a leading contract development and manufacturing (CDMO) company, Cenexi acquisition is a strategic deal.  Most of Cenexi's CDM revenue currently comes from Europe and it also exports to  several other global markets.

Gland Pharma on Tuesday had announced the acquisition of 100 percent stake in Cenexi Group for €120 million while the maximum consideration payable will be 210.3 million Euro based on addition of debt.

The Gland-Cenexi transaction is expected to be completed by March 2023.

The acquisition will leave Gland Pharma with Rs 2,000 crore in cash compared to Rs 3,800 crore earlier.

Sadu said that Cenexi started off with revenue from a low-margin business but is now moving to a high margin business profile as it has put a lot of projects in place over the last 18 months. He also said that higher utilisation will contribute to Cenexi's margin improvement.

Shares of Gland Pharma had gained on Tuesday after reports surfaced about the company's Chinese parent Fosun mulling a sale of its entire stake in the company. Sadu denied the reports by stating that there has been no communication from Fosun Pharma on stake sale of any form, adding that they don't communicate on a daily basis as Fosun is a large international conglomerate.

Gland Pharma is yet to give guidance for the current financial year. Sadu said that the company needs more time to provide guidance for the year as they are currently in a wait and watch mode with regards to the same.

For the September quarter, Gland Pharma reported a 3 percent drop in revenue while margin contracted over 650 basis points compared to the same period last year. Sadu attributed the earnings performance to a higher base and supply chain issues that hurt revenue and margin.

Brokerage firm Citi believes that how the two businesses will complement each other and generate synergies is yet to be determined. It further stated that the acquired business will have to achieve EBITDA margin of nearly 18-20 percent to turn EPS accretive. It had EBITDA margin of 13 percent in calendar year 2021.

Citi has maintained its sell rating on Gland Pharma with a price target of Rs 1,920.

On the other hand, Morgan Stanley views this acquisition favourably and believes that growth for Gland Pharma will resume in the next financial year. It has maintained its overweight rating on the stock with a price target of Rs 2,558.