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.
Profit & Loss:
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.
- Geo-political instability in key international markets.
- Raw material availability & Increase in the price of raw material.
- Licensing Norms.
- Currency risk.