Company Name – Gufic BioSciences Limited (Gufic) Current Share Price – INR 266 (April 13, 2022) Market Cap – INR 2,582 cr |
1. What is interesting about the stock?
The journey of the Gufic group started way back in the 1970s when Late Shri Pannalal Choksi imported a lyophilizer from the USA to produce lyophilized injections. Gufic was the first Indian company to do so. Lyophilisation, also known as Freeze Drying technology, is a process in which water is removed from a product after it is frozen and placed under a vacuum, allowing the ice to change directly from solid to vapor without passing through a liquid phase.
The benefits of lyophilization are many, which include enhanced product stability and shelf life. The market for lyophilized drugs has grown fast and almost 25-30% of the new injections manufactured over the last 5 years are lyophilized and this is expected to grow at a CAGR of 8-10%.
Over the years, Gufic combined its high-end lyophilization technology along with its R&D expertise to offer differentiated products targeted at Indian and international markets. Between 2007-09, Gufic ventured into contract manufacturing (CMO) services for various partners. Recently, the Company ventured into backward integration into API (Bulk Drugs) to control the volatility of the raw material prices of its branded formulation business. Gufic is now the 3rd fastest growing pharma company in India. It has grown its annual lyophilization capacity from 60 lakh vials in 2007-08 to 480 lakhs in 2020-21. The Company is undergoing a capacity expansion which would boost its lyophilization capacity to 840 lakh vials a year.
Let’s look at the business segments of Gufic in more detail:
A. Domestic Formulations Business – This segment generated about 55% of the revenues for the Company in FY21. They offer their product portfolio in over 15+ therapy areas and as of Mar-2021, they have 18 brands that generate more the INR 5 cr of annual turnover each. The management has guided 55-60% gross margins in this segment.
Gufic Super Specialty – This segment houses two major divisions in Criticare (Focused on treatment of critically ill patients) and Ferticare (infertility treatment). Gufic is one of the manufacturers of Amphotericin-B, which was used in the treatment of Black Fungus (a serious side effect of Covid-19 oxygen support).
Gufic Mass Specialty - Gufic has 2 SBUs to focus on mass specialty segments like General Practitioners, Paediatricians, Gynaecologists, and Physicians. The two SBUs are Gufic Spark - which focuses on therapy areas like anti-infectives, gastro, gynecology, and respiratory and nutraceuticals, and Gufic Healthcare – which focuses on natural and herbal products.
Gufic Specialty – This segment has two newly created SBUs – Stellar and Aesthaderm. Stellar is focused on Orthopaedic and Gynaecological products in various segments like pain, infection, pregnancy, lactation, bone, and muscle products. Aesthaderm has been launched with differentiated Aesthetic dermatology products in the moisturizing agents, anti-aging, hyperpigmentation, sunscreen, and pre/post-procedural products. Gufic is the first company to launch an indigenously manufactured Botulinum Toxin (for wrinkles and sagging skin) in collaboration with Prime-Bio, USA.
B. International Business – Gufic exports around 130+ products to 15+ countries globally, with around 150+ more products in the pipeline for registration. The major export markets are Germany, Russia, Africa, and the Middle East. This segment contributes about 15% of the total revenues.
C. Contract Manufacturing (CMO) Business – Gufic offers CMO services to 70+ partners for more than 150 products spread across multiple therapy areas. The focus is on developing markets like Africa, Southeast Asia, Australia, Canada, and the Middle East. Around 25% of the revenues come from the CMO division, which has a gross margin of 30%.
D. API/Bulk-Drug Business – While this division contributes around 5% of the total revenues, it was mainly formed as a part of a backward integration strategy to insulate Gufic from the cost pressures of raw materials. This division produces APIs for antifungals along with their intermediates, antibacterials, and anesthetic agents.
Key Future Growth Drivers for Gufic -
Botulinum Toxin and other Peptides – The global market for Botulinum Toxin is about USD 6.5 billion, wherein ‘Botox’ manufactured by Allergan is the global market leader. This injection is used for smoothing wrinkles and fine lines along with several other cosmetic treatment applications. Sales are expected to increase with the drug finding use in treatment beyond aesthetic applications, such as migraines, eye squints, excess sweating, leaky bladders, severe muscle spasms, and depression. ‘Stunnox’ Brand manufactured by Gufic aims to capture market share in this segment. The Indian market for Botulinum Toxin stands at INR 120 cr and is still in a nascent stage. Hence, Stunnox can be a massive game-changer for Gufic. The high regulatory and safety standards required for manufacturing, storing, and transporting the product acts as an entry barrier for other competitors. Other variants of botulinum toxin available in Indian markets are imported from Korean (SIAX and Nabota) and French (Dysport from Ipsen) companies. Compared to Botox (INR 16,000/vial), Stunnox is priced in the affordable range of INR 8,000-9,000/vial. Gufic has also forayed into a class of drugs called Peptides (a high entry barrier due to complex chemistry). Immunity (Thymosin Alpha), infertility (Recombinant products), and several other products in the critical care segment are key focus areas for this class.
Foray into New Drug Delivery System (NDDS) – With the lyophilization process becoming a commodity in the pharma space, Gufic has ventured into pre-filled syringes, dual-chamber bags, and dual-chamber syringes for its Criticare and Ferticare divisions. This can open new growth avenues in domestic as well as international markets.
Foray into immuno-oncology – Gufic has recently entered into an agreement with Selvax Technology for development activities for immunotherapy (an alternative cancer treatment). Again, this is a nascent market where huge growth can be unlocked in the coming decade.
Capacity expansion to serve Indian and international markets- Major upcoming capex will lead to further growth in the India and exports business. The combined capex planned in the Indore Unit-II facility and the Penem Block in Navsari is around INR 320 cr, out of which INR 170 cr would be from internal accruals.
Sector Outlook
India has a prominent and rapidly growing presence in the global pharmaceuticals industry. It is the largest provider of generic medicines globally, occupying a 20% share in global supply by volume, and supplies 62% of global demand for vaccines. India ranks 3rd worldwide for production by volume and 14th by value. According to the Indian Economic Survey 2021, the domestic market is expected to grow 3x in the next decade. India's domestic pharmaceutical market is estimated at USD 42 billion in 2021, likely to reach USD 65 billion by 2024 and further expand to reach ~USD 120-130 billion by 2030.
A major challenge for Indian pharma companies, selling in the domestic market, is the pricing controls imposed by the National Pharma Pricing Authority (NPPA) which prohibits them from increasing prices on certain drugs even when faced with the increasing price of raw materials.
Competitive advantages (MOATs)
Cost differentiation – The INR 5,000 cr critical care market in India is dominated by MNCs like Merck and Sanofi. Gufic has managed to create a niche for itself because it can sell the same molecules for about one-fourth of the cost. This is achieved through the economies of scale for the product pipeline, continuous investments into New Drug Delivery Systems (NDDS), strong distribution reach through 23 Cost and Freight (C&F) agents across India, and backward integration into API manufacturing for the same molecules.
Technology/molecular differentiation – In areas where price differentiation is not possible, Gufic competes on molecular or technological differentiation. Another distinctive strategy by Gufic while entering a new therapeutic area or a new international market is to offer the entire basket of products across the segment. Hence, in any new segment Gufic enters, it aims to be among the top 3 players. The company spent ~8% of its revenues on R&D in FY22 which is exceptional for a company of its size.
Strong pipeline of molecules – For an R&D-focused organization, major value unlocking happens when patents are granted for its molecules. For Gufic, 5 new patents have been granted and another 8 are in the process of filing. Along with that, Gufic has a portfolio of 50+ projects across all therapy areas. Additionally, 17 projects are in various clinical phases. In the international business, around 150+ products are in the pipeline for registration.
2. Key Historical Financials
Gufic has recorded a sales CAGR of over 22% over the last 10 years. This has also coincided with an increase in EBITDA and PAT margins.
Company has continuously been in capex mode and hence D/E ratio was on the higher side. However, Gufic has reduced debt in the recent quarters and with the newly commissioned plants expected to be commercialized by Q4CY22, Free Cash Flow is expected to further increase from its regular business.
There is a one-time boost in revenues in FY21 & FY22 due to Covid-19 (~ 15% topline impact) which is expected to go away in FY23. However, management is confident of 15%-20% Y-o-Y organic growth continuing for the foreseeable future.
ROCE and ROE have been >20% in the recent few years. However, R&D expense is going to go up as Gufic ventures into complex molecules like peptides and biologicals.
Working Capital cycle has increased from 81 days in 2016 to 130 days in 2019. The WC cycle has again decreased to 80 days in FY21, boosted by Covid-19 critical drug sales.
3. What is my view on Company valuation?
At 29x TTM P/E ratio, Gufic seems to be fairly valued given the growth trends and management guidance of 15-20% growth. The branded formulations business is expected to continue being a cash cow for Gufic. The Return on Incremental Invested Capital (intrinsic compounding rate) is about 23% for the last decade. The current valuation indicates a PEG ratio of 1.5x
However, we must keep in mind the massive PE re-rating that can be achieved with the growth and commercialization of ‘Stunnox’ and other specialized molecules as the opportunity size is huge
Backward integration into API manufacturing can control the raw material volatility to some extent and improve the margins
Median P/E for Gufic has been around 34x, which means it is currently trading at multiples close to its historical valuations.
4. What are the risks to the investment analysis?
Risks to the analysis are:
Some of the therapeutic areas where Gufic operates are highly competitive, and it might face margin pressure in the future. Also, the presence of NPPA means Gufic cannot pass on the price increase of raw materials to the customers, as it operates in the life-saving drugs segment
For Stunnox to grow big, it must compete with ‘Botox’ which is a behemoth brand in this segment
Biologicals and immunotherapy have a low success rate and high complexity and can be cash guzzlers in the near term
About the Author
I am an MBA grad from the Indian Institute of Management, Bangalore, and currently working as a corporate finance specialist in a technology-based startup. I have cleared all 3 levels of CFA, US. I am an avid reader of businesses and like to analyze emerging trends in various sectors and macroeconomy.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.