Why don't other companies undercut Gland's (cost+profit margin+profit share) model especially when they enjoy such high margins? Does Gland deal in products where competition doesn't exist?
Also, isn't Gland expensive currently? I feel all ratios stop me from purchasing it, high PE, high PB, high Price/Sales, low CFO/EBITDA. Wanted to know your opinion on valuations given it leaves very less margin of safety compared to other opportunities present in the pharma industry.
PS: Love your Journal & insights. Thank you for the content.
Hi Aditya, see in theory a business with high margin would attract competition and that would reduce the margins. However, for practical purpose it works in reverse; having a higher margins is an indication that one is doing something that most others cannot do.
In case of Gland it would be ability to provide quality injectables supply without disruptions. In injectables space ability to make investments in large infrastructure and maintaining the quality compliance of such infrastructure is key. Typically, all a CMO does is it takes the entire IP from the partner and does pure manufacturing. But, Gland is not a pure CMO in the sense that it has its own R&D capabilities through which it files its own ANDAs and then license the same to other pharma companies, so the value provided by Gland is not only manufacturing but also an approved product portfolio that is ready to be marketed along with a ready supply.
In terms of valuations, I personally see valuations on a relative basis. It is not written anywhere that 25 PE is right or 10 PE is right or 50 PE is right. Neither is there a proper method to justify what constitutes a fair PE. Different cycles of market has a different valuation cycle as well. In the current market, all major players with similar business metrics like size of business, quality of company, ROCE, margins etc like Syngene, PI, Divis all trades at 50-60x multiple and Gland also trades in similar band.
On valuations side, I don't see margin of safety in the entire market honestly. Everything is priced to premium. Earnings growth is the only thing I am backing on for most of my portfolio, valuation re-rating is something I have already enjoyed and do not expect any more going ahead, but you can never be 100% sure in the market, the current 50-60 PE band can expand to 70-80 also who knows. But I won't risk my money betting on just that, if that happens its greats, if not, then i am happy with earnings growth.
Why don't other companies undercut Gland's (cost+profit margin+profit share) model especially when they enjoy such high margins? Does Gland deal in products where competition doesn't exist?
Also, isn't Gland expensive currently? I feel all ratios stop me from purchasing it, high PE, high PB, high Price/Sales, low CFO/EBITDA. Wanted to know your opinion on valuations given it leaves very less margin of safety compared to other opportunities present in the pharma industry.
PS: Love your Journal & insights. Thank you for the content.
Hi Aditya, see in theory a business with high margin would attract competition and that would reduce the margins. However, for practical purpose it works in reverse; having a higher margins is an indication that one is doing something that most others cannot do.
In case of Gland it would be ability to provide quality injectables supply without disruptions. In injectables space ability to make investments in large infrastructure and maintaining the quality compliance of such infrastructure is key. Typically, all a CMO does is it takes the entire IP from the partner and does pure manufacturing. But, Gland is not a pure CMO in the sense that it has its own R&D capabilities through which it files its own ANDAs and then license the same to other pharma companies, so the value provided by Gland is not only manufacturing but also an approved product portfolio that is ready to be marketed along with a ready supply.
In terms of valuations, I personally see valuations on a relative basis. It is not written anywhere that 25 PE is right or 10 PE is right or 50 PE is right. Neither is there a proper method to justify what constitutes a fair PE. Different cycles of market has a different valuation cycle as well. In the current market, all major players with similar business metrics like size of business, quality of company, ROCE, margins etc like Syngene, PI, Divis all trades at 50-60x multiple and Gland also trades in similar band.
On valuations side, I don't see margin of safety in the entire market honestly. Everything is priced to premium. Earnings growth is the only thing I am backing on for most of my portfolio, valuation re-rating is something I have already enjoyed and do not expect any more going ahead, but you can never be 100% sure in the market, the current 50-60 PE band can expand to 70-80 also who knows. But I won't risk my money betting on just that, if that happens its greats, if not, then i am happy with earnings growth.