Gland Pharma Cenexi acquisition: Rs 1,800 or Rs 2,500, where is the stock headed?

Gland Pharma's acquisition of Cenexi, a French CDMO, for an enterprise value of 230  million euro is likely to bring only limited benefits for the drug maker, said analysts, who said the buyout is margin dilutive. A few brokerages have prices targets for Gland Pharma in the wide Rs 1,800-2,470 levels

At 9.19 am, the stock was trading at Rs 1,835, down 2.37 per cent, taking its year-to-date fall to 53 per cent.

Kotak Institutional Equities expects Cenexi to constitute 25 per cent of the combined entity’s FY2024E sales and 15 per cent of Ebitda.

"Apart from higher scale, we see limited benefits from this deal for Gland," it said. Kotak said  while Cenexi’s flat sales growth is concerning, given the EU manufacturing base, its margin is unlikely to scale up to Gland’s level even in the long run. The brokerage has a 'Reduce' rating on Gland with a lower face value of Rs 1,800.

The company management intends to increase the profitability of Cenexi by improving operational efficiency at the Fontenay site, accelerating technology transfers, shifting some of the products to the Gland site from Cenexi, and adding capacities at its existing Cenexi sites.

Due to different cost structure, Nirmal Bang Institutional Equities is separately valuing the Cenexi Group and assign Rs 75 per per share value base on 10 times of CY24 EV/Ebitda. On Gland front, although it is not positive about the US generics market, the brokerage likes Gland Pharma because of its presence in low competition injectable segment, ability to build economies of scale with a partnership model and a strong compliance track record.

"We have downgraded Gland multiple from 28 times to 26 times due to uncertainty about implication of parent financial condition and continuous cost pressure at least in near term. we maintain Buy rating on Gland Pharma with revised target price (TP) of Rs 2,472, valuing it at 26 times PE," the brokerage said.

Motilal Oswal said while it has raised its EPS estimate by 3 per cent for FY24 to factor in additional business due to acquisition, the acquisition is margin dilutive and that the return ratios of Cenexi (post acquisition) for 2022 would be much lower than Gland's. 

"Accordingly, we reduce the PE multiple to 28 times from 31 times to arrive at a price target of Rs 2,470 on a 12-month forward earnings basis. We reiterate our Buy rating on the stock," it said.

On the positive side, considering the need for local presence to gain business in European markets, this acquisition would help Gland strengthen its business prospects in the market. Also, given that Cenexi has capabilities in processing substances such as hormones, suspensions, and controlled substances, it would expand the Gland's overall offerings.

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