Gland Pharma rises after bagging deal to supply Russia's Covid-19 vaccine

Analysts upbeat about company's revenues, but say it will have to bump up its capacity quickly to meet the Russian order

The Gland Pharma stock hit a record high on Tuesday after the company signed a deal to supply Covid-19 vaccines from its injectables facilities. The deal with the Russian Direct Investment Fund envisages the supply of 252 million doses of Sputnik V Covid-19 vaccine. The company also indicated that this was the first of multiple partnerships being explored to leverage its manufacturing capacity and capabilities to support the global supply of Covid-19 vaccines.

The delivery of vaccines is expected to start from the fourth quarter of 2021. Kumar Gaurav of Kotak Institutional Equities expects the opportunity size to range from Rs 200 crore to Rs 1,500 crore assuming the pricing to be in the $3-$6 per dose range. The reason for the wide variance in estimates is due lack of clarity on final pricing, markets it will be sold in, scaling up of capacities, and market share of Sputnik V in various countries. The gains, especially on the revenue front, are likely to come in the FY22-FY23 period.

While this is positive, the stock cannot sustain its momentum. After the uptick yesterday, the stock corrected about 7 per cent in trade on Wednesday. Analysts believe gains from the vaccine deal will accrue to the company for a short period and given multiple manufacturers are entering the fray, there may be surplus capacities in the vaccine market.

The company had an initial plan of making 40 million vials of finished product annually. Given the order for Sputnik V and plans to tie-up with other companies, it will have to substantially expand its capacities. This may entail investments for what may turn out to be a short-term opportunity. Given that these manufacturing lines need to be dedicated, the company will need to replace components before it can be used to make other injectable products.

In addition to this, the profitability of vaccines may not be significant, according to analysts. At $3 per dose and the logistics costs involved, the margin can be in the 10-12 per cent range, says an analyst at a domestic brokerage. If the company has other alternative products in the vaccine or other injectable categories, an expansion will justify the investment, says the analyst.

 While analysts have not tweaked their estimates after the announcement of the deal, a strong product pipeline, and market share and margin gains should help its revenues and profits grow by 20-25 per cent each over the next three years. Given a 39 per cent gain over the last year and valuation at 36xFY22 estimates, the upside from the core business is factored in.