Comparing the Pharmaceutical Glass Packaging Players

Welcome to this week's newsletter, where we dive deep into the income statements of key players in the pharmaceutical packaging industry. Continuing with the series of newsletters started this year on this sector, today our analysis will shed light on how Stevanato Group, Schott Pharma AG, and Gerresheimer AG stack up against one another.

DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.

Income statement

Let’s start looking into the comparison of some of the most relevant income metrics I look into a companiy’s fundamentals.

Margins

As illustrated in Figure 1, the sector's margins are moderate, fluctuating between 30% and 36%. Notably, these margins have exhibited an upward trajectory in recent years, culminating in a peak in 2022 (mirroring the broader pharmaceutical sector). Currently, the sector's margins are undergoing a process of normalization.

Regarding operating margins, a significant disparity exists between Gerresheimer AG and its competitors. As discussed in my previous writing about the pharma glass packaging sector players, Gerresheimer's revenue stream is less reliant on glass packaging and more diversified with plastic-based solutions. This diversification likely contributes to its superior operational performance.

Despite reporting gross margins around 30%, Schott Pharma AG and Stevanato Group maintain operating margins are near 20%. This demonstrates their exceptional operational efficiency. Given that their primary expense is manufacturing supplies, as pharma glass production is an energy-intensive process demanding skilled labor and specialized materials tailored to specific products, this efficiency is particularly noteworthy.

Same trends described for the previous two images are found when looking at the net profit margin (figure 3). It is remarkable how Stevanato Group net margin is still normalizing while Schott Pharma AG keeps trending upwards. This responds to market dynamics which I will later explain (see Stevanato Group and the pharmaceutical industry destocking section).

Revenue, operating profit & net profit growth

In the table below I have computed the growth rates of revenue, operating profit and net profit from 2020 to 2024 (using the estimates).

As it can be observed, Stevanato Group not only shows the largest revenue growth but also largest EBIT & net profit growth rates. This is explained as it is the company with the most remarkable margins improvement, showing its operating leverage through the accelerated growth rates of EBIT & net income.

In contrast, Gerresheimer's operating leverage is minimal, resulting in a close correlation between revenue growth and net profit growth. Schott Pharma AG's situation falls somewhere between these two extremes.

Revenue per employee

In this section, we examine key performance indicators (KPIs) to gain deeper insights into the companies' business performance. One such metric is revenue per employee. As shown in Figure 4, Schott Pharma and Stevanato Group consistently generated higher revenue per employee than Gerresheimer. For example, in 2023, Schott Pharma and Stevanato Group achieved over €190,000 per employee, while Gerresheimer generated only €170,000 (a 10.5% difference).

Note: I have checked some of the data points on the annual report and they are very accurate but ChatGPT didn’t nail it, e.g. Gerresheimer report number of employees at the end of 2023 was 11660 and not 12000.

Balance sheet

Firstly, none of the three companies have a net cash position (Stevanato had it back in 2022 but not anymore). Hence, looking at the cash generation power of the companies to repay their debt, it can be observed that Stevanato Group and Schott Pharma AG have little debt compared to the cash the business generates. On the other hand, Gerresheimer AG has a Net Debt/EBITDA ratio which I consider a little too much than what I like to see.

Regarding the balance sheet composition, all companies use mainly equity to finance their assets with Debt to Equity ratios lower than one (see Figure 7).

Gerresheimer AG's interest coverage ratio of 4.2 is relatively low, indicating some financial strain. In contrast, the other two companies demonstrate strong financial health with comfortably covered interest expenses.

Cash flow statement

I have calculated the FCF margin of all those firms (see table below). As it can be observed Schott Pharma AG has the larger FCF margin at a remarkable 9%.

Moreover, it should also be noted the large CapEx cycle Stevanato Group has undergone during the last years judging by its larger CapEx/Revenue ratio, which has been twice as large than peers during the last two years. (see figure 9). I will develop further later on this topic.

Working capital (WC) management

All three companies maintain positive working capital, meaning they invest in expenses before generating revenue from sales. The table below shows the working capital as a percentage of revenue for each company. Notably, Gerresheimer AG has a lower working capital ratio compared to the other two, suggesting more efficient management in this area. This efficiency might be attributed to their product mix, which includes plastic packaging. It is also observed in the shorter cash conversion cycle of Gerresheimer AG (see figure 10).

Conclusion

Overall, this analysis of the three primary competitors in the pharmaceutical glass packaging sector demonstrates that the more specialized companies exhibit superior performance across key metrics. Additionally, they maintain more conservative balance sheets, indicating a prudent financial approach of their management teams.

Moreover, out of the two focused players, Schott Pharma AG and Stevanato Group, I will continue investigating on the former because of the following features:

• More profitable and operational efficient.

• More conservatively managed.

• Recently listed (< 1 year) so the chances of it still being

• More robust to downturns, as discussed below.

Stevanato Group and the pharmaceutical industry destocking

Stevanato Group has, as part of its 2020-2023 industrial plan, allocated half of its CapEx budget to expanding production for their EZ-fill® platform. In addition to the EZ-fill® expansion, Stevanato is investing in the development of high-performance syringes and integrated drug delivery systems and they have also initiated the construction of a Technology Excellence Center in Boston.

Stevanato Group has recently faced some signals indicating a potential lack of demand. In their Q1 2024 financial report, the company reported a revenue decline attributed primarily to lower demand for their glass vials. This decline was noted to be due to industry-wide destocking, particularly affecting their EZ-fill vials, suggesting a possible slowdown in customer orders as clients worked through excess inventory accumulated during previous periods of high demand​. In figure 11 you can see how its days of inventory outstanding have skyrocketed from roughly 91 in 2021 to 135.3 in 2024 (17.23% CAGR vs 12.2% CAGR for Schott Pharma AG)

In light of these factors, there are concerns about whether Stevanato Group's capacity expansions and capital investments could lead to operational inefficiencies or overcapacity if demand does not recover as anticipated.

Hope you enjoyed this newsletter and thank you one week more for joining me into analising such an interesting sector (especially considering all the time is taking me between each newsletter dedicated to it).

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