Stevanato Group S.p.A.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Stevanato Group S.p.A. is a global provider of drug containment, drug delivery, and diagnostic solutions, primarily serving the pharmaceutical, biotechnology, and life sciences industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Stevanato Group is a global provider of glass primary packaging solutions for the pharmaceutical, biotechnology, and life sciences industries. They also provide engineering, automation, and analytical testing services to support pharmaceutical companies throughout the drug development lifecycle. The company has a diverse product portfolio that includes pre-fillable syringes, cartridges, vials, ampoules, and other specialized containers. The company’s global scale is underscored by its manufacturing facilities in multiple continents and sales operations in over 70 countries.

Revenue Distribution:

  • Biopharmaceutical and Diagnostic Solutions: This segment focuses on developing, manufacturing, and selling drug containment and delivery solutions (e.g., cartridges, syringes). It represents the core revenue generator of the company.
  • Engineering: This segment focuses on the development and manufacture of equipment and systems. It’s responsible for the automation of the production process and for the development of customized production solutions. It’s responsible for manufacturing, testing, and delivery solutions.

Trends in the Industry:

  • Growing Demand for Biologics: The biopharmaceutical market is experiencing strong growth, driven by the increasing demand for biologics and biosimilars. These drugs, which are more sensitive to environmental factors and have more stringent quality requirements, are fueling demand for higher-quality, customized containers and delivery systems, such as those produced by Stevanato Group.
  • Trend toward Parenteral Drugs: There is a broader shift towards injectable drugs and away from oral dosages. This shift is influenced by greater efficacy of injectable drugs in treating certain conditions which drives demand for parenteral containers.
  • Emphasis on Patient Convenience and Safety: There’s a clear focus on more user-friendly and safer drug delivery devices, such as self-injection systems. This shift requires more advanced designs and greater innovation in packaging, contributing to demand for more complex and specialized solutions.
  • Increased regulatory scrutiny: Increasingly, regulatory oversight and the enforcement of stringent international standards on pharmaceutical manufacturing and packaging are driving up customer requirements. These factors contribute to the demand for high-quality solutions and services.
  • Impact of the COVID-19 pandemic: The COVID-19 pandemic highlighted the fragility of global supply chains, and the increasing emphasis on secure and stable production. The increased demand for vaccines and new drugs have highlighted the requirement for the rapid and seamless production of containers that meet stringent quality and safety requirements.

Margins:

  • Gross profit for the 3 months ended Sep 30 2023 was EUR 174.8M or 36% of revenue, compared to 33% for the 3 months ended September 30 2022, it also highlights that it is a steady increase in margins compared to 32% for the year ended December 31, 2021.
  • Operating profit margin, which was 16.2% and 14.9%, for the three and nine months ended September 30, 2023 respectively, is improving compared to 13.6% in FY2022.

Competitive Landscape:

  • Stevanato Group competes in a complex market against numerous players. The market is partially fragmented, however, with a few big companies having global reach and market dominance. The industry also includes many smaller, local companies providing solutions and equipment.
  • There are several strong competitors.
    • Gerresheimer, a German company, offers glass and plastic primary packaging solutions.
    • Schott AG, also German, produces specialty glass for various applications including pharmaceutical containers.
    • BD (Becton, Dickinson and Company), which sells injection and infusion systems to be used with drug packaging
    • Catalent and West Pharmaceutical Services also compete in parts of the market, as they offer a variety of pharmaceutical packaging and drug delivery solutions.
    • Numerous smaller companies also compete on a regional and local level.
  • The major differentiators among those companies are: quality and reliability of production, innovation of new products, and pricing strategies.

What Makes the Company Different?

  • Integrated Solutions: Stevanato provides integrated solutions spanning the entire lifecycle of injectable drugs from container manufacturing, and engineering, to analytical and advisory services. The one-stop-shop offering allows for better customer integration and high switching costs.
  • Proprietary Technology: Stevanato develops and engineers its own specialized glass for pharmaceutical applications and customized packaging machinery. The proprietary knowledge enables a competitive moat.
  • Global Manufacturing Footprint: Stevanato has manufacturing facilities and commercial operations around the globe with the majority of their business coming from Europe, this allows them to be close to their large customers, making logistical coordination simpler.
  • Focus on High-Quality Products: The production processes of the company are tightly controlled and designed for safety and quality which allows the company to cater to the demanding needs of the healthcare industry.
  • Strong Customer Relationships: With deep expertise in the pharmaceutical and biotechnology industry, the company often collaborates with its clients to develop custom solutions to their needs. The collaborations enhance customer loyalty and provide the company with good insight for future products.

Financials in Depth:

  • Recent Results (Q3 2023):
    • Revenues increased by 7.6%, or 9.3% on a constant currency basis, to 277.7M.
    • Gross profit amounted to 174.8M with a 36% margin, an increase from 33% in the corresponding period last year.
  • Net profit rose to 70.7M compared to 69.7M in the previous year. * Adjusted EBITDA was 91.6M or 32.9% of revenue for the 3 month period, and is 29.3% year to date.
  • Balance Sheet (as of September 30, 2023):
    • Total assets: EUR 2.2 Billion.
    • Total liabilities EUR 1.0 Billion.
    • Equity: EUR 1.1 Billion.
  • Debt:
    • Net debt is EUR 752.5 million, which is a decent amount to have but manageable. The debt consists mainly of bank loans and notes, both of which are repayable over the coming years.
  • Cash Flow:
    • Free Cash Flow amounted to 181.3M in the nine months of 2023.
  • Growth:
  • The company expects revenue to increase in the mid-single digits over the long term, with the Biopharmaceutical and Diagnostic segment in particular driving growth.

Recent Concerns/Controversies and Management Viewpoints:

  • Supply Chain Disruptions: The company has faced problems with its supply chains and has worked extensively on diversifying its suppliers to deal with these problems going forward.
  • Inflationary Pressures: Similar to most other industries, the company has been dealing with higher material and energy costs, but has offset a part of this by increasing their prices. Management indicated that pricing is set to continue and also is reflected in the higher gross margins this year compared to last.
  • Impact of COVID-19 Pandemic: The company has seen changes in operations and increased sales and profitability due to the need for drug delivery solutions during the pandemic. Now, going into a post-pandemic phase the company plans on keeping a part of this high performance.
    • Management has said that it will be more selective in choosing new contracts based on profitability and to not grow at all costs.
  • Growth Strategy: Management is focusing on strong organic growth, while being open to further strategic investments.
    • The core strategy of the company includes increasing sales of high-value and high-margin products, increasing efficiency and implementing cost reduction initiatives, and exploring new markets and geographies to expand its presence.
    • Management is expecting growth to be slow in developed markets such as Europe and North America, while it will be faster in Latin America and other emerging markets.

Moat Analysis: 2 / 5

STVN’s economic moat is narrow and is primarily driven by a combination of factors. They have a relatively strong moat based on switching costs, their scale and proprietary production technology. They do have a decent level of intangible assets, and some network effects, but their impacts are small, making their moat not wide.

  • Intangible Assets (Brands, Patents, Regulatory Licenses): They have a few intangible assets that give them an advantage, such as specialized glass manufacturing techniques that are not easily replicated, but have nothing that significantly limits competition in a broad sense.
    • The brand is not too strong and would not be a large source of revenue if competitors are able to produce similar products.
    • Patent protection is limited to some very specific technologies, and is not enough to stop other players from competing.
    • They do however, benefit from having a regulatory approval, but this is mainly from the manufacturing process, and is not related to the pricing or product features, so it does not generate any pricing power.
  • Switching Costs: Switching costs are moderate. Because their product offerings are complex and heavily integrated in the supply chain, customer switching is costly, but not impossible. Customers often prefer stability, so this limits competition.
  • Network Effects: There’s limited network effect, but the business tends to become more attractive for buyers when there is a large supply of production capabilities. This also helps lock-in new customers.
  • Cost Advantage: Although the company has a global operation and production facilities, they do not have any specific cost advantages over competitors, they do not rely on location, scale or proprietary materials.
  • They do try and optimize their supply chain to limit and control costs.

Risks to the Moat and Business:

  • Technological Disruption: A major risk is technological disruption in materials science and production. New materials or new production methods may make STVN’s proprietary technology obsolete. For example, new plastics, new types of coatings, or new types of drug delivery may emerge and render some of the current processes redundant.
  • Intensifying Competition: Increased competition, especially from Chinese and other low-cost manufacturers, could lead to lower prices, a price war, and reduced margins, eroding overall profitability.
  • Regulatory Changes: The industry is highly regulated and future regulatory changes could affect the cost and ease of doing business.
  • Dependency on Key Customers: STVN has long contracts with pharmaceutical companies which gives them reliability, but loss of, or a major changes, in these contracts may negatively affect future results.
  • Currency Fluctuations: As a global company, they are exposed to fluctuations in foreign exchange rates. This can affect profitability, especially when raw materials prices are fixed at a specific currency.
  • Supply Chain Issues: The company is also susceptible to supply chain disruptions, material shortages, or quality problems.
    • The war in Ukraine has caused problems for some of their suppliers. The company needs to keep finding new suppliers to ensure future production isn’t slowed down.
  • Economic Downturns In the event of a recession or a global economic downturn, sales from the engineering division might fall with reduced capital expenditures from manufacturers.

Business Resilience: Stevanato has shown resilience over time and also shown the ability to adapt to changes, specifically in the last few years with the pandemic and recent supply chain challenges. A major factor in its resilience is the high quality and safety standards, making it difficult for customers to switch to other companies. Also, they operate in a necessity industry, since they cater to the pharmaceutical and biotech industries which rely on their products. The company also has been diversifying their supply chain and markets, reducing exposure to a single economic factor or a specific country, which is also good from a risk perspective.

Understandability: 3 / 5

The company has a decent understandability for a normal investor with a financial background. It helps that the basic products sold by the company are fairly straightforward (packaging for drugs) - as opposed to very complex business models.

  • The company sells glass containers for pharmaceutical applications and equipment, both of which are relatively simple and readily understandable.
  • However, the complexity lies in the technical specifications of the glass products and the regulatory environment of pharmaceutical and medical devices. These can add an extra layer of complexity for those without prior experience in the industry.
  • The engineering and automation components can also be tricky to understand because they involve several types of technical expertise.
  • The company provides a good explanation of their core financial drivers in their filings.
  • The company’s financial reports and earnings presentations can be overwhelming for the casual investor.

Balance Sheet Health: 4 / 5

The balance sheet of STVN shows moderate health with a good level of equity, and a manageable amount of debt. The company is cash flow positive, and has adequate liquid assets to cover debt obligations. The risks associated with their balance sheet aren’t too severe to threaten the company’s survival, however, a large portion of their assets are in intangible ones such as goodwill, and some of their liabilities are from deferred taxes, which can be hard to estimate. Overall, the balance sheet is in a good, but not perfect, shape.

  • Debt: The total debt of EUR 1.0 billion is manageable compared to its total assets. The short-term nature of the debt is somewhat concerning, but the company has generated a positive cash flow, which would allow for paying off those debts without issue.
  • Cash: The cash level is around EUR 200 million which is more than enough for its operational and financial needs.
  • Equity: Equity is stable and makes up the majority of the total liabilities and equity, suggesting that they have a sound base and aren’t overleveraged.

conclusion

STVN is a specialized supplier for the pharmaceutical and biotechnology industries with a narrow moat stemming from high switching costs, proprietary technology, and scale benefits. Their financials are positive and growing, and the company has been dealing with its financial obligations carefully. However, the business is susceptible to disruption and economic cycles, especially with rising competition in the industry.