EQL Pharma aiming for 19% Revenue Growth in 5 Years

Catalysts

• Recurring Cash Flow: EQL’s core generic product delivers near‐“infinite” cash flow, thanks to its essential role in healthcare. 
• Market Niche & Protection: Its product is too small for major competitors to challenge, ensuring a stable, low‐competition environment.
• Inelastic Demand: As the medicine addresses a fundamental human need, demand remains robust across economic cycles.
• Robust Pipeline Conversion & Growth Potential: With a current marketed portfolio of 40 products and an additional 40 in the pipeline, assuming a conversion rate of 80–90%. This implies that 32–36 new products could successfully launch, nearly doubling the portfolio in the upcoming 4-5 years.

Assumptions

• Revenue in 5 Years: Assuming the pipeline conversions translates to revenue, the underlying growth would correspond to a compound annual growth rate (CAGR) in the range of approximately 15–19% for the next five years with the majority of conversing occuring in the later part of 4-5 years. Hence I assume 19% revenue growth P.A for the upcoming years - in light of strong past execution. Introduction of new products to the pipeline could potentially increase expected growth.
• Based on historical data — where net profit margins have generally ranged between about 9% and 12% — and the outlook of doubling revenue through successful pipeline conversion, it's reasonable to assume that net profit margins could improve as scale efficiencies are realized. In a 5‑year scenario, net profit margins might be expected to reach the range of 16-18% assuming the midpoint for the model 17%. Corresponding to 70-75% of expected ebit margin which is expected to be in the range 23-26%, close to the company’s current financial target of ebit margin of 25%) as indicated in this analysis the assumption of improving margins are supported by the current margin expansion trend: https://www.kalqyl.se/wp-content/uploads/2025/02/EQL-Pharma-Rapportkommentar-Q3-2425-1.p

Risks

• Personnel Risk: The company’s success has historically depended on key individuals who have effectively executed its strategic agenda. Maintaining and attracting the right talent is critical; the departure of experienced executives or loss of specialized expertise could adversely impact operational efficiency and strategic execution.
• Geopolitical & Supply Chain Risks: International operations expose the company to geopolitical uncertainties—such as transport disruptions or regional instability — that can affect supply chains and increase operational costs. Past issues, like transport disruptions in key routes (e.g., the Suez Canal), demonstrate the potential impact of external factors.

Valuation

• Given that the industry average is around 19× while more comparable companies trade at about 30×, a reasonable P/E for EQL Pharma in 5 years would likely fall between these figures. Considering its stable, recurring cash flows from essential generics, along with a strong growth story driven, a multiple in the high teens to low 20s would be justified. If the company successfully executes its pipeline and further improves margins, the market could reward it with a P/E closer to 25×. Assuming PE ratio to be in the mid range. 23 PE is assumed in the model.
• Given the business model with steady, close to perpetual cash flows, discount rate remains at low at 6% adding ~1% to Simple’s 4.76% suggested rate, due to the current earnings not covered by free cashflow (negative 40-50 msek for 2023 and 2024).

What to Look for in the Next Quarterly Report

• Pipeline Progress: Updates on the conversion rate of the pipeline, particularly how many of the 40 potential products advance into the market. Key product launches and any changes in the pipeline composition (e.g., additional products in the review or launch phases).
• Financial Goals & Margin Expansion: Announcements of new financial goals and strategic plans that may revise current valuation assumptions.
• Strained cashflow/cash conversion needs to improve over the coming quarters to align with earnings over time.