Dishman Carbogen Amcis: Potent tonic (Buy)

The company derives its strength from the oncology-focused pipeline and CRAMS portfolio

Indian pharma players selling generic drugs have been on the back-foot over the last few years due to multiple headwinds in key markets.

Though many major pharma companies reported improving set of numbers in the last few quarters, the recovery seems to be gradual, given the lower generic opportunity in the key US market, rising competition and continuing regulatory overdrive on domestic plants.

However, Indian companies engaging in contract research and manufacturing services (CRAMS) activities are expected to do well, due to the availability of English-speaking, low-cost and highly skilled professionals in India.

Increasing price of inputs in global pharma industry and patent expiries are shrinking margins in the pharma industry. The global pharmaceutical companies are, therefore, driven to outsource the drug development to leverage their resources, spread risk and focus on issues imperative to their survival and future growth.

Dishman Carbogen Amcis is one such company that stands to gain from its CRAMS portfolio with diversified clients, R&D expertise and better utilisation of its facilities.

Over the medium to long run, the growth prospects of Dishman look robust, given its strong oncology-focused pipeline, improved focus on high-margin molecules and increasing sales of Vitamin D analogues.

At the current price of ₹190, the stock trades at 21 times its trailing 12-month earnings, compared with its three-year historical average of 29 times. This PE multiple is far lower than the valuations of 50 times that its peer Divi’s lab enjoys.

In 2017, the stock was impacted by deferment of certain contracts and weaker sales of Vitamin D, which hit both revenue and profits. Investors with a long-term horizon can consider buying the stock at current levels.

In the nine months ended 2018-19, Dishman’s consolidated revenue grew by 13 per cent (year-on-year) to ₹1,409 crore and net profit was up by 31 per cent to ₹135 crore. The company’s operating margin stood at 27 per cent during the period.

Business structure

Incorporated in 1983, Dishman provides CRAMS services worldwide and supplies marketable molecules such as bulk drugs, intermediates, specialty chemicals, vitamins and chemicals.

The company has capabilities in process research and development and works on projects ranging from early to late-stage clinical trials and commercial manufacturing. It now has 10 manufacturing plants — four in Switzerland, two in India, and one each in France, the UK, the Netherlands and China.

The company derives revenue from the two segments — CRAMS and marketable molecules. About 76 per cent of the total revenue (as on December 2018) comes from the CRAMS segment that involves contract research (CRO) and contract manufacturing (CMO). The remaining 24 per cent comes from marketable molecules, including Vitamin D analogues and generic APIs. The top five clients are Mylan, Abbott, J&J, Novartis and Celegene, accounting for 19 per cent of its total sales. About 75 per cent of revenue comes from repeat orders.

Integrated CRAMS business

Dishman’s CRAMS business is divided into Dishman CRAMS India and Carbogen Amcis AG (includes Europe facilities).

CRAMS India, that accounts for 16 per cent of total sales, is a high-margin business for the company (60 per cent operating margin as of December 2018) and takes care of manufacturing of large-scale commercial batches.

Carbogen (contributes 56 per cent of sales) handles the research and clinical trials by working with the innovator pharma companies (early to mid-stages of a drug lifecycle). However, the margin has been low at 20 per cent. Carbogen has 250+ innovator companies as its clients, of which 80-85 per cent are small pharma companies.

From FY11-18, the CRAMS business grew at a CAGR of 10 per cent. Currently, Dishman operates in four therapies, including oncology, cardiac, CNS and ophthalmology. Overall, there are 450+ molecules under development. Currently, Dishman has a strong CRAMS order book of $130 million.

In 2015, the company restructured its business strategy by implementing a strict margin criteria. This led to a significant jump in the operating margin but resulted in tepid growth in FY16 and FY17.

Promising segment

Oncology is the key focus segment for Dishman (currently contributes 50 per cent of the sales), which is expected to be the most critical therapeutic segment, driving global spend in medicine.

IMS has projected that the oncology segment is expected to grow at a CAGR of 12.7 per cent in CY16-22 and sales is expected to reach $192 billion. Focusing on this, Dishman has set-up a dedicated high potency (HIPO) API facility at Bavla.

With the current pipeline of around 25 molecules in early Phase III and 15 molecules in late phase III (50 per cent are high potency oncology products), Dishman is expected to generate substantial cumulative revenue over the medium to long term.

Among the commercialised products, Niraparib (API for ovarian cancer drugs) is also being tested in various other indications, including metastatic breast cancer, lung cancer and prostate cancer.

 

Any positive development could prop up Dishman’s sales. Launches of potential blockbusters like Crenolanib and Nuzyra will also be expected to drive earning growth.

Profitable Vit-D analogues

The marketable molecules vertical has four sub segments — generic APIs, specialty chemicals, vitamins and chemicals and disinfectants.

The company restructured its portfolio and exited from the formulation of low-margin Vitamin D products to high-margin Vitamin D analogues, that resulted in higher profitability.

Dishman now aims to forward integrate the Vitamin D analogue business into development and manufacturing of finished dosage form the next 12-24 months. Moreover, with the focus on niche generic APIs (especially oncology), this is likely to support future growth.

No major capex has been planned for the next few years; hence, the profitability should improve.

Commissioning of the new development building in Switzerland and Vit-D Softgel capacity in India, expansion in the high potency facility and ramp up in the China API plant will enable double-digit revenue growth and drive margin expansion in the next two to three years.

 

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