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R e v i v a l o n c a r d s …
We met the management of Divi’s Laboratories (DLL) to get insight of
business model and growth plans. DLL is engaged in manufacture of
generic APIs, custom synthesis of active ingredients for innovator
companies and other speciality chemicals like peptides and
nutraceuticals. DLL’s product portfolio comprises of two broad segments-
(i) Generic APIs including Nutraceuticals and (ii) Custom Synthesis of
APIs, Intermediates and Speciality ingredients for innovator pharma
giants. It also includes peptide building blocks. The sales break-up
between these two segments is almost 50:50 (FY11). The company
remains committed to only few research driven opportunities as was the
case when it started commercial operations in the early nineties. This is
why so far it has filed just 39 odd DMFs and doesn’t want to increase its
count drastically. To enter custom synthesis space in the nineties, the
company made its own case to the innovators which, until then were
relying on services provided by major players such as BASF, Degussa
etc. As these players grew and became as big as the innovators
themselves, companies like DLL on account of their capabilities and
commitment towards strict IP regime, started getting assignments. DLL
currently owns 3 manufacturing facilities- One in Nalgonda near
Hyderabad and two in Vizag. It is in the process of setting up 4th
manufacturing facility also in Vizag.
Business model
Generic APIs
The company manufactures generic APIs and advanced intermediates for
off patented APIs. So far it filed 39 DMFs with the USFDA and 10 DMFs
with the EDQM. Generic APIs account for nearly 50% of total sales. The
key APIs are Naproxen, Dextromethorphan Hydrobromide, Lopamidol &
Phenylephrine. DLL enjoys more than 70% market share across the globe
for APIs like Naproxene and Dextromethorphan hydrobromide.
Naproxen is a non-steroidal anti-inflammatory drug (NSAID) used in the
treatment of arthritis, spondilitis and other inflammatory conditions.
Around 18% of DLL’s total revenues come from Naproxen. Its DMF was
approved by both USFDA and by EDQM. Other players which
manufacture Naproxen API are Roche, Teva, Albemarie, Farchemia and
Dr Reddy’s Laboratories. Around 9% of the total revenues come from the
Dextromethorphan Hydrobromide API. The API is a cough suppressant,
which is a widely used ingredient in the formulation of cough syrups and
tablets. Other players which manufacture this API are Roche, Dr Reddy’s
Laboratories and Wockhardt
Revenues from Generic APIs also include revenues from Carotenoids.
Around 5% of total revenues (~60 crore) came from Carotenoids in FY11.
Carotenoids are chemicals with nutritive properties that exist in the
pigment that colors plants and animals. As a fat-soluble material,
carotenoids are ingested by humans in countless colorful fruits and
vegetables. They are important as antioxidants, as well as in their capacity
to get converted to essential vitamins. These are extensively used in food
and beverages. Global market size of carotenoids is US$ 1 billion, which
is expected to grow to US$ 1.2 billion by 2015E. Although the growth
prospects for Carotenoids remain at low scale, only handful of players
occupies the market space. The company manufactures various types of
carotenoids include Beta Carotene, Astaxanthin, Canathaxanthin and
Lutien.
Custom Synthesis
DLL is engaged in the development process and customs synthesis of
several APIs and advanced intermediate compounds for pharma MNCs
for their discovery products that are under various phases of
development either for clinical trials or commercial launch post patent
acquisition. Almost 20 among top 25 global MNC majors are customers of
the company. Generally this type of custom synthesis manufacturing
starts with order for a small quantity (either in grams & kilograms) and
later can be scaled up to commercial lots. DLL owns four R & D centres,
two pilot plants, and three large scale manufacturing facilities with
approval from various regulatory bodies. This kind of infrastructure helps
the company to alter the scale as per requirements.
Revival in the CRAMS space
The management has maintained that after almost 8-9 quarters of
inventory rationalisation, the customers globally have more or less
completed the de-stocking exercise which took heavy toll on the CRAMS
players globally. Although the re-stocking has not yet started, DLL hopes
it will start after 1-2 quarters. However, customer are looking to maintain
just in time (JIT) system rather than maintaining 45-60 days inventory.
Capex
In FY11 DLL spent ~| 200 crore on capex. It spent | 80 crore on the 2nd
SEZ facility in Vizag and the remaining was spent on existing facilities. It
intends to spent another | 100 crore on the new facility and ~| 40-50
crore on the existing facilities. The new Vizag plant is expected to become
fully operational by FY13.
View
DLL was one of the few Indian CRAMS players identified by MNCs quite
early, thanks to its capability and strict adherence to the sanctity of IP
regime. Over the years it has consolidated its position by growing at a
CAGR of ~20% between FY01- FY11. Due to slow down in the overall
CRAMS industry and rapid de-stocking at the customers end, DLL’s
financial were impacted in FY10 and 1st half of FY11. As the de-stocking
phase is almost completed, the company looks forward for 10-15% sales
growth YoY going ahead. Since it is catering to both innovator and
generic requirements equally, we believe the company is well poised to
grow at a decent rate. The management as indicated that the company
has no intentions as of now, to move into formulations and to compete
with their own clients. With virtual debt-free status, cash (liquid
investments) of ~| 525 crore, healthy EBITDA margins in the range of
~35-40% and revival in the CRAMS space, we believe the premium
valuation is justified. We are positive on the stock for long term
investment horizon.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
R e v i v a l o n c a r d s …
We met the management of Divi’s Laboratories (DLL) to get insight of
business model and growth plans. DLL is engaged in manufacture of
generic APIs, custom synthesis of active ingredients for innovator
companies and other speciality chemicals like peptides and
nutraceuticals. DLL’s product portfolio comprises of two broad segments-
(i) Generic APIs including Nutraceuticals and (ii) Custom Synthesis of
APIs, Intermediates and Speciality ingredients for innovator pharma
giants. It also includes peptide building blocks. The sales break-up
between these two segments is almost 50:50 (FY11). The company
remains committed to only few research driven opportunities as was the
case when it started commercial operations in the early nineties. This is
why so far it has filed just 39 odd DMFs and doesn’t want to increase its
count drastically. To enter custom synthesis space in the nineties, the
company made its own case to the innovators which, until then were
relying on services provided by major players such as BASF, Degussa
etc. As these players grew and became as big as the innovators
themselves, companies like DLL on account of their capabilities and
commitment towards strict IP regime, started getting assignments. DLL
currently owns 3 manufacturing facilities- One in Nalgonda near
Hyderabad and two in Vizag. It is in the process of setting up 4th
manufacturing facility also in Vizag.
Business model
Generic APIs
The company manufactures generic APIs and advanced intermediates for
off patented APIs. So far it filed 39 DMFs with the USFDA and 10 DMFs
with the EDQM. Generic APIs account for nearly 50% of total sales. The
key APIs are Naproxen, Dextromethorphan Hydrobromide, Lopamidol &
Phenylephrine. DLL enjoys more than 70% market share across the globe
for APIs like Naproxene and Dextromethorphan hydrobromide.
Naproxen is a non-steroidal anti-inflammatory drug (NSAID) used in the
treatment of arthritis, spondilitis and other inflammatory conditions.
Around 18% of DLL’s total revenues come from Naproxen. Its DMF was
approved by both USFDA and by EDQM. Other players which
manufacture Naproxen API are Roche, Teva, Albemarie, Farchemia and
Dr Reddy’s Laboratories. Around 9% of the total revenues come from the
Dextromethorphan Hydrobromide API. The API is a cough suppressant,
which is a widely used ingredient in the formulation of cough syrups and
tablets. Other players which manufacture this API are Roche, Dr Reddy’s
Laboratories and Wockhardt
Revenues from Generic APIs also include revenues from Carotenoids.
Around 5% of total revenues (~60 crore) came from Carotenoids in FY11.
Carotenoids are chemicals with nutritive properties that exist in the
pigment that colors plants and animals. As a fat-soluble material,
carotenoids are ingested by humans in countless colorful fruits and
vegetables. They are important as antioxidants, as well as in their capacity
to get converted to essential vitamins. These are extensively used in food
and beverages. Global market size of carotenoids is US$ 1 billion, which
is expected to grow to US$ 1.2 billion by 2015E. Although the growth
prospects for Carotenoids remain at low scale, only handful of players
occupies the market space. The company manufactures various types of
carotenoids include Beta Carotene, Astaxanthin, Canathaxanthin and
Lutien.
Custom Synthesis
DLL is engaged in the development process and customs synthesis of
several APIs and advanced intermediate compounds for pharma MNCs
for their discovery products that are under various phases of
development either for clinical trials or commercial launch post patent
acquisition. Almost 20 among top 25 global MNC majors are customers of
the company. Generally this type of custom synthesis manufacturing
starts with order for a small quantity (either in grams & kilograms) and
later can be scaled up to commercial lots. DLL owns four R & D centres,
two pilot plants, and three large scale manufacturing facilities with
approval from various regulatory bodies. This kind of infrastructure helps
the company to alter the scale as per requirements.
Revival in the CRAMS space
The management has maintained that after almost 8-9 quarters of
inventory rationalisation, the customers globally have more or less
completed the de-stocking exercise which took heavy toll on the CRAMS
players globally. Although the re-stocking has not yet started, DLL hopes
it will start after 1-2 quarters. However, customer are looking to maintain
just in time (JIT) system rather than maintaining 45-60 days inventory.
Capex
In FY11 DLL spent ~| 200 crore on capex. It spent | 80 crore on the 2nd
SEZ facility in Vizag and the remaining was spent on existing facilities. It
intends to spent another | 100 crore on the new facility and ~| 40-50
crore on the existing facilities. The new Vizag plant is expected to become
fully operational by FY13.
View
DLL was one of the few Indian CRAMS players identified by MNCs quite
early, thanks to its capability and strict adherence to the sanctity of IP
regime. Over the years it has consolidated its position by growing at a
CAGR of ~20% between FY01- FY11. Due to slow down in the overall
CRAMS industry and rapid de-stocking at the customers end, DLL’s
financial were impacted in FY10 and 1st half of FY11. As the de-stocking
phase is almost completed, the company looks forward for 10-15% sales
growth YoY going ahead. Since it is catering to both innovator and
generic requirements equally, we believe the company is well poised to
grow at a decent rate. The management as indicated that the company
has no intentions as of now, to move into formulations and to compete
with their own clients. With virtual debt-free status, cash (liquid
investments) of ~| 525 crore, healthy EBITDA margins in the range of
~35-40% and revival in the CRAMS space, we believe the premium
valuation is justified. We are positive on the stock for long term
investment horizon.
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