YOGESH AGARWAL & FAMILY
AJANTA PHARMA Worth: Rs 142 cr
Many may still recall Bollywood’s Jumping Jack Jeetendra endorsing male ‘energiser’ Thirty Plus on national television in the 1990s. But few will remember Mumbai’s Ajanta Pharma as the company behind the product. Ajanta, it appears, is only too happy for that to be the case. For it has moved on. And Ajanta’s founding family scion Yogesh Agarwal is making sure there’s no looking back.
For the better part of this decade, Yogesh, 38, has presided over a strategic overhaul of the firm that has seen it shift focus away from over-the-counter (OTC) products such as Thirty Plus (no longer available in India, though exported) to speciality prescription drugs in ophthalmology, dermatology and cardiology in the Indian market. The company also pared down exposure to high-risk markets such as Russia and strengthened its presence in South-east Asia, Africa, and West Asia with a similar product focus. “The specialty focus was a measure to restructure our Indian operations,” says Yogesh. “We firmly believed that Ajanta had the ability to make this transition and become a player focusing on key therapeutic areas.”
With good result, it appears. Total income has more than doubled to Rs 384 crore on a standalone basis from five years ago. In 2009-10, the company grew total income by 18 per cent while net profit rose 33 per cent to Rs 28.54 crore. In the last fiscal, its shares on the Bombay Stock Exchange almost tripled to Rs 182. Some of that also factored in a buyback that the company launched a year ago. “Yogesh is responsible for our tunaround and reorientation,” says Arvind Agarwal, chief financial officer of Ajanta and a spokesperson for the company.
The founding family of Ajanta, the Agarwals, are Marwaris from Bansod village in Maharashtra. Ajanta was founded in 1973 by Yogesh’s uncle Purushottam Agarwal, a pharmacist by training. The company, and Purushottam’s extended family, shifted to Mumbai in 1989.
Starting with ‘Pinkoo’ brand of baby’s gripe water, the company built a portfolio of OTC products. But it lacked the resources to make a big enough splash because OTC products need sustained marketing support. While it spotted the export opportunity early, it burnt its fingers in Russia during the ruble crisis.
Under Yogesh, an MBA from the Johnson & Wales University, US, who joined Ajanta over seven years ago, the company changed its avatar. It began looking at prescription drugs where the doctor is the company’s immediate customer and chose less-competitive areas such as ophthalmology. The company invested in research and development (R&D) of differentiated formulations such as a once-daily version of a thrice-daily tablet to improve patient compliance. “The challenge was to introduce products that are not ‘me-too’,” says Yogesh. “We could tide over that with our R&D efforts.” A majority of the products that it launched in the past three years in the Indian market, for instance, were new drug delivery systems.
In spite of its smart rebound under Yogesh, the company just cannot afford to rest on its laurels. For one, Ajanta Pharma is still undersized in an industry where the largest company Ranbaxy tops a billion dollars in revenues. Two, it is now making plans to enter the US market, which can be an expensive exercise. Three, it needs to keep churning out new products in a tighter drug patent regime. Against this backdrop, will the company continue to demonstrate its fitness and vitality well into its 40s?
(This story was published in Businessworld Issue Dated
26-07-2010)
The Indian pharma growth story could not have got a more opportune time to unfold. Impending patent expiries, regulated markets gradually opening their markets for generic products and the US passing the much-awaited Healthcare Bill in order to cut down healthcare costs are turning out to be a boon for generic companies in India. And the proof is the way investors are lapping up pharma stocks on the bourses. While valuations of the sector appear to be strained, there is still room for value buying from the current gamut of stocks of small and large pharma companies.
Industry experts have heralded the five-year period between FY10 and FY15 as the golden period for generic companies in view of the patent expiries worth $100-150 billion. Nearly 40 Indian companies are geared up with US FDA approved facilities and Abbreviated New Drug Applications (ANDA) approvals to meet the huge opportunity.
The passing of the landmark Healthcare Bill in the US holds a lot of promise for generic companies. With emphasis on increasing the coverage of health insurance and cutting down costs of healthcare, the Bill is likely to provide a big fillip to the usage of low-cost generic drugs. The Bill seeks to bring an additional 40 million Americans under comprehensive medical insurance. This will lead to large incremental demand for drugs and other healthcare goods and services. Bulk of this incremental demand is likely to be captured by generic drug makers. The Bill may also encourage Americas insured population to increase the usage of generic drugs and curtail the use innovative drugs.
Indian pharma companies — most of them being exporters of generic drugs and intermediates to the US, the world’s largest drug market — are going to gain by the passage of this Bill. While the impact is long term in the form of increase in procurement of generic drugs by US, it is nevertheless a positive sign.
Leading Indian drug makers like Cipla, Dr Reddy’s Labs (DRL), Lupin and Cadila Healthcare have the potential to become leading global generic players. They have healthy para IV pipeline, are geographically well diversified, have lean cost structure and at times have dominance in certain niche segments. However, they are still quite small compared to large global generic players. For instance, Teva, the Israeli generic pharma company with more than one-fourth the share in the US generic market, is more than thrice as big as the combined size of all Indian companies.
The growth opportunities for generic pharma companies are shifting from being US centric to other regulated markets like Europe and Japan and emerging markets in Latin America and the Middle East. Countries like Germany and Japan are opening up their markets for generic companies in a bid to cut down the rising healthcare cost. Many Indian companies like DRL and Biocon have established subsidiaries in Germany and are securing contracts of insurance companies. Companies like Lupin have been early entrant in Japan that is registering good growth in its generic pharma market.
Pharma stocks have seen a lot of positive action in recent times as market has taken cognisance of the aforementioned factors (see the table). The ET Pharma Index has doubled in the past one year – losing its defensive streak and outperforming the Sensex. As a result, most companies are trading at not-so-attractive valuations. However, investors interested in riding the pharma growth bandwagon can consider companies like DRL, Lupin, Cadila Healthcare, Biocon and Sun Pharma with promising business models and growth track record.
Buying stocks for year 2009 has been a nightmare for investors in current stock market. Investors are constantly searching for stocks to buy from good sectors in economy which probably could buck the trend in show growth in 2009. Core generics remain defensive; alternative themes to suffer: The developed market generics business will be the most resilient to global slowdown, as governments running large deficits will aggressively promote generics to rein in healthcare costs. Other areas in the pharma industry are not as well-placed: the CRAMS business faces inventory reductions by customers, falling prices of end-products and idle capacities; growth in the emerging markets will likely cool off owing to financial pressures; and the drug discovery business continues to face tight credit conditions. More growth drivers: The Democrat regime’s proposal to bring 47m more Americans under health insurance could increase the size of the generics market by 15%. The recently expanded PEPFAR (President’s Emergency Plan for AIDS Relief) and para IV patent challenge opportunities are other growth drivers. Opening up of the regulated biosimilars market represents another medium to long term growth opportunity. Top picks: Sun Pharma, Cipla and Dr Reddy’s are the best plays on the continuing growth in developed markets. We expect all three to register 20%-plus revenue CAGR over FY08-11. Ranbaxy and Glenmark too will benefit in the long term, though in the medium term, their prospects will likely be hampered by drug quality issues with US FDA and emerging market pressures, respectively. Cipla will be the key beneficiary of the expanded PEPFAR programme. Biocon and Dr Reddy’s hold promise in the regulated bio-similars market. Our top picks At current market prices, Sun Pharma, Cipla and Dr Reddy’s offer the biggest potential upsides from growth in the generics business, in our view. These companies are well positioned to exploit the large opportunity in the US and other developed markets, and we do not see any major risk to their businesses. Ranbaxy and Glenmark also stand to gain from increasing market share in these geographies, but are likely to underperform in the near term. Cipla would be among the prime beneficiaries of the expanded PEPFAR programme: the company has been one of the biggest suppliers to the programme over last five years and has a large number of products specially approved by the US FDA under the scheme. Dr Reddy’s and Biocon hold promise in the regulated biosimilars market, as both companies have multiple biologicals registered and sold in the semi-regulated markets and are on course to developing them for the regulated markets. Sun Pharma We rate Sun Pharma as one of the best plays on the Indian pharma industry, as we expect its revenue growth to outpace that of the domestic and international pharmaceutical markets over the next 2-3 years. Sun’s product portfolio, which is dominated by drugs to treat lifestyle diseases, should help it maintain higher growth rates than the overall market, while a tight control on costs keeps profitability robust. A negotiated deal on the Taro acquisition could be a near-term catalyst for the stock. Sun has about US$500m cash in hand and a debt-free balance sheet. These attributes position it to be a prime beneficiary of any consolidation drive in the US and other developed markets. We believe there are also potential acquisition-led upsides in the near term, other than Taro. BUY. Cipla We expect Cipla’s core earnings to register a CAGR of 36% over FY08- 11, significantly aided by rupee depreciation and consequent margin expansion, apart from accelerated growth in volumes. Recent capacity expansion through new plants in Indore and Sikkim will contribute to volume growth. Industry reports indicate the return of growth momentum in the domestic pharma market, where Cipla has one of the strongest franchises, especially in respiratory medicine. Cipla’s unique business model of registering products in other countries and partnering with other companies to market them makes it the best counter-cyclical play in the Indian pharma space. We maintain our BUY rating. Dr Reddy’s Labs We believe that the market’s concerns over various businesses of Dr Reddy’s are overdone, given the potential for sustained overall earnings growth at over 20% a year. The downside in the German market, from the costly acquisition of Betapharm and subsequent changes in the market, have already been priced in the stock, in our view. The stock is trading at a P/E of 10xFY10ii core earnings, at a 20-35% discount to peers; we expect the gap to close over the next 12 months. In the medium term, there could be more upside from the company’s biosimilars portfolio and acquisitions in the developed markets. BUY with a target price of Rs511. Biocon The depreciated rupee and falling raw-material prices have put Biocon back on the growth track, with gross margin expanding 900bps and EBITDA margin expanding 770bps QoQ in 3QFY09. We believe that the expanded margins will start accruing to bottomline from 1QFY10 onwards, after hedges at higher rupee rates have expired. Additional growth triggers in the near to medium term include the single AOK contract won by Axicorp in Germany, the pipeline of generic products for the US market and the launch of insulin glargine in the domestic market, biosimilar insulin in Europe and oral insulin in India. Buy with target price of Rs154. Opto Circuits We believe India’s cost advantage and technical expertise can make the country a global hub for medical devices over the next 10 years. Opto Circuits, being the only large Indian medical-devices company, would be a key beneficiary of the industry’s growth. Excluding the effect of acquisitions, the company’s revenues registered 36% CAGR over FY04- 08ii, but in our view, it has barely scratched the surface; there’s a huge opportunity yet to be tapped. We expect organic annual growth above 40% over FY08-11. Completion of the acquisition of Criticare presents another platform to stabilise and expand the sales front-end in the US. Other growth drivers are its subsidiaries Eurocor, Ormed and Devon. Buy with price target of Rs156.
The new year is already a few weeks old, but it doesn't seem to have done your investments much good. The bears look like they have camped out in the markets. This is the time when some investors go looking for stocks of companies that provide goods and services which are scarce. Others look for companies that can withstand recession. It is for such investors that we direct our public service message: do drugs. No, seriously. Pharma companies seem well placed to weather out these markets, though you wouldn't think so judging by their performance during the previous bull run. But that poor showing was largely due to regulatory and company-specific issues. However, these companies are now steadily gaining ground as margin pressures ease due to lower commodity prices.
The general environment for the pharma industry, particularly for domestic companies, seems positive. Tight healthcare budgets have led to a bigger push for cheaper drugs by government and insurance companies in emerging markets. This offers significant opportunities for the Indian companies. Apart from the rising scope for producing cheaper drugs, Indian pharma companies are becoming popular among global innovator firms. These outsource their research and production activities to cheaper locations, and India is a favoured destination.
The Right Dose
Why pharma stocks can outperform Sensex in 2009
Robust domestic demand: The Indian pharma market is expected to grow by 14-15% a year over the next two years.
Focus on cheaper drugs: Stretched healthcare budgets are forcing emerging economies to look at cheaper generic options.
Outsourcing opportunities: Indian pharma companies are increasingly offering clinical trials and R&D services for MNCs; API and CRAMS is set to grow by 20% per annum.
Off patenting: Global generic drug manufacturers target an estimated $70 billion worth of drugs to go off-patent over the next five years.
"The estimates for outsourcing opportunities vary from a modest $5 billion to $50 billion till 2016, when most of the current blockbuster drugs will become off-patent. India has an edge over other emerging economies in this space and this presents a huge advantage. More and more innovator and generic companies are either setting up their own operations in India or are resorting to heightened outsourcing," says Ajit Kamath, Chairman and Managing Director, Arch Pharmalabs. More such Indian companies are increasing their foothold in non-US markets like Latin America, Russia , Africa and Asian countries such as Japan . These markets are not only growing at a faster pace than the developed ones, but also offer high potential for generics drugs.
So, how do you select a pharma stock? There are three broad types of pharma companies in the country: generic manufacturers, contract research players, and multinationals. Generic drugs are produced by companies like Lupin, Cipla, Sun Pharma and Ranbaxy. These companies offer long-term value due to their strong foothold in developed markets. The contract research and manufacturing services (CRAMS) players offer outsourced production and research services to MNCs. The companies in this segment include Piramal Healthcare, Divi's Labs and Jubilant Organosys. Finally, there are MNCs like GSK Pharma and Pfizer, which leverage the strengths and expertise of their global parents in the domestic market.
Which of these will help your portfolio? "The robust earnings of India pharma companies are likely to come from patent challenges, which leads to a 180-day marketing exclusivity in the US . The companies in the CRAMS segment are likely to report good growth as the margins are higher than in generic drugs," says Ranjit Kapadia, head of research, Prabhudas Lilladher.
Best Pharma Picks
Stock
Sales CAGR 2007-2011E (%)
Net profit CAGR 2007-2011E (%)
P/E (x)
Free cash flows (Rs Cr)
Net Debt/Equity (%)
2008-9E
2009-10E
2007-8
2008-9E
2007-8
2008-9E
Cipla
23.6
29.8
17.3
11.7
-397
229
11
13
Dishman Pharma
26.9
30.1
8.1
6.0
-273
-31
99
97
Divi's Labs
27.1
31.6
16.0
12.2
137
277
2
-18
Lupin
26.3
23.2
9.1
7.6
-522
-12
28
28
Piramal Healthcare
14.8
26.5
12.1
8.1
327
-82
60
66
Sun Pharma
23.9
24.5
10.6
9.7
558
752
-35
-43
Data source: Nomura, Enam Securities
Sun Pharma, Cipla, Lupin and Piramal Healthcare are the preferred stocks. Sun Pharma has the strongest balance sheet in the sector, allowing it to generate multiple new growth engines in the future.
Apart from the intrinsic strength of these companies, there is also the fact that pharma has traditionally fared better than the other sectors during a downturn largely due to an inelastic demand. During the previous bear phase (February 2001 to July 2003), the BSE Healthcare Index gained 21%, while the Sensex lost 11%. In 2008, when the Sensex lost 53%, the Healthcare Index outperformed it by containing its losses to 33% (see chart). "Over the next couple of years, major pharma stocks are likely to outperform the Sensex due to a strong growth in the domestic market and a sharp rise in formulation exports. The stocks will attract long-term investors like insurance companies and pension funds which have a three to five year investment horizon. Pharma stocks are likely to give steady returns," says Kapadia.
Prescription For Profit
Low debt-equity ratio: Will help the company in avoiding high interest costs.
Free cash flows: Ensures that the company is liquid and is making money from operations.
Low P/E ratio: Don't overpay; look for stocks that have a P/E of less than 10.
No foreign debt: Avoid firms that have FCCBs coming up for conversion in the near future.
Pharma stocks might help your portfolio weather the recession, but only if you select wisely. However, not all pharma stocks are recession-proof. This is due to the weak or highly leveraged balance sheets of some of these companies. Until last year, when credit markets were flush with liquidity, almost all pharma companies raised money through foreign currency convertible bonds (FCCBs) either to fund acquisitions or capacity expansions. These bonds, issued to overseas investors, carry a stipulated interest rate and have an option of conversion to equity shares on expiry. Investors opt for conversion if the market price is higher than the conversion price on expiry. If the market price is lower, they are likely to opt for cash payment.
Hence, the pharma companies whose FCCBs are due in the near future and whose market prices are lower than the conversion price will be financially strained as they need to borrow or sell assets to meet the debt obligations. This can result in an increased debt burden and their overall profitability can come under pressure.
So, stay away from stocks whose prices are much lower than the conversion price and are facing a FCCB conversion in the near term. Wockhardt and Aurobindo Pharma are the most vulnerable, with the former expecting FCCBs for conversion this year, and the latter in 2010. Wockhardt's FCCBs are due on 25 September at a conversion price of Rs 486 per share against the current market price of Rs 95.
Aurobindo's conversion price stands at Rs 522 in 2010 against the market price of Rs 109 per share. Companies like Orchid, Jubilant, Ranbaxy and Glenmark have two-three years before their FCCB conversion comes into force. But experts are positive about these companies as they enjoy strong cash flows, which would eventually help them repay the FCCB amount even if the bonds aren't converted.
Based on analyst reports, we have shortlisted the best picks in the sector (see table). Sun Pharma, Cipla, Lupin and Piramal Healthcare are the preferred stocks. "Sun Pharma has the strongest balance sheet in the business, which equips it to generate multiple new growth engines going forward," says analyst Nitin Agarwal, setting a target price of Rs 1,398 per share for the stock.
