BUY
Target Price Rs. 870 CMP Rs. 735 4QFY20E PE 20X
Index Details IPCA Laboratories Ltd is a fully integrated pharmaceutical company. Due to Sensex 35,219 non-compliance with US FDA requirements, IPCA profits declined during Nifty 10,740 FY15-FY17. We believe the worst is over for IPCA and is likely to show Industry Pharma strong PAT growth in FY19E-20E due to (a) likely resolution of the USFDA issue leading to a revival of US sales (b) ramp up in the institutional antimalarial sales, and (c) improvement in profitability with margin
expansion as remediation expenses will decline from FY19E. Scrip Details Mkt Cap (Rs cr) 9,261 US remediation issue likely to be resolved: We expect the USFDA import ban BVPS (Rs) 196.1 on the three plants viz., Ratlam, Pithampur and Piparia may be lifted by end of O/s Shares (Cr) 12.6 1HFY19E. IPCA has completed the remediation work and invited the USFDA for Av Vol (lacs) 2.88 the inspection of all the three plants. IPCA believes that it has taken necessary 52 Week H/L 742/ 400 corrective measures as per the USFDA requirements under the cGMP
Div Yield (%) 0.2 regulations. We expect the revival of the US business soon after this resolution. The Health Canada has already inspected all the three plants and has given its FVPS (Rs.) 2.00 clearance. Shareholding Pattern Shareholders % Institutional business a growth driver for IPCA: The Global Fund had Promoters 46.13 stopped IPCA from selling Artemisinin-based Combination Therapy (ACTs) due Public 53.87 to the USFDA issues about the quality lapses in its plants. In November 2017, the Total 100.0 Global Fund selected IPCA as the supplier for antimalarial drugs for three years. IPCA vs. Sensex This would boost the institutional revenues by ~ Rs 280- 380 crs in FY19E and
FY20E. We expect a 44% CAGR in revenues from FY17-FY20E as IPCA has got STOCKPOINTER client approval to restart the supplies.
EBITDA Margin to expand and return ratios to improve by FY20E: We expect the EBITDA margin expansion due to a reduction in remediation cost from Rs. 50-70 crs every quarter in FY18E to Rs. 2-3 crs till 1QFY19E. Remediation costs will stop completely from 2QFY19E. US business traction, new launches in the
US, India and Institutional products, better performance from Europe/ U.K, Russia and ROW with currencies stability will drive ROCE and ROE to 16% by FY20E.
We launch coverage with a BUY rating and a price target of Rs. 870, arrived at by applying 20x multiple to its EPS Rs. 43.6 for the year ending March- 20E. Our target price suggests a return of 18% from the Current Market Price (CMP) of Rs. 735 over the next 12 months. Key Financials (Rs. in Cr) EPS EPS Growth RoE ROCE P/E EV/EBITDA Y/E Mar Net sales EBITDA PAT (Rs.) (%) (%) (%) (x) (x) FY17 3,157 430 188 14.9 104 7.9 9.4 49.3 22.5 FY18E 3,203 460 252 19.9 34 9.7 10.4 36.9 21.1 FY19E 3,995 748 459 36.4 83 15.5 17.9 20.2 12.8 FY20E 4,551 874 550 43.6 20 15.9 18.7 16.9 10.7
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This document is for private circulation and must be read in conjunction with the disclaimer on the last page.
❖ Company Background
IPCA Laboratories Limited is pharmaceutical company incorporated in 1949. IPCA was promoted by a group of medical professionals and businessmen and was incorporated under the name 'The Indian Pharmaceutical Combine Association’ which was changed to IPCA Laboratories Limited in 1993. IPCA is a vertically integrated company with a diverse presence across geographies including India, Africa, Asia, Australia and the U.S. It is a fully integrated company producing branded and generic dosages, APIs (Active Pharmaceutical Ingredient) and intermediates. IPCA is one of the largest manufacturers of few APIs which they produce right from the basic stage. Their dosage business is backed by their own APIs.
IPCA is one of the world’s largest manufacturers of atenolol (anti-hypertensive), chloroquine phosphate (antimalarial), furosemide (diuretic) and pyrantel salts (anthelmintic). It is gradually shifting towards the chronic segment therapeutics, reducing its dependency on selected therapeutic segments.
IPCA operated in the following segments in FY17:
1) Branded dosage, accounted for 53% of the total revenues 2) Generics dosage, accounted for 22% of the total revenues 3) APIs and intermediates, accounted for 22% of the total revenues 4) Others, amounting to 3% of the total revenues.
FY17 Sales break-up by segment FY17 Sales break-up
18% 23%
46%
32%
77% 5%
India Dosage International Dosage Dosages APIs India APIs International Formulations
Source: IPCA Labs, Ventura Research Source: IPCA Labs, Ventura Research
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Manufacturing Facilities of IPCA Labs Facility Operational Since Dosage form Catering to Dosage U.K, Europe, S.A, New Zealand, Athal, Silvassa October 1995 Tablets & Capsules Canada and ROW Dehradun, Tablets, Cephalosporin: Tablets and India, Mauritus, Sri Lanka, Trinidad, May 2006 Uttaranchal injectables (dry powder) Africa, Jamaica, Russia & Yemen India, Institutional sale in Nepal & Jorthang, Sikkim June 2011 Tablets & Capsules Bhutan United Kingdom, Europe, South Betalactum derivatives – Tablets, Africa, Australia, Europe, Russia, Kandla, Gujarat December 1993 Capsules & Dry Syrups Gulf countries, Venezuela and ROW countries Piparia, Silvassa September 2004 Tablets & Capsules Canada & Australia High Potency Oral Solids Tablet Pithampur, Dhar October 2014 Europe & ROW countries dosage (Hormonal Products) United Kingdom, Europe, Canada, SEZ Indore, November 2008 Tablets & Capsules Australia, New Zealand, South Madhya Pradesh Africa and ROW countries. Tablets, Liquids, Injectables & India, South Africa, Russia and Ratlam December 1983 Ointments ROW countries Tarapur, September 2014 Tablets & Sachets India & ROW countries Maharastra API Ankleshwar, Gujarat 1988 API PMDA- Japan Aurangabad, 1999 APIs and Intermediates WHO- GMP Maharashtra Baroda Upcoming APIs Indore, Madhya 1994 APIs and Intermediates WHO- GMP Pradesh Mahad, 1989 Intermediates GMP Maharashtra Nandesari, Gujarat 2013 Hormones WHO GMP TGA-Australia, EDQM, Danish Ratlam, Madhya Regulatory Authority, PMDA-Japan, 1985 APIs Pradesh WHO-Geneva, US-FDA*
*Under Import Alert Source: Company presentation, Ventura Research
IPCA’s first manufacturing API commissioned in Ratlam, MP in 1985. At present the company has 16 manufacturing facilities for APIs and Dosages and is headquartered in Mumbai. IPCA has manufacturing facilities for producing APIs and dosages which are approved by drug regulatory authorities including the US-Food and Drug Administration (FDA), UK-Medicines and Healthcare Products Regulatory Agency (MHRA), South Africa- Medicines Control Council (MCC), Brazil-Brazilian National Health Vigilance Agency (ANVISA) and Australia-Therapeutic Goods Administration (TGA).
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Top Brands of IPCA Labs
Source: IPCA Labs, Ventura Research
IPCA’s top 10 dosage brands are Zerodol (Aceclofenac and Combinations), Lariago (Chloroquine), HCQS (Hydroxychloroquine), Perinorm (Metoclopramide), Rapither (Artemotil), Tenoric (Chlorthalidone + Atenolol), Lumerax (Artemether + Lumefantrine), Etova (Etodolac), Malirid (Primaquine) and Folitrax (Methotrexate) which are sold in over 110 countries across the globe. The international and Indian business each account for ~50% of IPCA's income.
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Milestones
Year Events
1976 Started marketing of sugarcoated Chloroquine tablets, first time in India. 1978 Launched dosages of Metoclopramide under brand name 'Perinorm'® for the first time in India 1980 Launched dosages of Bromhexine for the first time in India R&D-API and R&D-Dosages development departments set up to provide technology-based 1981 products. 1982 First company after Eli Lilly to develop a pre-constituted dosages of Erythromycin Estolate 1984 Commencement of first API plant and second dosages plant in Ratlam First API Plant for manufacturing of Chloroquine Phosphate, set up at Ratlam and Production of 1986 API Atenolol, for the first time in India, commenced at Ratlam 1993 Acquired Hoechst India's dosages unit at Kandla 1994 Acquired API manufacturing plant from BDH Pharmaceuticals (a subsidiary of E-Merck) at Indore 1995 Commissioned modern dosages plant at Athal (Silvassa) 1996 Commissioned new API R&D Centre at Mumbai Athal, Dosages manufacturing unit received approval from UK-Medicines and Healthcare Product Regulatory Agency (MHRA) formerly known as UK- Medicines Control Agency (MCA). At the 1997 same time, Athal, Kandla and Ratlam Dosages manufacturing plants received the approval from MCC (Medicines Control Council) South Africa. 1999 First to introduce dosages of Hydroxychloroquine Sulphate under brand name 'HCQS' in India Acquired 'National Druggists (Pty) Ltd.' in South Africa. 'Ipca Pharma Nigeria Ltd.' incorporated in 2001 Nigeria 2002 Wholly owned subsidiary 'Laboratories Ipca Do Brasil Ltd.' incorporated in Brazil Launched marketing divisions for- Rheumatology Care and cardio- diabetology segment. Wholly 2003 owned subsidiaries 'Ipca Pharmaceuticals Inc.’ and ‘Ipca (UK) Ltd.' Incorporated in USA and UK respectively. Commissioned new Dosages manufacturing plant at Silvassa. Ratlam, API manufacturing facility 2004 inspected by US-FDA and the facility was found to be in compliance with global GMP requirements. Merger of Innotech Pharma Limited with Ipca in August, 2005. Acquired cardiac brand Isordil 2005 from Wyeth Lanched first dose of ACT combination for treatment on malaria, Entered into strategic alliance 2006 with Ranbaxy for the U.S market. Commencement of new dosages plant in Dehradun WHO prequalify Ipca dossier of Artesunate + Amodiaquine co-blister making Ipca the 2nd 2008 company in the world and the 1st Indian company to receive this prequalification. Ipca Laboratories Ltd. acquires 100% share capital of Onyx Research Chemicals Ltd. holding Company of Onyx Scientific Ltd. through its wholly owned subsidiary Ipca Laboratories U.K. Ltd. 2011 The acquisition brings together two Contract Manufacturing Organisations (CMOs) to better serve their customers on a global basis. 2014 Ipca acquired dosages manufacturing unit located at Tarapur, Dist. Palghar, Maharashtra 2018 Acquired 100% share capital of Pisgah Labs Inc., North Carolina, USA.
Source: IPCA labs, Ventura Research
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❖ Key Investment Highlights:
➢ Indian dosage revenues growth in recovery mode:
We expect the India dosage business to grow at a CAGR of 13%. IPCA’s domestic growth was sluggish in FY17 and 1HFY18 due to low seasonal sales in anti-malaria. Business was impacted by destocking during the GST (Goods and Services Tax) transition & demonetization. A decline in regulated prices of products also hurt revenues in India.
India Dosage Revenues
2,500
1,964 2,000 1,723
1,500 1,369 1,412 1,207 1,129 970 1,000 inRs.crores 500
- FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: IPCA labs, Ventura Research
IPCA is one of the market leaders in Anti- malarial and Rheumatoid Arthritis in India. IPCA’s 3 brands are in the top 300 list in India viz., HCQS, Zerodol- P and Zerodol- SP. IPCA is changing its segment focus from anti- malaria to other chronic segments which are high margin segments. IPCA’s Indian dosages business comprises 13 marketing divisions focusing on key therapeutic segments. IPCA has introduced 12 new brands/ line extensions in India during the FY17 IPCA works on clinical research as a tool to launch innovative combination dosages. It focuses on brand building with promotion. IPCA focuses on portfolio optimization, strategies to identify the need and gaps to build, enter, maintain and exit the approaches. IPCA is working at strengthening therapy areas which are at the beginning stage but can gaining market share which would give margin expansion in coming years.
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Indian Branded Dosages- Therapeutic Contribution
FY17 FY16 Therapeutic Segments % to total sales % to total sales Non-steroidal anti-inflammatory 41% 39% drugs (NSAID) Cardiovascular & Anti diabetics 21% 23% Anti- malarial 12% 12%
Gastro- Intestinal products 4% 5% Anti- bacterial 6% 6%
Cough Preparations 5% 4%
Dermatology 4% 4% Neuro Psychiatry 3% 3%
Urology 2% 2%
Nutraceuticals 1% 1%
Others 1% 1%
Total 100% 100%
Source: IPCA labs, Ventura Research
IPCA is shifting its focus from the antimalarial business to pain, antidiabetics and cardiac segments (contributed ~60% of total Indian dosage revenues in FY17) to reduce the risk and uncertainty of antimalarial seasonality and volatility in the margins. While 1HFY18 sales were under pressure, we expect recovery and normalized sales from 2HFY18E with new launches in the therapeutic segments.
➢ Ramp up in the International Dosage business:
International dosage business of IPCA labs contributed ~45% of the total sales in FY17. International dosage business includes Branded and Generics business. IPCA exports branded dosages to Russia, South Africa, Australia, New Zealand and Rest of the World (ROW) while it exports generics to US, Canada, U.K and Europe. The International business has been under- pressure since FY15 due to import alert from USFDA and Currency fluctuations in Emerging markets.
IPCA’s international dosage business grew at 8% CAGR in FY14-17. We expect the business to grow at a 10% CAGR in FY17-20E considering a resolution for the USFDA issue and stable currencies going forward.
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International Dosages Revenues
1,400 1,237
1,200 1,131 1,105 1,000 958 867 853 800 700
600
Rs. inRs.crores 400
200
- FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: IPCA labs, Ventura Research
US Generic business
IPCA international dosage revenues grew at a CAGR of 21% in FY11-14, driven by the sales from US and Europe. The main focus area of IPCA was the US where it grew by offering dosages backed by its own API. IPCA followed a partnership model in the US to establish its product in the market. It had entered into a partnership deal with three companies which includes Ranbaxy Laboratories Ltd (now Sun Pharmaceutical) where IPCA shared its operating profit with the marketing companies. IPCA had almost doubled its sales in the US in FY11 to FY14. This changed with regulatory constraints imposed USFDA since FY14. IPCA’s three plants - 2 dosages and 1 API plant - face an import alert that banned the supply of generic drugs in the U.S.
• Regulatory challenges in the past three years
IPCA was issued form 483 observation by US Food and Drug Administration (USFDA) for its Ratlam API plant in July 2014. IPCA voluntarily stopped its supply to US markets to take corrective measures for the FDA observations as this was the sole manufacturing unit of IPCA for other manufacturing API and dosage plants. IPCA had received 6 observations including data integrity issue during the July 2014 visit of the USFDA. IPCA received an import alert on 22nd January 2015 for Ratlam API plant. This import alert had no impact on the business of IPCA as it had voluntarily stopped the supplies to the US. In addition to this, on 24th March 2015, IPCA’s two dosage plants in Indore and Silvassa were banned by the USFDA.
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USFDA excluded four APIs manufactured at Ratlam plant from the import alert. They were Hydroxychloroquine Sulfate, Propanolol Hydrochloride, Trimethoprim, and Ondansetron. Hydroxychloroquine Sulfate is one of the major API for anti-malarial and was marketed by Ranbaxy (now Sun Pharma) as per the partnership deal between the two companies and has been the main contributor to the US sales for IPCA. IPCA and Ranbaxy had voluntarily stopped the supply of Hydroxychloroquine Sulfate due to the facility issues but would come back as soon as the regulatory issues are solved. Hydroxychloroquine Sulfate has seen a price hike due to the entry of new entrants in the market.
Health Canada had requested IPCA to voluntarily quarantine any drugs manufactured at the Indore dosage manufacturing unit intended for the Canadian market as an interim measure and precautionary step in view of the US-FDA audit observations made regarding GMP (Good Manufacturing Practices) deficiencies at these manufacturing unit.
IPCA has been working on the remediation as per the USFDA requirement by auditing the ex- post facto manufacturing data for the last five years. IPCA appointed a team of consultants to review the processes and take corrective actions. It employed consultants to conduct forensic analysis of the standard operating procedures of the plants and to review the manufacturing data of last five years. IPCA restructured the Quality Assurance (QA) team as per the suggestion of the USFDA to have a controlled Standard Operating Procedures (SOPs) at the management level.
• Positive changes likely in FY19E
IPCA has completed the remediation work of all the three plants and invited the USFDA to visit for re-inspection. We expect the resolution for all the three plants by end of 1HFY19. We expect the revenues from the US business to start from 2HFY19 with ANDA approvals and the partnership deals resuming with Ranbaxy (now Sun Pharma) and other companies. These partnership deals will help IPCA to supply their products in the US markets by gaining better revenues and margins by lowering the costs. Ratlam is the only API source for the Silvassa and Indore plants with other plants related to the US business as the plants are vertically integrated. We believe that the Ratlam plant approval can lead to a revival of US dosage business of IPCA. We are optimistic about a positive outcome as Health Canada inspected and gave a clearance to all the three plants.
• ANDA filings
As at end of December-17, IPCA had filed 47 ANDAs (Abbreviated New Drug Applications). 18 of these were approved. IPCA plans to file 8-9 ANDAs every year. IPCA would be working on the new ANDAs once the regulatory issues get resolved.
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Other Generic Business
The European Union is the key market for the Non- U.S Generic business. The Non- US generic business had seen a decline since 2015 due to the political changes in UK and Europe which included Brexit. The Euro and British Pound had seen a sharp decline as an impact of Brexit, which affected IPCA’s generic business. IPCA had an impact of Brexit because all the realization for the European Union used to be in British Pound. Since the British Pound declined by almost 10%, total shipments were reduced.
Branded Dosage Business
This segment accounted for Rs. 320 crs revenues (nearly 11% of total sales in FY17). The branded dosage segment of IPCA is backed by their own APIs. IPCA promotes 60 plus brands of dosages in more than 36 countries of Asia, Africa, CIS and South America, including Colombia, Ghana, Ivory Coast, Jamaica, Kazakhstan, Kenya, Mauritius, Myanmar, Nigeria, Oman, Peru, Philippines, Russia, Senegal, Singapore, Sri Lanka, Sudan, Tanzania, Ukraine and Vietnam.
The branded dosage revenues grew at a 20% CAGR from FY11 to FY15. In recent years, IPCA has seen a volatility in revenues of this segment due to the currency fluctuations in Russia, CIS, and ROW. The depreciation of Australian and New Zealand dollars impacted the revenue growth. IPCA is expanding its branded dosage business through expansion of geographical coverage and increase the branded dosages marketed. IPCA focuses on the continuous filing of the new products in these countries. We expect the branded dosage business to stabilize with stability in the currency rates.
➢ Re-entry in the Institutional Business
The anti-malaria dosage is a key focus area for IPCA. It is one of the players producing anti-malaria dosages. These are Artemisinin-based Combination Therapy (ACTs) supplying to the global funding programs. IPCA supplies anti-malarial dosages to organizations like World Health Organisation (WHO), United Nations Children's Fund (UNICEF), International Development Association (IDA), Mission Pharma, Population Services International (PSI), Médecins Sans Frontières (MSF), Medical Export Group (MEG) & Ministries of Africa. They are one of the active participants in Global Fund’s Voluntary Pooled Procurement (VPP) and Affordable Medicines Facility-malaria (AMFm).
IPCA is one of the world’s largest manufacturers of Artemism- based APIs & dosages. WHO, Geneva has approved the API and Dosages plants for anti- malaria. IPCA supplies its anti- malarial products to other companies like Astrazeneca, Pfizer, Bayer, Sanofi Aventis and Dafra, Mepha.
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Anti- Malarial Dosages and APIs of IPCA
Mefloquine tablet 250mg Chloroquine Sulphate
Amodiaquine Proguanil HCL
Artesunate Dihydro Artemisinin
Artemether Piperaquine Phosphate
Arteether Quinine tablet 300mg & 600 mg
Beta- Arteether (Artemotil) Pyrimethamine
Artesunate Sterile
Chloroquine Phosphate
Lumefantrine
Primaquine Sulphate
Source: IPCA labs, Ventura Research
The Global Fund provides financial aid to treat various diseases. It is a partnership between governments, civil society, the private sector and people affected by the diseases. Global fund is designed to accelerate the end of AIDS, tuberculosis, and malaria as epidemics. IPCA’s anti-malarial institutional revenues were ~24% of the total sales in FY15. The Global Fund had restrained from allocating any volume of Artemisinin-based Combination Therapy (ACTs) to IPCA on account of the warning letter issued to the company by USFDA. The suppliers should not have any regulatory issues, according to the Global Fund. The stoppage of the supplies of the anti-malarial formulation resulted in sharp decline in the revenues for IPCA. The institutional business revenues were ~Rs. 340- 390 crs in FY13-14 which declined to around Rs.120-150 crs in FY16-17.
IPCA has been selected as a panel supplier of anti-malarial drugs for the Global Fund Pooled Procurement Mechanism and for the Private Sector Co-Payment Mechanism for three years in October 2017. This would boost IPCA’s institutional revenues from FY19E. We expect the institutional business to reach by FY20E the same levels as it was in FY13-14. IPCA expects its institutional business to grow by 18-20% from FY19 onward. Management expects the WHO business to commence from 1QFY19.
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Institutional Business Revenues
450 383 342 360 281 281 270 170 180 148 129 inRs.crores 90 0 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: IPCA labs, Ventura Research
➢ API to boost the revenues
API business of IPCA is the backbone of the company. APIs contributed to ~25% of the total sales in FY17. IPCA supplies its API products in Indian as well as international markets. IPCA is one of the largest exporters of APIs from India. IPCA exports its APIs to regulated markets like the U.S, Canada, Europe and Australia. IPCA’s API business declined at CAGR of 5% from FY14-FY17 due to Ratlam plant issue as it is the largest manufacturing plant for APIs and contributes ~20% of revenues.
India API sales International API sales
Rs. in crores Rs. in crores 320 800 279 689 638 600 566 554 240 223 600 514 509 178 178 165 400 160 141 139
200 80 - - FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: IPCA Labs, Ventura Research Source: IPCA Labs, Ventura Research
IPCA has commissioned a new API plant in Baroda to reduce the dependence on Ratlam plant for API manufacturing. We expect a recovery in the API sales with the likely resolution of the USFDA issue for Ratlam plant. With the resolution, IPCA would be able to file new DMFs in the US markets. It can launch new APIs in the Indian as well as regulated markets with new capacity in Baroda. We expect CAGR of 11% in revenues from FY17-20E. IPCA is exploring new strategic business relationships with small API
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manufacturers for increasing the product basket and also increasing its research focus on developing the APIs with Non- fringing process. IPCA’s own APIs will help to explore new opportunities by backing the dosage, especially in the generics market.
➢ Expansion of EBITDA margin
IPCA’s EBITDA had been impacted adversely due to the USFDA issue for the three plants. IPCA’s EBITDA margins declined from 24% in FY14 to 14% in FY17. IPCA incurred remediation costs of approximately Rs. 500- 700 mn annually since FY15. This hit EBITDA margins. Stoppage in the supplies to the tender business added to IPCA problems as this is a high- margin business for IPCA. We expect EBITDA to grow at a CAGR of 27% in FY-FY20E and the margins to expand from FY19E from the current levels of 15% to 19% in FY19E and FY20E as i) IPCA has completed all the remediation process which would reduce the remediation cost to Rs. 20-30 mn in the 1HFY19 and then stop in completely in 2HFY19, ii) IPCA has been selected as the suppliers for the Global Fund antimalarial which would start from 1QFY19.
➢ Capex, and Debt level in control
Management has guided no major capex for the coming two years except for the maintenance capex of around Rs. 100- 150 crs till FY20E. The existing plants are not utilized at their optimal levels due to the USFDA issues for which the capex has been completed in FY14-FY17. IPCA has completed its capex for new API Baroda plant.
The management has guided a reduction in the tax rate from 29% in FY17 to 21-22% in FY18E and further would reduce more around 16-17% as the company has made higher deferred tax provisioning in FY17 & FY18E. With the improvement in profitability, reduction in tax provisioning and no large capex plans, we expect the debt to reduce from FY19E. We expect the gross debt to reduce from Rs. 529 crs in FY17 to ~Rs. 350 crs in FY20E.
➢ Improvement in the Return Ratios
The fall in the profitability and business issues has affected the return ratios of the company. IPCA reported 33% ROCE and 24% ROE in FY14. This was the highest return ratio that IPCA had achieved. Returns started falling in FY15 due to the business-related issues such as US FDA and reduction in revenues from institutional business for malaria. ROE and ROCE in FY17 were 8% and 9% respectively. We expect a turnaround from here on with improvement in the business. We expect the ROE to be at 16% and ROCE at 19% in FY20E.
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❖ Global Pharmaceutical Industry:
Pharmaceutical industry is one of the world’s fastest growing industries and remains one of the biggest contributors to the world economy. The unprecedented expansion in global healthcare access over the past few years has seen hundreds of millions of people in low and middle-income groups, benefiting because of governmental programs and rising incomes. (Source: IPCA Annual reports)
The global pharmaceutical market is now estimated to be just over US $ 1.1 trillion and is expected to grow at a CAGR of about 5% over the next few years to reach US$ 1.5 trillion by 2021. A move to value-based outcomes in drug research, increased penetration of specialty drugs, greater patient access to medicines and continued rise of emerging markets will be primary drivers behind increase in global medicine spending through 2021.
USA will continue as the world’s largest pharmaceutical market and emerging markets will make up 9 of the top 20 markets. Developed market spending growth will be driven by original brands, while emerging markets will continue to be driven by non-original products that make up an average 91% of emerging market volume and 78% of spending. New medicines increasingly are specialty in nature, and their share of global spending is expected to continue to rise from less than 20% ten years ago to 35% by 2021.
In emerging markets, long-term economic growth, increasing expectations for healthcare provision and changing diets and lifestyles are increasing the demand for healthcare products across all life stages. This is primarily to treat chronic conditions, including respiratory and cardiovascular disease. This demand is expected to grow significantly faster in these markets over the coming years than in more mature economies. At the same time, downward pressure on pricing by government, focus on prevention than treatment and high cost of R&D pose major challenges to the industry globally.
Key pharmaceutical markets
USA
Growth in the US medicine spending slowed by half in 2016 to around 6-7% from 12% in 2015. Medicine spending in the US is decelerating since 2001. However, it rebounded sharply in 2014 and 2015 due to a lower level of patent expiry impact. The market was further buoyed by high prices of both branded and generic medicines. Over the coming five years the market will grow from $462 billion to $645–675 billion in FY 2021 on an invoice price basis, but from $318 billion to $405–435 billion in FY 2021 on a net basis. Global demand for generic drugs will continue to grow as consumers pursue avenues to reduce costs. In the US, generic drugs comprise about 70% of the pharma market by
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volume. With around $100 billion worth patent expiries over the next five years, generic business has a significant growth potential. However, issues of compliance and fast erosion in prices, along with not very clear strategy of new administration will remain key challenges in this market.
EU5
Growth in medicine spending in the top 5 European (Germany, France, Italy, Spain and the UK) markets will increase from US$ 151.8 billion in 2016 to US$ 170–200 billion in 2021, growing at around 1-4%. the most pressing question for European governments on issues outside pharma, revolves around BREXIT. After more than half-a-century of integration in Europe, including medicines-related institutions and practices, disentangling the U.K. from Europe is extremely complicated. While uncertainties persist, the impact on the U.K. pharmaceutical market is expected to be modest with a 1.5% slower growth rate. The adoption of new medicines in Europe will be affected by budget concerns in implementing recent innovations and relatively weak economic growth. European governments manage spending on medicines through price and access controls. The trend is expected to continue in the forecast period too. Consequently, few medicines are considered breakthroughs in the region and thus, few achieve premium pricing. Most new launches face stringent price regulations in the European markets.
Australia
Australia’s pharmaceutical market is set to grow marginally from US$13.5 billion in 2016 to US$ 13.5-16 billion by 2021, registering a compound annual growth rate of 0 3%. This growth will be driven by good market access to pharmaceutical drugs, higher generic penetration, increasing awareness of the need for the early detection of lifestyle and chronic diseases, the subsidized cost of prescription medicines through the Pharmaceutical Benefits Scheme (PBS) for all eligible patients, and the annual addition of new drugs. Currently, Australia’s pharmaceutical market represents a knowledge-based, technology-intensive industry, and is positioned to advance Australia’s economic output and social wellbeing. The industry receives significant financial support from the government through the sale of medicines listed in the Pharmaceutical Benefits Scheme (PBS) and the R&D tax incentive.
Pharmerging markets
The pharmaceutical spending of markets stood at around US$ 242.9 billion in 2016. It is estimated to grow at a compounded annual growth rate (CAGR) of 6-9% during 2016-20 to reach US$ 315-345 billion by 2021. Note: (Pharmerging markets includes China, Brazil, Russia, India, Venezuela, Poland, Argentina, Turkey, Mexico, Vietnam, South Africa, Thailand, Indonesia, Romania, Egypt, Pakistan, Ukraine, Algeria, Colombia, Nigeria, Saudi Arabia and Russia)
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Generics market
Globally, the market has been propelled by initiatives of governments to promote generic drugs. The governments seek to promote the use of generic drugs against chronic diseases. Patent expiration of branded drugs is one of the key influencers for the growth and prime reason for generating more revenue for the generic drugs market. Moreover, new emerging markets of developing countries and the low cost of generic drugs are majorly responsible for the growth of the generic drugs market. Going forward, emerging and unexplored markets may be responsible for creating new opportunities
❖ Indian Pharmaceutical Industry:
India’s pharma industry is placed third in global rankings in terms of volume, but 14th in value. India’s pharmaceutical sector accounts for about 2.4% of the global pharmaceutical industry in value terms and 10% in volume terms. The country’s pharmaceutical industry is expected to expand at a CAGR (Compounded Annual Growth Rate) of 12.89% over 2015-20 to reach US$ 55 billion. Generic drugs form the largest segment of Indian pharma market and offers immense potential for growth in future. By 2020, India is likely to be among the top three pharmaceutical markets by incremental growth and sixth largest market globally in absolute size. Growing middle class households, coupled with the improvement in medical infrastructure and increase in the penetration of health insurance in India will also influence the growth of pharmaceuticals sector.
Indian pharma companies have a well-diversified business model with an optimal business mix across all primary geographies – India, Emerging Markets and the USA. USA with about 30% is India’s largest pharma export destination followed by European Union. It is estimated that 40% of the generics drugs sold in the USA are manufactured in India. Indian pharmaceutical manufacturing facilities registered with US FDA at 500 plus is also highest for any country outside USA. The country also has a large pool of scientists and engineers who have the potential to steer this industry ahead to an even higher level.
Indian pharma companies are focusing on global generic and API business, R&D activities, contract research and manufacturing alliances. India is also fast emerging as a preferred pharmaceuticals manufacturing location. Increasing use of pharmaceutical generics in developed markets to reduce healthcare cost will provide attractive growth opportunities to generics manufacturers and thus Indian pharmaceutical industry is poised for an accelerated growth in the coming years.
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❖ Key Risks
1. Regulatory risk: Regulatory risk is one of the major risk for IPCA. A regulatory audit is conducted by the regulatory bodies to ensure the manufacturing facilities meet the current Good Manufacturing Practices (cGMP) requirements. As IPCA is already exposed to several observations by the USFDA, the company is taking corrective measures to resolve these issues so as to market its products to U.S market once again.
2. Price risk: The business/ market risk for IPCA is the price risk and its ability to pass on the same to its customers. The products pricing competitiveness is a primary factor for the acceptability of Company’s products in the global markets. IPCA’s procurement process ensures that the pricing power is not affected by price changes in the market for the raw materials. The backward integration into manufacturing of several API’s for its own use in the dosages manufacturing also works as a mitigating strategy for price risk faced by the Company.
3. R&D risk: Absence of innovation in the products and process may obstruct the growth. IPCA is making a continuous effort towards innovative technologies which are designed to expand the product portfolio.
4. Operational risk: Interruptions in the raw material supplies may cost contraction of margins for IPCA. Vendor auditing helps to avoid this risk and also backward integration of its own APIs work as a mitigation for IPCA.
5. Quality risk: Lack of quality control in manufacturing may threaten the reputation of the Company and also expose to litigation. To mitigate this risk IPCA has restructured its Quality Control team for better control to avoid the adverse consequences.
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❖ Financial Performance
In 3QFY18, net revenues grew 15% YoY at Rs. 870 crs. The Indian dosages sales was up 12% YoY at Rs. 383 crs whereas the international dosages stood at Rs. 273 crs, 17% up YoY. The overall APIs business grew by 16% YoY at Rs. 191.5 crs while the Indian API business grew by 59% YoY at Rs. 59 crs and the exports grew by 4% YoY at Rs. 133 crs.
EBITDA stood at Rs. 161 crs a growth of 46% YoY due to reduction in the remediation cost and lower other expenses including the SG&A expenses. EBITDA margins were at 18.8% as against 14.9% in 3QFY17.
PAT grew by 155% YoY at Rs. 105.6 crs as against Rs. 41.4 crs in 3QFY17. The tax rate was slightly lower due to higher deferred tax.
Quarterly Financial Performance (Rs. in crores)
Description 3QFY18 3QFY17 FY17 FY16 Net Sales 859 740 3,157 2,843 Growth (%)
Total expenditure 698 629 2,726 2,569 EBITDA 161 110 430 274 Margin (%) 18.8% 14.9% 13.6% 9.6% Depreciation 44 43 171 161 EBIT (Ex. Other Income) 117 67 259 112 Non-operating Income 11 6 22 28 EBIT 128 73 282 140 Margin (%) 14.9% 9.9% 8.9% 4.9% Finance Cost 6 6 23 29 Exceptional Items - 4 - - PBT 123 64 258 111 Margin (%) 14.3% 8.6% 8.2% 3.9% Prov. For Tax 17 22 70 19 Reported PAT 106 41 188 93 Margin (%) 12.3% 5.6% 6.0% 3.3% Share of Associate - - - - Minority Interest - - - - Profit after Tax 106 41 188 93 Margin (%) 12.3% 5.6% 6.0% 3.3%
Source: IPCA Labs, Ventura Research
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❖ Financial Outlook
We expect IPCA PAT to grow at a CAGR of 43% for FY17-FY20E because of a) grip on the domestic dosage business b) new launches in FY19E and FY20E by focusing on the high growth segments c) likely resolution on the import ban by USFDA for all the three plants d) increasing sales from the Institutional business e) margin expansion with reduction in the remediation costs and also due to focus shift on high margin business going ahead and e) increasing filings and sales in U.S, Canada, and Europe/ UK. We expect the EBITDA margins to reach 19.2% in FY20E due to the reduction in the remediation expenses. The net profit is expected to grow at a CAGR of 43% for FY17- FY20E.
Growing trend of Revenues Improvement in the Return ratios going forward
(Rs. in Crs) (%) (%) 5,000 30 20.0% 4,000 25 15.0% 20 3,000 15 10.0% 2,000 10 1,000 5 5.0% - - 0.0% FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E Net sales(LHS) EBITDA margins( RHS) PAT margins (RHS) ROE ROCE
Source: IPCA Labs, Ventura Research Source: IPCA Labs, Ventura Research
Stable Working Capital going ahead
(No of days) 200 150
100
50
- FY16 FY17 FY18E FY19E FY20E Debtors Creditors Inventories
Source: IPCA Labs, Ventura Research
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❖ Valuation
We initiate coverage on IPCA Laboratories Ltd at a fair objective of Rs. 870. This represents a potential return of 18% from the CMP of Rs. 735. The stock is trading at 34x/19x/16x its earnings estimate for FY18E/FY19E/FY20E. We have assigned a PE multiple of 20X on the Mar-20E EPS of Rs. 43.6/- to arrive at the fair value.
Our analysis is based on the assumption:
1. The USFDA re-inspection and clearance of all the three plants. We believe that there is a very high probability of this happening.
2. A revival of Institutional business for malaria treatment.
Attractive Valuation along with High Growth
14% IPCA Labs
Ajanta Pharma 11%
Alembic Pharma 9%
Strides Shasun Revenue CAGR for 3 Years 3CAGR Revenuefor
6% 14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0 23.0 P.E ratio
Source: Ventura Research
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Share price and P/E
(Rs) (x)
800 80
600 60
400 40
200 20
- -
Close Price(LHS) PE(RHS)
Source: Ventura Research
IPCA’s Price to Earnings multiple (P.E) has been impacted by the low earnings due to the import alert and stoppage of the institutional business and U.S sales which is reflected in the chart.
The market has started factoring in the likely resolution of the USFDA issues which is reflected in the share price of IPCA. Considering the PAT CAGR over FY17-FY20E, we are assigning P.E. multiple of 20X for March- 20E.
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Peer Comparison for Financial performance with estimates
EBITDA EV/EBIT PAT Mgn ROE P/E P/BV Rs. in Sales EBITDA PAT Mgn EPS DA (%) (%) (x) (x) crs (%) (x)
Indian Peers
Ajanta Pharma
FY17 1,933 713 507 36.9 26.2 57.6 36.7 23.3 7.5 16.6
FY18E 2,099 665 482 31.7 23.0 54.6 26.3 24.5 6.0 17.8
FY19E 2,338 753 549 32.2 23.5 62.1 24.5 21.6 5.0 15.7
FY20E 2,687 882 663 32.8 24.7 75.0 22.8 17.9 4.3 13.4 Alembic Pharma
FY17 3,102 615 403 19.8 13.0 21.4 24.5 25.0 5.3 16.4
FY18E 3,124 639 414 20.5 13.3 22.1 20.1 24.2 4.5 15.8
FY19E 3,536 737 477 20.8 13.5 25.1 19.4 21.3 3.9 13.7
FY20E 4,042 879 580 21.7 14.3 30.4 19.1 17.6 3.3 11.5 Strides Shasun
FY17 3,483 811 400 23.3 11.5 44.6 15.9 14.3 2.1 7.1
FY18E 3,451 516 174 14.9 5.1 18.9 6.5 33.8 2.0 11.1
FY19E 3,839 738 365 19.2 9.5 42.3 12.5 15.1 1.7 7.8 FY20E 4,388 881 485 20.1 11.0 55.3 14.2 11.6 1.5 6.5 IPCA Labs
FY17 3,157 430 188 13.6 6.0 14.9 7.9 49.3 3.7 20.4
FY18E 3,203 460 252 14.4 7.9 19.9 9.7 36.9 3.4 19.2
FY19E 3,995 748 459 18.7 11.5 36.4 15.5 20.2 2.9 11.7
FY20E 3,583 874 550 19.2 12.1 43.6 15.9 16.9 2.4 9.8
Source: Ventura Research, Reuters
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Financials and Projection
Y/E March (` crore) FY17 FY18E FY19E FY20E Y/E March (` crore) FY17 FY18E FY19E FY20E
Profit and Loss statement Per Share Data (Rs)
Net Sales 3,157 3,203 3,995 4,551 Adj. EPS 14.9 19.9 36.4 43.6
% Chg. 1.5 24.7 13.9 Cash EPS 21.0 7.0 22.8 33.9
Total Expenditure 2,726 2,743 3,247 3,677 DPS 1.0 1.4 2.6 3.1
% Chg. 0.6 18.4 13.3 Book Value 196.1 216.1 252.5 296.1
EBITDA 430 460 748 874 Capital, Liquidity, Returns Ratio
EBITDA Margin % 13.6 14.4 18.7 19.2 Debt/ Equity (x) 0.2 0.2 0.2 0.1
Other Income 22 38 40 40 Current Ratio (x) 1.8 1.9 2.3 3.0
PBDIT 453 498 788 914 ROE (%) 7.9 9.7 15.5 15.9
Depreciation 171 175 183 194 ROCE (%) 9.4 10.4 17.9 18.7
Interest 23 24 24 23 Dividend Yield (%) 0.2 0.2 0.4 0.5
Exceptional Items 0.0 0.0 0.0 0.0 Valuation Ratio (x)
PBT 258 299 581 697 P/E 49.3 36.9 20.2 16.9
Tax Provisions 70 48 122 146 P/BV 3.7 3.4 2.9 2.5
Reported PAT 188 252 459 550 EV/Sales 3.1 3.0 2.4 2.1
Minority Interest 0.0 0.0 0.0 0.0 EV/EBITDA 22.5 21.1 12.8 10.7
PAT 188 252 459 550 Efficiency Ratio (x)
PAT margin (%) 6.0 7.9 11.5 12.1 Inventory (days) 101 105 108 109
Other opr Exp/ Sales (%) 0.0 0.0 0.0 0.0 Debtors (days) 58 75 75 80
Tax Rate (%) 27.1 16.0 21.0 21.0 Creditors (Days) 148 140 135 125
Balance Sheet Cash Flow Statement
Share Capital 25 25 25 25 Profit Before Tax 258 299 581 697
Reserves and Surplus 2,450 2,701 3,161 3,711 Depreciation 171 175 183 194
Minority Interest 0.0 0.0 0.0 0.0 Working Capital Changes -99 -362 -379 -340
Long Term Borrowings 352 260 220 180 Others -65 -24 -98 -123
Deferred Tax Liability 169 160 150 150 Operating Cash Flow 266 89 288 428
Other Non-Current 26 28 28 28 Capital Expenditure -135 -139 -153 -200 Liabilities Total Liabilities 3,022 3,175 3,584 4,095 Other Investment Activities -5 5 0 0
Cash Flow from Gross Block 2,210 2,360 2,510 2,710 -140 -134 -153 -200 Investing Less: Acc. Depreciation 311 486 669 863 Changes in Share Capital 0 0 0 0
Net Block 1,900 1,874 1,841 1,847 Changes in Borrowings -128 70 -108 -200
Capital Work in Progress 62 57 60 60 Dividend and interest -28 -24 -24 -23
Cash flow from Non-Current Investments 205 194 194 194 -156 46 -132 -223 Financing Net Current Assets 758 939 1,369 1,868 Net Change in Cash -31 1 3 5
Long term Loans & 97 110 120 125 Opening Cash Balance 155 125 126 129 Advances Total Assets 3,022 3,175 3,584 4,095 Closing Cash Balance 125 126 129 134
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