Stock Focus: Dishman Pharmaceuticals - A Strong Turnaround

Dishman Pharma is majorly into CRAMS (Contract Research and Manufacturing Services). The other part of the business named as MM (Marketable Molecule) comprises of bulk drugs, intermediates, Quats and speciality chemicals and outsourced/traded goods.

Apart from Indian units it has manufacturing and R&D facilities in Switzerland, UK and Netherlands and a green field manufacturing facility at Shanghai, China.

While the going was good during 2006-09, Dishman benefited mostly from higher outsourcing from pharma majors both in production and contract research. Expecting a higher growth ahead major players expanded capacity by organic & inorganic routes.And then the troubles began....

The troubled years: FY 2010 – FY 2012

The problems started post 2009, with the ongoing global recession and spurt of M&A led consolidation, led to a slump in order inflows. As pharma majors focused on cost cutting and inventory rationalization CRAMS players with all their expanded capacities were hit hard. 

Also R&D cut down led to decrease in Contract research opportunities. It was a tough time to be into CRAMS. For Dishman everything was running fine till 2009 when it was hit hard due to above problems. 

In 2009-2010 Dishman posted negative growth in revenues (fell from 1,070 Cr to 920 Cr) and profits (fell from 146 Cr to 117 Cr). The company was already servicing heavy debt from the earlier acquisition of Carbogen Amcis in 2006. Now the slump along with ongoing capacity expansions was disastrous.

During 2009-10, Company started a Vitamin-D manufacturing facility at Veenendaal, the Netherlands (Nov, 2009) the specialty Oncology API facility at Bavla, Gujarat (Jan, 2010). The Chinese facility for APIs and API intermediates came up in Shanghai, China. Another significant development was the US FDA approval for Dishman's API production facility at Ahmedabad (Feb 2010)

During 2010-11, the situation worsened. While consolidated sales grew (from 920 Cr to 1037 Cr) profits slumped drastically (from 117 Cr to 80 Cr). Revenue split was 66% CRAMS and 34% in MM. Drastic increase in RM costs and higher finance costs impacted profits severely.

Company added a new manufacturing unit at Bavla for Vitamin D, manufacturing unit for Antiseptics and Disinfectants, new High-Potency(Hi-Po) manufacturing (Unit-9). It developed non-infringing process for about 10 APIs of various therapeutic categories. In MD&A for FY11, company expected significant growth for CRAMS industry going forward till 2013. And it was followed by an even disastrous 2011-12.

During 2011-12, while consolidated sales grew (from 1,037 Cr to 1,130 Cr) profits slumped drastically yet again (from 80 Cr to 57 Cr). Revenue split of 64% for CRAMS and 36% for MM. The decrease this time was accounted due to higher tax expenses as the tax concession available to EOU units in India were not available (from FY12 onwards) and the tax rebate available (on carry forward loss to one of their subsidiaries) was fully adjusted against the profits.

In Jan 2012, Dishman’s Swiss subsidiary Carbogen Amcis acquired Creapharm Parenterals, a subsidiary of France based Greapharm Group. Creapharm specialized in liquid, semi-solid and injectable aseptic dosage form. It came to be known as Carbogen Amcis SAS. 

Company received US FDA approvals for Veenendaal facility (Netherlands). Major expansion units viz. Hypo facility (Unit 9), Disinfectant Division (Unit 10) and Vitamin D3 (Unit 13) went live at Bavla facility.

Decoding the disaster: Financials

A look at the common size P&L for the past five years gives us enough insights into the business slump as we see rise in RM costs (2009-12) higher interest burden from debt servicing (2009-12) and depreciation from capital expansion eating into net profit margins (slumped from 14% in FY09 to 5% in FY12)

	FY 08	FY 09	FY 10	FY 11	FY 12
Sales Turnover	100%	100%	100%	100%	100%
Raw Materials	39%	30%	30%	38%	35%
Excise Duty	0%	1%	1%	1%	1%
Power & Fuel Cost	3%	3%	3%	3%	4%
Other Manufacturing Expenses	3%	4%	5%	4%	4%
Employee Cost	26%	25%	27%	27%	26%
Selling and Administration Expenses	11%	10%	11%	9%	9%
Miscellaneous Expenses	1%	3%	1%	1%	3%
Profit before Interest, Depreciation & Tax	25%	25%	25%	21%	21%
Interest & Financial Charges	4%	5%	4%	5%	6%
Profit before Depreciation & Tax	21%	21%	21%	15%	15%
Depreciation	6%	6%	6%	7%	7%
Profit Before Tax	15%	15%	15%	9%	8%
Tax	0%	1%	2%	1%	3%
Profit After Tax	15%	14%	13%	8%	5%

....and the turnaround: FY2013

It was a struggle for existence, and over this period Dishman did some things right which helped it to finally turn around in FY2013. 

   

     Restructuring at Carbogen Amcis : With a slump in global R&D spend the company did quite right to curtail research services (CRS – Contract Research Services) which has the problem of higher manpower cost as compared to CRAMS. At Carbogen Amcis the research staff was reduced to 80. In addition Dishman re-instated earlier CEO, Mr. Mark Griffith, who played a major role in turning around the unit and focusing on debt reduction.

     Building capacities: Dishman did one thing right. They were well prepared to play the CRAMS game better when demand returns by expanding capacities at the right time in the right place. The HiPo (High-Potency) facilities for Oncology at Bavla were completed by this time. Company invested around 500 Cr in total, around 200 Cr in Hi-Po, 125 Cr in Sanghai facility in China and another 175 Cr for Vitamin D3 and Disinfectant facility. 

     Gaining from Demand –Supply mismatch: The company came to a sweet spot with respect to certain chemicals from the marketable molecules segment. It is now the sole manufacturer of Benzethonium Chloride globally. Also it is one of the only couple of players to manufacture Vitamin D3 (facing global scarcity from RM supply constraint). In such situations, company can leverage high margins from an otherwise manufacturing unit.

     Contract ramp-up from key client Abbott (earlier Solvay): Solvay (now Abbott) has been one of the key clients. Dishman primarily supplies Eprosartan (Teveten) API to Abbott with long term contracts. The contract revenue grew at CAGR of 36.1% to Rs 174.0 Cr over FY2007-09. However, due to Solvay-Abbott merger and inventory rationalization during FY2010, the order flow declined. Now that inventory rationalization has normalized world over, healthy growth is once again expected from Abbott for FY2013 and onwards.

With the major Cap-Ex behind them company now could focus on debt reduction from increased order flows and cash generation. Thus profit margins which once slumped to 5% would gain again to high double digits boosted by better earnings and debt reduction. The company has repaid 52 Cr of debt in H1FY13 and expects another 50 Cr to be repaid by the end of this fiscal year.

Post consolidation in the pharma industry and looking at the impending patent cliff (losing patents on major revenue generating blockbuster drugs) the pharma giants have again started outsourcing heavily putting CRAMS players in a sweet spot.

The growth numbers over the last 12 months point to a healthy recovery and turnaround more so over the last 6-months (Apr-Sep 2012)

Half-Year periods	Mar-11	Mar-12	YoY grw	Sep-11	Sep-12	YoY grw
Net Sales Turnover	586.17	616.29	5%	507.78	608.96	20%
Other Income	13.82	10.28		2.68	2.87
Total Income	599.99	626.57		510.46	611.83
Total Expenses	495.59	484.67	-2%	415.02	458.31	10%
EBITDA	104.4	141.9	36%	95.44	153.52	61%
EBITDA margin	18%	23%		19%	25%
Depreciation	35.84	37.15		39.37	39.76
EBIT	68.56	104.75	53%	56.07	113.76	103%
Interest	38.13	26.69	-30%	46.25	36.37	-21%
Int/EBIT	56%	25%		82%	32%
PBT	30.43	78.06	157%	9.82	77.39	688%
Tax	6	30.1		1.06	12.12
PAT	24.43	47.96	96%	8.76	65.27	645%
PAT Margin	4%	8%	87%	2%	11%	521%
Equity	16.14	16.14		16.14	16.14
Earning Per Share	3.03	5.94	96%	1.09	8.09	642%

Latest Developments:

·         Order inflows: 

o   Company has signed major supply agreements with Abbott (100mn Euro deal on EM and Fenofibrate), Astellas (18mn Euro deal with Carbogen Amcis), Celegene (Euro 20mn), Astra Zeneca etc. 

o   Sales of Eprosartan (from Abott) has gained traction in Q2FY13 and generated revenues of USD 5 mn. The company expects to get INR 70-75 Cr of revenues from Eprosartan supply.

·         SEZ Land sell-off:

o   Dishman’s management decided to de-notify the SEZ plan. It has given the mandate to 2‐3 consultants to sell the SEZ plant and is expected to garner around 100 Cr which will be used to repay debt.

·         Capacity utilization:

o   Unit 9 (Oncology) capacity is entirely sold out although the revenue impact is likely to be visible only from FY14 onwards (expected $15-20m in FY14) Presently supplying clinical quantity (R&D need) to Merck for one of their experimental oncology drug from this facility. Astellas, Cephalon and Lexicon have shown interest in using this facility.

o   Vitamin D3 facility will also start contributing from coming quarters. Due to worldwide shortage Vitamin D3 margin expected is high.

o   For the disinfectant unit, negotiations are on to enter into JV with one of the global disinfectants player (>$3bn sales).

o   China unit has started supply of 3 products and contributes $ 4mn at EBITDA level. Arpriprazole is expected to be filed from China by March 2013. Expected to breakeven by next year.