Divis has broadly two segments 1. Generics 2. Custom synthesis . Operating economics of both the divisions are different , hence its worth to discuss separately .
Generics API : Divis generics business comprises manufacturing & supply of generic api & intermediates mostly of matured molecules to various global markets . This division contributes fifty percent of total turnover including Nutraceuticals . Turnover grew by 20 percent over last ten years with 40 percent EBIDTA margins .
1. Judicious product selection : Product selection based on volumes ,pricing ,leadership and complexity of molecules .
2. Chemistry skills : Complex chemistry skills enable it to develop proprietary , efficient processes and commercialise for clients .
3. Low cost manufacturing : With tight control on cost front , divis has ability to control pricing .Compare to other companies divis always build huge plants ( Hundreds of acres ) and stay away from peer clusters . Hyderabad facility ( 500 acres ) , Vizag facility ( 350 acres ) , upcoming kakinada plant ( 500 acres ) . I guess idea would be to built and execute plants at high economies of scale . Apart from this divis SO FAR has known for executional capabilities in new plants and approvals .
4. Global leadership : In most of the products Divis aims to attain global leadership . Top three molecules Naproxen , dextromethorphan , nabumetone ( Together 30 percent of total turnover ) divis has more than 70 percent market share . Recent products are again successful like levetiracetam ( 70 percent market share ) and Gabapentin .
5. Non infringing patent policy : Clear strategy of respecting peers patent and focusing on matured molecules
By developing products with complex chemistry , tight cost control and priced so as to keep away competition , over the period of time divis attained leadership in couple of molecules . As of now . For example twenty years back there were multiple players in naproxen , divis started to manufacture @ 150 rupees and prices have been crashed to 40 rupees now . Operating at huge scale and process refinements helps to attain stupendous margins . While present molecules act as cash cow and new launches will drive growth .
As of now Divis has been filed 31 DMF to USFDA , 19 COS from European authority and 72 EU dmf’s
Nutraceuticals : This segment is relatively new to Divis , represent five percent of total turnover growing at 30 percent . Global carotenoid market offers $ 1.5 Billion opportunity and Divis started to launch products in feed and health segments with products like beta carotene , lutein etc in european countries ..Major players are DSM , basf . It’s difficult segment to crack and offer significant opportunity both in terms of volumes & pricing .
Key risks :
1. Incremental growth depend on ability to identify, launch new products
2. Most of the present high volume molecules are matured
3. Postponement in patent expiries and delay in genericisation
4. Regulatory approvals and delay in ratification
5. In the intermittent periods of regulatory issues , the chances of aggressive competition can prop up .
Pointers to look for
* 1. Very difficult to analyse product wise data given numerous moving parts .
* 2. Directionally over longer periods patent cliff presents opportunity for companies like divis and how it’s been shaping out
Custom Synthesis : This segment represent collaboration with research partners at NCE development stage and supporting the innovators throughout lifecycle of molecule . This segment represents fifty percent of turnover with higher profitability and growing at 20 percent cagr .
1. Ability to offer process design , optimisation and yield improvements
2. Development in gm / kilo levels
3. Analytical & process expertise to generate reliable data for regulatory submission
4. Strict IPR : By maintaining highest standards in IPR , Divis has built very long term and successful relationships with innovator companies
5. Strength of mass manufacturing once innovator gets product approval .
6. Dedicated research team on FTE basis supports innovators
7. Client validations & Regulatory approvals
8. As a dedicated crams player , divis has consciously avoided formulations
Chemistry skills ,cost , timelines , compliance , trust , comprehensive services all play role in Custom synthesis business . This segment has relatively high entry barriers and stickiness as players in generally aim long term relationships . Once customers are successful in nda approvals and the probability is high to remain as key supplier .( Generally innovators would have their own manufacturing plant + they will mention somebody else as alternate supplier )
Key pointers to look for
1. Given the confidentiality agreements and uncertain nature of business , divis won’t disclose commercialised products , number of projects , clients name etc ..
2. Given the longer relationships , if there is a big jump in numbers we can safely assume that , one of their client molecule would have been successful and the probability is very high in sustaining volumes .
3. Broader trends in contract research opportunity
Key risks :
1. * Like in investing , froth , optimism & fear are very much involved innovators research . .Companies announce new research projects on hope and shelve at bad patches . Now a days lot of virtual companies are mushrooming in early stages and they work on outsourcing .
2. * Broadly research outlay has been fairly stable over longer periods , it’s not growing either . Again large companies started to withdraw from early stage molecule development and buying at Phase 2a & 2b .
3. * Outsourcing research has been a strong theme as innovators are very much losing patented molecules and related cost pressures
4. As its molecular research is highly uncertain , companies shelved / postponed their projects from time to time . This happened in 2002-03 and 2009-10 periods .
Key parameters of vendor selection :
1. Strong chemistry skills and process optimisation
2. IPR compliance & related trust
3. Susceptibility of business model i.e.. Product , client concentration , balance sheet etc . ( If vendor is vulnerable to above factors , then chances of getting trust from biggie's would be low , as sustainability is key ) What is something happens to vendor ? Its all about ensuring uninterrupted supplies
Great business # Six sides of great
1. Attractive operative economics : Divis with core chemistry skills ( Chiral synthesis ) has grown by twenty percent over last ten years . Building capacities on proper visibilities with reasonable cost structures aiming economies of scale by getting leadership
2. Sustainable competitive advantage ; Focused strategy right from identifying molecules , attaining global leadership and by pricing at levels where competition could get waned off . Low cost manufacturing + Strong chemistry skills would be key competitive advantage
3. Growing market opportunity : With ever growing cost pressures both in research + manufacturing trend has been outsourcing , It’s getting stronger and stronger . With huge talent pool and strict compliance ( Gaining trust ) compare to our competing countries , India has already been leading to grab major share . THis could grow if not accelerate from here .
4. Pricing power : BY attaining global leaderships and low cost manufacturing , Divis enjoy pricing power in manufacturing . Most of the molecules being matured and competitors vacated , Divis could increase prices . 40 percent Ebidta margins + 30 percent ROCE indicates pricing power
5. Low capital intensity : Sector itself is a high capital intensive sector , average asset turn has been around 0.9-1 times over ten year periods
6. Management : Company has excellent talent pool leading by Mr.Murali.K.Divi and Mr.Ramana with enough depth in the middle management level .Divis has unique culture of retaining employees and most of them are with the company from last 20-25 years . Attrition is very low . Managing 10k people is not an easy task . Capital allocation track record often indicates management quality . With nil equity dilution after ipo , 40 percent + dividend distribution , building capacities on proper visibility and commitment from clients , focus on organic focus indicates quality of management .
Dis : It's just broader discussion on company based on my understanding . NO Holdings