(Sandeep Patel) #86

Some data to chew. First draft. Lot more digging required.

Divis Labs API v1.pdf (211.6 KB)

  • Unit 2 contributes much higher to the total API sales than Unit 1.
  • In Unit 2, the exempted APIs contribute major chunk to the total API capacity & API sales.

Items requiring additional digging -

  • Only one innovator molecule or there are more? Particularly not exempted ones.
  • Generics for which Divi’s did not file DMF.
  • Add column for market size, to derive market share figures.
  • For how many years are key molecules/products being manufactured by Divi’s? Which are the relatively new products?

Joint effort from Ankit, Ananth and Sandeep with pointers from Anant and thought provoking queries from Donald.

(Furkan Alam) #87

Anyone who attended the con-call, please share more insights.

(nil_71) #88

Divis Lab Mgmt looks in an overactive mode post the import alert whereas they were completely unreachable before all that.

(Donald Francis) #89

Concall Update, shared by a friend

  1. US exposure (including indirect supplies) of Divi’s Unit 2 is around 22%, but the
    drug exemptions protect most of the US sales of the unit. Considering the
    exemptions, Divi’s management expects a net revenue impact of 3‐5%.
    Additionally, its customers are trying for more product exemptions from the Import Alert

  2. Since the company received an Import Alert before a warning letter, it has already started
    corrective and preventive actions (CAPA) based on observations in the Form 483,
    has provided an update on its CAPA in January 2017, and is ready to file a 2nd
    update on CAPA by 31st March 2017. However, the management is waiting for a
    detailed communication from the USFDA on Import Alert, based on which Divi’s will plan
    remediation action

  3. Management expects limited remediation cost at Unit 2, as it believes observations
    are procedural and do not require major changes in plant/equipment

  4. The USFDA has already given a methodology for the export of exempted products
    to the US; accordingly, Divi’s is in discussions with a third party for verifying its

  5. Divi’s expects no impact of the Imort Alert on its capacity expansions (Rs 2.5bn brownfield expansion in Vizag and Rs 5bn greenfield expansion in Kakinada). In order to manage capacity constraints and delay in planned expansions, it is expanding Unit 1 capacity with an investment of Rs 1.75bn

  6. It indicated that its Unit 1 was inspected by the USFDA in June 2014 and a routine
    inspection is possible anytime. It says it is well prepared as it has already corrected
    issues in Unit 1 as per observations highlighted in Unit 2

  7. Divi’s has a current cash position of ~Rs 17bn but it does not have a buyback or
    special dividend plan soon; its prime focus will be on resolving plant‐related issues

  8. Expects moderate growth of 10% in sales over the next two years due to capacity
    constraints, delay in greenfield projects, and the impact of the IA.

(Donald Francis) #90

Some significant data points/management-speak are there before us, and the immediate response probably (for everyone) is - the worst is more than priced-in; things don’t look that bad.

The same information is available to everyone - however “interpretations” can and do differ. The above is an automatic, a la Daniel Kahneman, System1 Response. But are there other interpretations, possible?

1.Why does this statement not border on misplaced confidence, bordering on over-confidence?

a) Is it likely/even possible to have put-in-place (order, install, integrate with processes) all necessary (and found missing) data-integrity equipment/software/process-integration in UNIT1 in such a short timeframe - while UNIT2 issues on the same are still to be vetted as rectified, and external consutants are at work

b) Isn’t it unlikely that perhaps the more critical issue (debatable) of Metal-Particles traceability (undetected and unsolved) in UNIT2, which perhaps again the USFDA will be very cautious to investigate much more deliberately before giving an all-clear - to be pre-supposedly solved already in UNIT1

c) The Management-Speak so far has been prompt to try and address panic reactions - but long on general confidence-boosting statements, and woefully short on commenting on criticality of observations, and explaining some of the interventions/resolution mechanisms to give credence/substance to the confident “we-are-on-top-of-issues” kind of statements

d) While it will be a good thing for sure, if no further adverse developments take place - but to take it as a given, assumes UNIT1 will come out unscathed in any immediate/scheduled inspection - a best-case optimistic scenario?. Also Divi’s being a contract manufacturer runs the risk of more inspections getting triggered due to multiple customer product-related triggers (unlike the generics biggies from India), perhaps

In order to manage capacity constraints and delay in planned expansions, it is expanding Unit 1 capacity with an investment of Rs 1.75bn

e) Unit1 Expansions will take time to put in place. How does that affect 10% growth projections of next 2 years

Requesting folks not to take this as a for-or-against debate pitch. I am very interested in Divi’s :slight_smile: if it qualifies as a no-brainer, long-term opportunity. I like to reverse positions (wear a different hat) in a more deliberate attempt at killing a tempting prospect - with hopefully System2 kind of processing. We need more such attempts - to ask more probing questions; its too easy to be lulled by our automatic system1 responses.

(Mridul) #91

Spot on! Would be foolish on our part to think that mgmt will themselves disclose any more skeletons…


There was no material slip here. The management in conf call said that Clauses 99-32 were informed to them on the next day.

I agree with you here. The management should have spelled out both the causes and the remedial actions in terms of what additional processes are being followed, just a saying that the process has become more stringent is not sufficient enough. To some extent the questioning and the response in conf call was pretty ordinary. Also I expected management to take more questions without restricting themselves to one hour, looking at the criticality of the issue.

(S Khan) #93

IPCA labs had a similar situation circa Jan 2015 . Four of its drugs were exempted from import alert :

1). Hydroxychloroquine Sulfate
2). Propanolol Hydrochloride
3). Trimethoprim
4). Ondansetron

the first one HCQ had a severe shortage , i believe IPCA along with cadila was the one of the 2-3 US FDA approved manufactures for that API in the world. at one point price escalated
as much as by 20 times (from $20 a bottle to $430 in a matter of weeks). it was expected that IPCA could take advantage of this and mitigate the revenue loss due to the import alert . However , IPCA was unable to export this product to USA in time as FDA insisted on a third party Batch verification of the API which was based in Vietnam before shipping. This took its own time and IPCA was unable to sell this product in US for atleast 3-4 quarters . By that time prices of HCQ came down to saner levels and didn’t made any dent to IPCA’s topline . Cadila had one time windfall gain thanks to HCQ during the same period.

While analyzing the product list , one should look at possible shortages if company is the only or among one or two manufactures which could lead to price escalations plus bear in mind that even if company has some exempted products its not a given that will be able to sell it smoothly as FDA tends to introduces extra cumbersome compliance requirements on companies with import alerts.

(Donald Francis) #94

Yes - the competitive position on the products - is one of the first things to get clarity on. However, this being year end most folks are terribly busy, else this is straightforward and easy to establish from DMF filings, I would think one of the first things our specialists would have established.

@lustkills @ankitgupta @ananth - whenever you find the time :slight_smile:
for info - all our Pharma info specialists are full-time working professionals, by the way


I have a more basic question here:

In this entire debate about management are we looking for a causality where none exists and passing judgments on the management both for and against? There is a significant history of mgmt going through regulatory inspections should that not be a significant evidence for the management doing the right things most of the times?

There is ofcourse no doubt about value destruction due to sales/profitability impact and the delayiong of further registrations from Unit 2 and the impact on pipeline. There could also be some kind of margin pressure because the tag of no FDA issues is lost. But specifically to what you are asking to do above I have a few questions:

  • How does this help if one has to take a 3 to 5 year view of the company?

  • Does any of the above change Divis Chemistry skills?

  • Does any of the current scenario impact the low cost of production in the longer run?

  • How does the above analysis materially impact value/future value creation beyond a year or two?

(Donald Francis) #97

I am hoping you are not pulling a fast one, on me :wink:. Great past track record, great chemistry skills, low cost production, and low valuation is all you need for a long-term investment decision? Taking cues from past track record, and everything else as a given - is a typical System1 Response call - which is probably adequate for very smart folks - its never been that simple for me.

Only when one believes Competitive Strategy/Position and Value are joined at the hip, will someone see value in Competitive Analysis. I am a bit surprised - are we saying Porter’s Competitive Analysis framework is useless in Business Analysis- we should only do broad-strokes investing? Doesn’t matter (even) for someone considering a concentrated portfolio bet with upwards of 10% allocation??

If you are a HM Bhakt, and He says in the essence Risk Control of the Portfolio comes from only one thing - Gap between Value and Price. He further elaborates, for that you need to KNOW Dependability and Stability of Value. Anyone will agree, dependability and stability of Value comes from the dependability and stability of future Cash Flows. And if you take this one step further - what does dependability of future cash flows depend on??

Only one answer - depends primarily on Stability of the Industry, and dependability and stability of the Competitive Position of the Business in its Industry. Today’s competitive position is a derivative of the competitive strategies deployed by the Management - which in turn is a derivative of the conscious choices made by the Management - Product segment, Market Sizes & Volumes, n stage chemistry, capacities vis-a-vis what the competition is doing (based on their unique strengths). I am hardly the person to explain the linkages with any lucidity, but those genuinely curious (unfamiliar) - can refer to excellent literature that exists, on topic.

It will be good to understand the competitive strategy (if we can) deployed by Divis - the how’s and the why’s - of the conscious product choices made -high volume, high sustainable market share/but low growth with the mix of faster growth, higher competition new segments. We don’t know what this might or might not reveal, but we sure do have an open mind about following due process of business analysis. At the least, the exercise will lead to better understanding of the business, product choices, competitive landscape, and hopefully reveal some insights on strategies deployed by the management - useful for any long-term holder of the business.

Frankly I am a bit annoyed now at persistent attempts - to stymie - a closer look at the business and management. Those who do not see value in the exercise - for the umpteenth time - can they just humour those who want to go-ahead and complete the exercise, please. Its always good to have an open mind, even when you might be convinced about the futility of an exercise. Who knows what the exercise reveals - let’s enjoy the process of discovery.

Please refrain from a rejoinder - please DO NOT clutter up a potentially good business analysis - that is impartial to any views held on either side - it is all about knowing more about the business - a focus on putting ALL the FACTS on the TABLE.

(Hitesh Patel) #98

Some questions that crop up from concall details are:

Re point 1–What is the timeline for exemptions for the few products which are exempted? FDA can very well put the exempted products on import alert list any time it sees fit.

Re point 3 – Coming to remediation costs, it would also have to account for retaining consultants and following their suggestions and guidelines. This could entail unforeseen costs.

Re point 4 – What are the costs associated with verifying its operations through third party?

But with the lapse having happened will the company be able to command premium valuations it used to be accorded by markets even if the problems were to be resolved? this could have an impact on the compounding rate even if the story gets on track.

If one traces similar history of problems with Ipca and Sun Pharma and the management responses to those situations, then something interesting emerges. Initially the attitude of management is to brush off all blame and calm the investors and assure them that it is only a matter of time before the issues are resolved. They often offer definite timelines. Maybe a few months to six or nine months. (in the first place as we have experienced, management itself has no idea when USFDA is going to turn up again for inspection again.) In case of Sun pharma, there were news/rumours of Mr Sanghvi himself making presentation to the FDA about remedial measures taken at Halol and that caused lot of optimism even in company employees that approval is a done deal. Only for the hopes to be dashed again recently.

Once a couple of quarters elapse before any positive development happening, the tone of management changes to something like — We cant predict timelines bcos we dont know when the USFDA will turn up for inspection.

Coming to the business characteristics, it has been established by donald and Om that it is capex heavy. There would be a high element of fixed costs and operating leverage can work negatively here. How would the returns from the new facility pan out if utilisation rates were to remain low for a prolonged time. Good thing here is company is not leveraged and can afford to bear costs due to strong balance sheet.

On the flip side one has to take into account their spotless clean record till now with the authorities. That should count for something but the issues raised about glass particles amount to serious breach of manufacturing practices.

And the other risk one has to consider is of some other drug authority of some other country finding faults with them and causing more damage to an already dicey proposition.

(Arindam) #99

Different folks have different decision-making patterns. Some need very in-depth understanding, I have seen some take great decisions based on the strength of the business model alone, and some decisions can be over-simplifications, yes. Yet, we also know folks who have been successful using all these diverse styles.

In the same vein, we should all be open to examining a business and management from all angles. There is no gain trying to second guess the utility of an exercise - or in what way does it change any decision-making. Better understanding of the business will perhaps convince us better of the Margin of Safety (or lack of it) inherent in the Price.

Price (safety in today’s price) cannot be the only/real guiding factor in decision-making. The same arguments were made at price 750 and lower, now being made at 650 and lower. Should price go to 450 or lower - for any reason - what will aid us more, is better understanding of the business.

Personally, would love to see the output of the product/segment analysis - being pushed by Donald

(vinamra chaware) #100

DCF Analysis for Divis:-

1)Import Alert would reduce FCF by 28% in next two years
2)Then FCF will return to what it was on 2016 with little bit growth
3)Latter growth in FCF will be below normal based on past data .
As during this 3 year period, new competitors will pick up some market from Divis
But impact would be less as its very capital intensive and research based business .Lot of technical constraint will make it difficult for competitors to fully dominate Divis .
But we assume Divis wont be able to return to previous OPM & NPM levels due to increased competition and would grow in future with below normal growth rate.
4)You can try various possible ALTERNATE HISTORY by putting your assumption in GREEN color marked cell.Divi’s Lab.xlsx (197.9 KB)

Note:-This excel template is only for educational purpose.Not Invested.May or may not invest in future.

(Furkan Alam) #101


(Ankit Gupta) #102

I did some work on the exempted molecules. Some snapshot of the same is given below:

Few pointers from the table:

  • Out of the 10 exempted molecules, there is just one molecule which is still under patent (Raltegravir Pottasium - brand name - Isentress and Dutrebis). This molecule is a blockbuster molecule for Merck & Co. with worldwide sales of more than USD 1.30 billion during CY16.

  • As Om pointed out, molecules like Levetiracetam, Gabapentin, Lamotrigine and Naproxen are highly genercised molecules but the growth the company is seeing in such molecules is a big achievement. Despite being the lowest cost producer, the company has such high PBILDT margins is just mind numbing to me!

Some of my observations after going through the concall:

  • Apart from the exempted list which has just one CRAMS molecule (remaining are generic molecules/intermediate), the company said that they are also trying to get exemption for ‘few genericised and CRAMS molecules’. Does it mean that some molecules under CRAMS (i.e. supplies to innovators) have also been banned? As per my limited understanding of CRAMS model, there are usually two or at max three major suppliers under CRAMS with one of them being a major supplier, supplying upto 60 - 70% of the total requirement of the innovator. I think innovators (large pharmaceutical cos) would be pushing USFDA to exempt some more molecules from the site. However, it is pretty surprising that these molecules still contribute less than 5% of the company’s total sales. Does it mean that most of the supplies under CRAMS to US markets happen from Hyderabad unit or most of the supplies under CRAMS is for European and ROW markets only? Furthermore, being a lowest cost manufacturer, it might not be difficult to get back some of your lost sales for generic products after the regulatory issues are sorted out but how the issue impacts relationship with innovators for CRAMS supply is something we need to understand in detail!

(SS64) #103

This Guy has predicted the import alert in Dec itself. Many of the points discussed makes sense now.


Disclosure: Invested from 700+ levels

(ashit) #104

Celogen life seems to be rival company he may not be research analyst
He knows importance of Naproxen and possible exemption from IA
Information is useful
Disclosure started investing at 630 level but still not having full conviction



More exceptions are now added:

Levetiracetam;Gabapentin;Lamotrigine;Capecitabine;Naproxen;Raltegravir potassium;Atovaquone;Levodopa;Intermediate 26U90 (chloropurine);BOC core succinate;2,4-wing active ester; Ethyl-7-chloro-2-oxo-heptanoate (CKE);(+)-2,2-Dimethylcyclopropyl-carboxamide (DCAM); L-moc valine - ; Oky Ksalt; Methyl 3-benzyloxy-1-[(uRS)-2,3-dihydroxypropyl]- 4-oxo-1,4-dihydropyridine-2-carboxylate (DHPM) ; 1-(2,2-Dimethoxyethyl)- 5-methoxy-6-(methoxycarbonyl)- 4-oxo-1,4-dihydropyridine-3-carboxylic acid (DHPA) ; (3R)-3-Amino-1-butanol (RABO) ; 2,3-dimethyl-2H-indazol-6-amine (GW776944B) ; 5-amino-2-methyl-benzenesulfonamide (GW700143X)

The new list can be accessed here

(HG) #106

Sure seems he knows what he is talking about -


Celogen Lifesciences and Technology also specializes in providing
consulting services in the area of plant set up for API as well as
Formulation Plants. The company has specialists in the company who
specialize in commissioning the plant and give consultancy on GMP and
Quality Assurance related issues. The company also takes up projects on
plant up-gradation, process validation, achieving final approval from
various Regulatory bodies such US-FDA, UK-MHRA, TGA – Australia, MCC –
South Africa, ANVIZA Brazil, INVIMA – Colombia etc.