Shilpa Medicare -Racing away on the Oncology API highway!

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Great Job Sandeep. I do have certain questions mainly on the strategy side and I think it would help if these are put across to the management:

a) The company has an over reliance in terms of sales on one single partner Intas. How is the company planning to de-risk itself from this?
b) One of things that came across in a discussion with an Industry veteran recently is that dependence on a single line of product can be very risky. Some of the examples quoted were the change in Leukemia treatment in last decade. Another example was an improvement in efficacy leading to reduced frequency in dosage or a new line of device. How does Shilpa see the emergence of such trends and what is strategy of dealing with such disruption?
c) There is large capacity coming up in Oncology. Lupin, Alembic, Torrent are all setting of Oncology facilities. How does the company see demand supply scenario in the next 5 years? Is there a possibility of overcapacity?
d) The consolidated and standalone gross block is 751 cr and 475 cr respectively. The consolidated and standalone sales are 724 cr. vs 682 cr. A gross block of 276 cr is resulting in sales of 42 cr. It would help if the company can explain when and how much will these subsidiaries contribute going ahead?

Frankly I have more strategic concerns with Shilpa and would like to understand management’s view on the same.

Discl.: Not invested have a +ve bias.

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Great set of questions @Anant. We should be asking these in AGM.

Here are some counterpoints:

On single customer risk:
ICE italy may have bigger part of revenues currently. This along with Intas may have significant part of revenues.
But the company has plans to get into multiple areas like manufacturing for Japan client (transexmaic acid).
Even US FDA approval will open new markets and hopefully new customers for the company.
Last AGM, Vishnukant highlighted contract manufacturing model for formulations plant at Jadcherla that has multiple customers for each molecule.
Now how well they execute remains to be seen.

if you see in 2014. the focus was more on APIs.
In 2015 he told he had risks of his clients (be it fda issues, expansions, clients strategic decisions) and for shilpa to mitigate these risks, he started focusing more on formulations.
So, in the past, he had taken strategic decisions to mitigate some of the risks.

reg dependency on oncology:
I personally think one of the key strengths of shilpa is their chemistry skills and their intellectual property understanding.
Vishnukant last year had told they are increasing capacity 4x of a commodity molecule like ambroxol (used in respiroty disorder). he also said because he had superior quality of this molecule he would get better margins which is due to superior chemistry skills.
This might be one of the steps to reduce over dependence on oncology.
This might have yielded good revenue last year. If you have good chemistry skills, you can diversify into newer areas (example PI industries from agrochem to pharma).
Even the revenues from ICE italy is not from oncology (almost 50% of revenues ?).

reg overcapacity in oncology:
If you see alembic oncology unit it is based on injectables. Last year Vishnukant was highlighting the current molecules in oncology that are expiring are injectables, but 5 years down the line
many are orals and shilpa is already investing in it. He also mentioned about setting up the first dry powder line in india.
He also mentioned whatever molecules they work on, they try to cover all possible delivery methods (RTU, liquids etc).
I’am not sure others have reached this stage in oncology. Shilpa has an advantage due to being an early entrant.
How well they capitalise this remains to be seen.
May be we can get this verified from some industry experts.

JV with ICE had significant investments is yet to yeild results. Other subsidiaries also in losses. Management commentary on subsidiaries is very postive.

These are just my counterpoints. We SHOULD ask these questions in AGM and get management perspectives on them as these are great questions.

ofcourse I’am biased :slight_smile:

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Great questions, Anant. Let me add to Ananth’s reply (disregard the overlap part please).

a) The co has an over reliance of sales on one single CRAMS product (ursodeoxycholic acid) currently; approx 50% revenue. This is sales to ICE Italy. Though a concern, the comforting factors are -

  1. Shilpa’s facility is ICE’s only facility outside Italy to source this product and
  2. ICE has entered into a JV with Shilpa
    Indirectly tells us robust demand of ursodeoxycholic acid seen by ICE.

Coming to Oncology API - contributes ~27% of revenue currently. 80% of it comes from EU export. Its key oncology API customers are – Actavis, Intas Pharma, DRL, Cipla, Sun, etc. That said, the co has not reported growth in Oncology API revenue numbers (in recent past). Why? Probably because the co has been focusing on US market. Delay in USFDA approval has impacted linear growth path line. The USFDA approval for its API facilities has come in last few months - this should pave the way for growth in coming quarters.

Add forward integration of dozen+ formulation/ANDAs (EIR awaited), tells us huge scope ahead. From multiple streams with margin improvement.

b) Oncology is a vast segment; multiple tumor types (unfortunately). Leukemia, Melanoma, Breast, Lymphoma, Lung, Sarcoma, Colorectal, and many more. Each having multiple molecules/treatments. Over the past 5 years, 70 new oncology treatments have been launched. I’ve draft chart (work in progress currently; will post shortly) showing in spite of 42 Oncology API in kitty (plus dozen under development), Shilpa has lot more to do to better its oncology coverage. Long runway ahead. In short, single oncology landscape, but multiple treatments/products in it.

Many of co’s new investment via subsidiaries path appears non-oncology. e.g. Shilpa Therapeutics (oral disintegrating strip products), Makindus (ophthalmology and rare diseases) and Navya (biologics).

c) Other cos are visualizing what Shilpa visualized few years back (Disc: Holding Alembic, Shilpa & Torrent). Oncology cost growth is expected in the 7.5% to 10.5% range annually through 2020 when global oncology costs will exceed $150 billion. Smart cos want to have a sizeable pie of this niche area. Shilpa has got couple years of head start. Invested heavily in resource and capacity prior others. Hopefully now is the time to enjoy fruit of seeds sown years ago.

d) A very valid concern. The FY16 AR throws some light on action plan for the subsidiaries going forward. Seems the co has clarity on near term growth through Oncology landscape and is thus investing confidently in long term initiatives. Sowing new seeds for future. Somehow I see it as a sign of visionary management; thinking multi year ahead (am positively biased).

I’ve execution concerns with Shilpa. Jockey has been visionary. Question is - can the co convert patents, approvals and capacities into delivery numbers? If yes, then great time ahead. Just for high level comparison (not an apple-to-apple one) - another well respected Indian co generates ~4000cr revenue and ~1150cr PAT with just 49 DMF filling (mostly non-oncology) + CRAMS.

As Ananth mentioned, we should ask these questions to management.

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@ananth, @Sandeep great defence guys. Just one more thing:

I have great regards for Mr. Vishnukant and came out highly impressed with him when I attended AGM FY14. The equity dilution needs to be questioned and understood. It should be questioned both in terms of need and impact.

I have seen Indian promoters being extremely protective about their companies. If an equity dilution happens and the promoter shareholding goes below 50% the easiest route is to bring in a private company held by the promoters (historically Shilpa has not been immune to this). With due respect to Mr. Vishnukant we need to understand the shareholding of promoters in various subsidiaries and also ask him this question.

Most of these questions should be put to the management and I hope their answers resonate with our thought process.

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A naive question - In the table Shilpa patent nos. against each molecule - what are these nos. - is it means Shilpa have that many patents in one molecule - can we have a bit more understanding what r these in simple terms ???

@hitesh2710 @Anant
Another question - From the AR - The company having so many subsidiaries - is it for business ease or this is the way Pharma companies will explore new avenues for growth??

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@MHS - Glad you asked this as it is important to clarify.

The patent number in the table illustrates -

  • Process and Formulation patents. None patent for molecule (Shilpa is not into NCE yet).
  • Patents applied in various jurisdictions - WIPO (World Intellectual Property Org), USA, Europe, Australia, India, NZ, Canada.
  • Patent applications and granted patents.

Suggest visiting www.lens.org. Search “Shilpa Medicare”. Can use Summary/ Abstract area to gauge high level stuff. If Full-text area looks all greek and latin, then you are not alone (I am in the same boat). :slight_smile:

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Hi Guys,

Just like Ayush mentioned before, I have been intrigued by Shilpa Medicare AR 2016.
Exciting developments for sure!
But couldn’t shake off the feeling …of too much…too fast ??

Two Overriding thoughts consumed me: Needed to chew more on

  1. Capital Allocation Record: ~210 Cr+ investment in Subsidiaries (over and above 300 Cr plus business expansion allocations in last 2-3 years) so far??
  2. Management Bandwidth?? Can Mr Bhutada by himself handle sooo much??

Attaching a PDF version, if above isn’t clear
Shilpa-Investments-Picture.pdf (692.3 KB)

I am glad I spent a leisurely couple of days to collect all that is known about the Investments/Subsidiaries. That gave me enough ammunition to try and Connect the Dots.

Delighted to use EverNote - this is a maiden effort - to Annotate my version of Connected Dots :slight_smile: I am a complete convert. Makes communicating “your” thoughts much easier !!

blob.jpg1117×647 426 KB

Please see if this resonates with you.
Help SPOT any inaccuracies in the Data/Information put up
Then we can move on to debate individual inferences/interpretations of the same

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Those who are not so familiar with Shilpa Medicare - and the Amazing transformation of this business - in the last 30 years under the truly visionary leadership of Mr Vishnukant Bhutada - A Pharmacy graduate form a Cotton Trading Family Background, you may like the following 3 picture stories

Shilpa-First-Decade.pdf (319.8 KB)
Shilpa-Decade-2.pdf (595.9 KB)
Shilpa-Decade-3.pdf (621.0 KB)

blob.jpg903×717 267 KB

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Shilpa AGM is soon on us: 29th Sep
Some of my friends had almost decided on skipping the AGM this year. However I see this as a MUST ATTEND AGM for those interested/invested/tracking Shilpa.

Management has been on record before, that 2017 2018 are extremely important (blockbuster) years. The above 4 picture-stories - are my attempts at converting the Skeptics - to being more OPEN to understanding the unfolding story :wink:

In any case, let’s get on with the task of compiling questions for the AGM

  1. The above will help us question Shilpa Management from a medium-term to long-term strategic perspective, and probe deeper …into the why’s and the how’s of Management Intent/Focus/Actions
  2. For the near-to-medium term story, enough ammunition has already been laid out by folks like Sandeep Patel, Ananth, Ankit, Vishnu and Others

Feel free to put up your Top concerns/queries, and we will try to get them addressed, as far as possible

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Great Work Donald. I have been silent reader on VP and really admires your passion, wisdom of Hitesh and Ayush, dedication of Ananth, Ankit to name a few.

I have done similar exercise and few additional observations / points to consider for Shilpa mgmt Q&A.

1. INM Tech

  • Plans to launch dental products in Q1"2018 - global mkt size - $12bn / Indian mkt Rs500 cr
  • Plans to launch coatings products in Q1"2018 - global mkt size - $15bn / Indian mkt Rs5000 cr
  • Also, developed 2 high value formulations for Opthalmics - will scale up using contract mfg facility - timeline??
    How much revenue contibution from this products in next 3 years?? Future Capex? Target mkts?

2. Shilpa Therapeutics

  • Current Capacity 8,00,000 units / day - mentioned in AR agressive capacity expansion is pursued. Additional capex?? Capacity post expansion?

3. Loba Feinchemie

  • As per AR key focus is now on API high margin business than fine chemicals and Expansion of capacity, human resource
    Strategy to leverage loba’s assets using shilpa’s API products for Europe??

4. Reva Medicare Pvt ltd

  • No material info on JV with Akira Pharma?? Mr. Gurpreet Singh Sandhu Director on Board of Reva Pharma Chem and Raichem Medicare is also Director of Akira Pharma. Mr. Gurpreet Singh Sandhu has worked with Tata and Ranbaxy earlier and is founder of meriwealth (http://www.meriwealth.com/).

5. Navya Biologicals
I am also curious to understand the reason behind hefty price paid for acquiring Navya. While digging for more info on the company found something interesting & thought provoking. The overview of Navya on the website of hiring company gives insight in to vision of the company which is reproduced below:

This ads were posted in Sep’2016.

"We are an aggressive biopharmaceutical R&D company that is now scaling up our operations and looking to go global. We are looking for technical leaders who willing to take responsibility for
deliveryteambuilding, focussed, think on their feet, go-getting and get a thrill from being audacious and introducing products on the market. We are not willing to settle for anything other than the best. We are equal opportunity employer. The work culture is goal oriented and increments based on performance & leadership"

Source: http://www.jobsindia.com/jobdetails.aspx?jobid=4691488&utm_campaign=jorain&utm_medium=organic&utm_source=jorain

"Navya Biologicals Pvt Ltd is an aggressive biopharmaceuticals startup based in Hubli. **We are now **
planning on setting up a world class, integrated R&D cum biologics manufacturing complex in Hubli-Dharwad and are looking for leaders with deep sense of commitment, integrity and ability to deliver on promises. We are an equal opportunity employer with premium being placed on leaders and team builders. We intend to be amongst the top 5 biopharmaceutical players over the next 15 years."

Source: http://www.jobsindia.com/jobdetails.aspx?jobid=4691489&utm_campaign=jorain&utm_medium=organic&utm_source=jorain

Next few years capex required for Navya? Equity dilution / thru debt / internal accrual reqd, if any?

Some of the larger pic questions are already raised by Anath and others therefore not repeating.

Dis: Invested in Shilpa.

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Thanks @Donald for the nudge. From what I can see is that the company wants to get into all possible 5 to 10 years from now pharma industry. It wants to get into novel delivery, oncology and also biosimilars (Navya). It already has Formulation and API facilities and with these investments it just wants to complete the circle. The only thing missing is the front-end distribution.

As you said it could be spreading yourself too thin or it could be looking forward and de-risking yourself.

I was looking into Navya because that at 77 crores looks expensive. I think there is no way we can arrive at a valuation estimate for Navya unless we know the strategic fit. A 3 crore sale can very well go upto 10 cr to 15 cr in a matter of year or two and suddenly 20x sales will come down to 4x.

Sticking too Navya I will just post their pipeline snippet from their website

image.png1359×603 134 KB

http://www.navyalife.com/pipeline.aspx
Although they do not post the exact molecule name but that is available from the valuation document:

image.png860×1146 782 KB

This is the valuation report it gives out financials and other details of Navya

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How would Watson like systems change Oncology drug research ?


Is Shilpa exploring such avenues for speeding up their research on Oncology drugs ?. (or) Is it irrelevant for Shilpa’s domain ?

One of the major use case for Watson is in aiding oncologists with accurate diagnosis ( http://www.ibm.com/watson/health/oncology/ , http://watsononcology.manipalhospitals.com/ )

Sorry if this post doesn’t add any value, but wanted to bring in the perspective of how big data analytics can impact industries (drug research in this thread’s context).

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Hello Everyone,

Apart from the mentioned qualitative factors in the thread, can any one throw the light on the Valuations.?? I mean at CMP of around Rs. 544, its quoted at TTM PE of 44x, p/bv of 6.49x and EV/TTM EBIDTA 27.29x.

I know that FMCG and Pharma sectors generally command the valuation on back of its predictable growth, sales, cash flow, steady revenue streams etc. But in case of Shilpa, current valuation justified?.

If in the optimistic year 2018, the company fails to deliver (what so ever reasons), what can be impact???

P.S: I am not asking any price levels.

Disc: Invested.

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ROE and P/E can never be out of sync for a long time. The Company is not producing incremental profits also from incremental investments. IMHO, this p/e cannot be maintained for a long time like this unless smart investors have a handle on the future business of the company thoroughly. Like an expert in their business domain -Oncology and who can convert the potential real business into real numbers. Which we cannot do as retail.

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Requests keep coming in for a first-level update on AGM. The mood was very upbeat. AGM conducted at spanky new office - accommodates Admin function - all this years they operated out of rented premises.
Our resident experts Ankit, Ananth, and others will provide more detailed coverage subsequently

It’s all good. Near-term to medium term will move at a slower speed than we might have imagined. 3-5 year looks very strong as the gains in near to medium term will consolidate. Beyond 5 years looks very strong/risk mitigated - more risk-diversification across big Pharma customers, non-oncology, Japan, and bio-similars becoming a leading segment contributor. Second level management has emerged grounds-up and professionals inducted and more will be inducted esp in Formulations. All subsidiaries have top-end professionals - some like in Konaa are big-Pharma recruits. Bio-Similar will see 150 Cr additional investment in next 2 years. Plant, equipment and others.

Reverse merger one-off long back was explained as a legacy issue that had happened. There is not a single paisa of promoter family money in any private investment as on date.

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@Donald was there any commentary or questions around the CFO & CS resignations?

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With our guys having done so much work on pipeline, different revenue streams, subsidiaries, etc - there was so much to ask - to get a sense of where Shilpa is headed :),

So I guess, we missed asking that.

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http://www.accessdata.fda.gov/scripts/cder/ob/results_product.cfm?Appl_Type=A&Appl_No=207518

Active Ingredient: AZACITIDINE

Proprietary Name: AZACITIDINE

Dosage Form; Route of Administration: INJECTABLE; INTRAVENOUS, SUBCUTANEOUS

Strength: 100MG/VIAL

Reference Listed Drug: No

TE Code: AP

Application Number: A207518

Product Number: 001

Approval Date: Sep 29, 2016

Applicant Holder Full Name: SHILPA MEDICARE LTD

Marketing Status: Prescription

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