Recently looked at Natco, in context of shilpa. Natco is strong player in oncology market. It is both in API & Formulations. They have a strategic tie-ups with marketing players for their niche products both in exports and domestic markets. The growth is being driven by strong performance in regulated markets.There are couple of triggers in place to indicate strong future growth.There business model is definitely more robust than Shilpa and that is indicated in the valuations.
Natco(2500cr) is roghly the same size as Shilpa (1000cr).
The thing that worries me about Shilpa is that we still know too little (inspite of Rudraâs or VPâs posts) compared to Astral/Mayur/Atul/Ajanta/JB Chem (when we had initially started researching on VP) and yet many folks here are invested (heavily) in Shilpa. My fear is markets usually go in opposite to what majority think.
Will there be a shakeout? Your guess is as good as mine.
Someone really got stuck into Shilpamed today - almost 276000 shares (>95% of total traded qty.) bought on delivery basis on nse/bse. Couldnât find any notices (block deal etc.) related to thisâŚ
Sales up 67.29% to 140.46 crore in Q3FY14 vs 83.96 crore in Q3FY13
EBITDA margins at 20.23% in Q3FY14 vs 13.16% in Q3FY13 and 17.6% in Q2FY14 (I think the margins expansion was something seniors like Donald, Ayush, Hitesh Bhai, Rudra were talking about)
PAT up 110% at 23.08 crore in Q3FY14 vs 10.98 crore.
Consolidated
Sales up 64% 154.04 crore vs 94.04 crore
PAT up by by 62% on yoy basis
There was some extraordinary expense of Rs.2.9 crore in consolidated results and if we include that in PAT figures there wont be losses at consolidated levels as seen in last quarter
This story seems to be panning out well, which made me look into it. A significant concern is regarding the seriously negative Free Cash Flows in 4 of the last 6 yrs. That makes be doubt the long term sustainability of this story. In effect it needs more cash to sustain itself than it generates. This is relevant for the long term view which my default lens
Shilpa is on an amazing run - galloping much ahead of our expectations - mostly on the strength of its API business (without the key big developments that are expected 12-18 months later).
Shilpa Medicare is at a big inflection point - the business looks to be catapulted into the next level in the coming 1-2 years. Like to highlight the following:
Development
Plant
Timeframe
Comment/Implications
Oncology API volumes boost
Raichur Unit I & II (Unit III coming up)
Local Oncology formulations player (API plant put on hold) sourcing APIs from Shilpa starting FY14.
**USFDA inspection over in Raichur Unit I & II in May 2013?Unconfirmed reports ofFDA Form 483 Observations??
JV with ICE, Italy
Raichur Plant coming up
<12 months
Only 3-4 players worldwide manufacturing the formulation. JV Partner controls the RM sourcing - so will have a pricing/margin advantage. JV Partner will take care of Marketing (RoW markets). Shilpa is doing CRAMS + profit share (?)
Oncology Formulations
Jadcharla Plant (ready June 2012?)
Approvals in 12-18 months
USFDA inspections/approvals to be undertaken. Plant is getting ready. Shilpa will be undertaking CRAMS for 5-6 leading global players. Contracts are already sewn up. No marketing needed on Shilpa's front.
Non-Oncology APIs (reportedly significant portion of API Revenues)
?
?
Acebrophylline, AmbroxolHCl, Fingolimod HCl, Nifedipine, Sildenafil Citrate (USFDA DMFs). Under development -Dimethyl Fumarate,Levadopa, Methotrexate,Odanacatib,Pirfenidone, Tofacitinib, Tranexamic Acid Shilpa Medicare: A leader in Oncology API, Expanding into Non-Oncology, Peptides and Complex Formulations -GLOBAL PHARMACEUTICAL AND BIOTECHNOLOGY OUTLOOK 2014 - INDIA PHARMAhttp://www.mpadvisor.com/abstractdetails.aspx?id=3465
HIV/AIDS AntiRetroViral APIâs Under Development
?
?
Abacavir Sulfate, Cobicistat, Elvitegravir, Emtricitabine, Lamivudine, Tenofovir. 4 of these and Quad - a combo drug is under license from Gilead Sciences under theUnited Nations-backed Medicines Patent Pool;3-5 per cent royalty payable to Gilead
**During an FDA inspection, investigators may observe conditions they deem to be objectionable. These observations, are listed on an FDA Form 483 when, in an investigatorâs judgment, the observed conditions or practices indicate that an FDA-regulated product may be in violation of FDAâs requirements. FDA Form 483 and FDA Warning Letter/Import Alerts are different things.
India has 526 USFDA units in which 403 intimations of violation (Form 483) of its manufacturing norms to Indian plants in the period from 2011 to Nov 2013. It is to be noted that one fourth of FDA inspection outside the US conducted in India. But Indian plants have received very less Import alerts/Warning letters by FDA. Only 21 warning letters have been issued to Indian companies which is far less than other Ex-US countries (Mexico: 74%; Canada and British: 30% - Import alert).http://www.mpadvisor.com/abstractdetails.aspx?id=3465
Risks exist. We have to note that USFDA process/compliance has become very very stringent. For someone not yet having a presence in US markets - this is perhaps not as serious as someone already having a significant presence. However it does mean that potential revenues from the US market can get significantly delayed.
We are trying to get some responses from Shilpa Medicare Management.
Please note there is a big difference between aForm 483 Observation, and this leading to aWarning Letter.
India has 526 USFDA units in which 403 intimations of violation (Form 483)of its manufacturing norms to Indian plants in the periodfrom 2011 to Nov 2013. It is to be noted that one fourth of FDA inspection outside the US conducted in India. But Indian plants have received very less Import alerts/Warning letters by FDA.Only 21 warning lettershave been issued to Indian companies which is far less than other Ex-US countries (Mexico: 74%; Canada and British: 30% - Import alert).http://www.mpadvisor.com/abstractdetails.aspx?id=3465
Please maintain the measure of objectivity. No panic reactions are warranted. Judging by the number of 483 violations (403) vs 526 USFDA installations - one can hazard an educated guess - this is now commonplace - which only means Indian Pharma manufacturers have to upgrade processes/documentation/investment in Q&A significantly.
If you have friends in the Industry - kindly check out how widespread is this 483 virus :). and how strong is the immune system of most US-facing Pharma players in India. Who are the strongest and most immune. Who are the weakest?
Urge everyone to do try reality checks at your end and revert. Will do the same.
Oncology API boost - Local Oncology formulations player (API plant put on hold) sourcing APIs from Shilpa starting FY14.
Does this mean this revenue will evaporate when the local player gets the API plant going. For How long revenues will keep pouring in and what impact on margins considering most of the revenues, as of now, is mostly from exports�?
Oncology Formulations
does undertaking CRAMS (for formulations) not require shilpa to have ANDAs for these formulations ? As of date Shilpa has no ANDAs to its credit.
HIV/AIDS AntiRetroViral APIâs Under Development
This, if I understand appropriately, is a low margin segment. A three party agreement between innovator, a company like shilpa interested in manufacturing and UN backed medical patent poolfacilitatingthis relation ship. Aurobindo pharma is reportedly reducing the overall share of antiRetrovirals as this being the low margin segment. When shilpa is already in high margin segment and have good pipeline and contracts in hand what is the trigger to go in antiretrovirals. Please help understand.
Regarding point no 2 above, the contract manufacturer doesnât need to have the ANDA. The contract manufacturer uses the ANDA of the owner, the company on whose behalf it is manufacturing the drug.
While we are on this topic, this is how the process works.
The owner of the product can sub-contract part or parts of the manufacturing process to various other companies. However, the owner is responsible for the entire supply chain to ensure that the quality standards are maintained as per the current Good ManufacturingPractices (cGMP). Here is the FDA link which governs pharma contract manufacturing.
The FDA audits that are conducted are done to ensure that the cGMP is being complied with. This is the standard that FDA has laid down to ensure that quality standards can be maintained for drugs being imported into the US. This is the yard-stick against which all global suppliers are measured.The FDA link for cGMP
The FDAinitiatesroutine inspections or specific audits if it receives reports that the drugs being supplied by a facility are not compliant.
Form 483 is raised to document the deviations observed by the auditors during their inspection with respect to cGMP. A form 483 doesnât automatically imply that the products would be barred fromenteringthe US or the facility is being shut down. The findings are discussed with the top management of the company and the management gets time to comply with the observations and report back to the USFDA with documentary evidence about the compliance. A sample letter issued by FDA to Wockhardt in 2013.
If you observe thelanguageused, it is not intended to be punitive but more of a collaborativeendeavorto being the company up to the required standards. We must realize that it is also in the interest of the US to keep the India supply line open as India is one of the largest pharma suppliers to the US. The latest bogey in the media that the FDA is out to corner the Indian suppliers, is nothing more than the Indian mediaâs usual reaction of blowing things out of proportion.
The FDA site has a wealth of knowledge and for people investing in pharma companies exporting to the US, it is well worth the time of the investor to understand all of the above processes.
[quote="piy_sharma, post:152, topic:62331050"]
> Regarding point no 2 above, the contract manufacturer doesn't need to have the ANDA. The contract manufacturer uses the ANDA of the owner, the company on whose behalf it is manufacturing the drug.
[/quote]
Thanks for that information P Sharma.
Between Shilpa & natco, I find Natco a better business than Shilpa, more so, when the valuation gap is narrowing down. I missed and continue to miss the shilpa bus because of the factor below.
I find natco better business than shilpa ( I am open to get corrected). Below is pipeline of APIs in CY14 from both. And Natco's piple line for future is also much stronger than that of Shilpa. Considering they are neck to neck in new launches, Natco has the added advantage of tie-ups with big players for marketing its drugs in US.
Oct 28,2014
BORTEZOMIB
velcade
> $1B
J&J
Natco
shilpa
Oncology (MDS)
Sep 2,2014
IBANDRONATE
Boniva
< $100m
Roche
Natco
Osteoporosis
Jun 10,2014
NAPROXEN
Natco
Pain Killer
Nov 25,2014
OMEPRAZOLE
Natco
Antacid & antiulcerant
Apr 1,2014
RIZATRIPTAN
$250m
Natco
Migrane
Aug 19,2014
SALMETEROL
Natco
Mar 10,2014
SUMATRIPTAN
Natco
migrane
March 30,2014
BUSULFAN
myleran/busulfex
**********
shilpa
Oncology (luemia)
June 14,2014
CAPECITABINE
Xeloda
$1.6B
Roche
**********
shilpa
Feb 11,2014
TEMOZOLOMIDE
no dmf
shilpa
2ndly, I am falling in love with my current holdings and not able to displace any of them (need to learn this better) for want of funds to invest in shilpa.
There are 8 entities holding nearly 28% stake in Shilpa besides the 56% stake held by promoters.Indian retail public seems hold only 9% stake in the co.
These big investors include Baring,Tano Capital, Std Chartred , Pivotal securities of Prof Mankekar , Amal Niranjan Parikh an upcoming HNI broker of Mumbai who purchased Harshad Mehta flats n 2 Bhutada community members.
Amal Parikh also holds big stake in Ratnakar Bank n Siticable.
Anyone know about the performance track record of these entities n implication of their holding on Shilpa ?
Both companies find their niche in Oncology segment , itâs being very difficult to quantify in terms of investment strategy which one is better .Both business models are quite different . Natco is more of an generic player compare to contract manufacturing & Api of Shilpa .Both models have their own merits and demerits .
As Natco is into research driven generic drug invention , development they will have higher margins and command higher valuations , but at the same time they have longer gestation periods , have to face stringent norms , arbitrations with patent holders etc . One single litigation of patent violation will ruin out their years of hard work .
For example Natco filed for Copaxone in 2009 and going to introduce in coming months ( Full five years ) . Meanwhile patent holder Teva challenged them to deny permission for generic players . After three year long battle in courts Natco got favorable ruling . Meanwhile Teva introduced changed dosages to hold itâs customers and in last two years couple of companies challenged copaxone by introducing competitive products .
Copaxone is big success for Natco no doubts regards that , but all over their journey they have to face lot of challenges .
Unlike generics , contract manufacturing CM space offers stable revenue streams and decent margins too . At the same time that doesât mean CM lacks entry barriers . There are significant entry barriers where relations with clients is key here .Entire theme of CM based on few parameters like 1. IPR compliance policy so that trust 2.Research skills and execution 3. Global authorities approved plants ( Entire front loaded capex ) and last but very important one cost efficiencies . Its very very tough to gain one significant client ( as preferred vendor ) as it takes years of time to gain that client confidence .All the agreements between clients and CM players are for minimum five year periods , so they have stable income .
All the companies in CM space works on confidentiality agreements hence very limited info for us . But i want to quote one example here . Shilpa has one significant client named ICE ITALY . Their relationship started ten years back and on that mutual confidence they started joint venture Raichem which is going to contribute revenues soon .
Its wrong to say there are no risks at all . They have to spend huge amounts to build global standard facilities and have to get approvals for facilities, products .
One wonder company in Contract manufacturing space is Divis which performed way better than generic players and at the same time there are Sunâs , Reddyâs too . It is all about individual comfort which business model to choose .
There is one basic confusion on whether DMF filings enable one to get license for finished dosage too bypassing a separate ANDA filing. Alembic separately reports their DMF and ANDA filings, however there are no corresponding ANDAs filing info for Shilpa.
ââŚA ânew drugâ must be covered by an approved new drug application (NDA/ANDA) to be marketed in the U.S. or by an investigational new drug application (IND) [505]âŚâ
ââŚNDA/ANDA sponsors may elect to refer to a an API DMF in their applicationâŚâ
The basic premise is for an API manufacturer they can supply APIs for the innovator/authorized generic provider during the patent period/exclusivity period and also to the other generic challengers post the patent expiry. Does manufacturing your own finished dosage jeopardize your position as a key supplier ?
