Ajanta Pharma

Stock Opportunities Not-so-Hidden Gems
81

Thanks Subbu, for validating the good story.

USFDA Approval for an OTC drug is a big achievement, no doubt about it. But no need to get maha excited about it. The domestic story and their success at the prescription-led model, increasing market share and rankings every year, is a more positive story… I agree with you.

Translating FDA approval into market success needs huge resources and is a big IF, like you said. We have other examples in ValuePickr forum - like Shilpa Medicare - which despite having several FDA approvals - haven’t been able to do much in the last 2 years!

The Orange Book search atUSFDA for Ajanta Pharma shows ithas got approval forLevetiracetamoral tablets 1G, 750, 500, 250 mg dosages And Risperidone for 0.25 mg, 0.5 mg, 1, 2,3 & 4 mg tablets.

And Here’s the complete list of approvals for Levetiracetam1G, 750, 500, 250 mg dosage approvals: some 30 odd!! [The list for Risperidone is also similar some 20 odd names.]

UCB INC - Original Patent Holder,AB PAR PHARM,ACCORD HLTHCARE,ACTAVIS ELIZABETH,AJANTA PHARMA,ANCHEN PHARMS,APOTEX INC,AUROBINDO PHARMA,BIOKEY,BOCA PHARMA,BRECKENRIDGE PHARM,COBALT LABS INC,DR REDDYS LABS,HETERO DRUGS LTD,INVAGEN PHARMS,LUPIN,METHAPHARM,MUTUAL PHARM CO INC,MYLAN,ORCHID HLTHCARE,ROXANE,SANDOZ,SOLCO HLTHCARE,TARO,TEVA PHARMS,TORRENT PHARMS,VINTAGE PHARMS,WATSON LABS,WOCKHARDT,ZYDUS PHARMS USA INC.

It will be good to understand the approach and strategy adopted by Ajanta Pharma. They may well decide to piggyback on the distribution network of a Dr Reddys, Cipla, or a Sun Pharma.!

82

Keppra

  • [

Keppra (levetiracetam)

](http://2011.ucbannualreport.com/medicines/current-treatments/Keppra®)

read more

Kepprahelping thousands of people living with epilepsy

Keppra (levetiracetam) was first approved in 1999 (U.S.) and 2000 (EU) as adjunctive therapy in the treatment of partial onset seizures in adults with epilepsy.

Since then, it has received several supplemental indications as adjunctive therapy across both partial and generalised seizures types as well as paediatric use in the U.S. and the EU. In the EU, Keppra is also approved as monotherapy for the treatment of partial onset seizures in adults with epilepsy.

E-Keppra was approved (July 2010) and launched in Japan (September 2010) with our partner, Otsuka Pharmaceutical.

Keppra2011 net sales: a¬ 966 millions

Keppra sales overview (a¬ million)

83

Bearish Viewpoints updated in the Stock Story. Guys, please help if you can see some other red flags!

Bearish Viewpoints

  • Higher Working Capital requirements - Working Capital/Sales has seen a significant jump in FY12 over FY11 - reversing the earlier trend. Working Capital by Sales is over 25% of Sales as compared to ~20% of Sales in FY11. This is attributable to the big jump in Inventory and Sundry Debtors - both going up by over 25% from FY11 levels. This might exert downward pressure on margins going forward.

  • Aggressive Expansion Plans - The company has indicated expansion plans entailing 400 Cr over next 2 years. This is a huge jump over the average spend of ~50 Cr per year over the last 4 years. This will mean stretching the balance sheet from the current comfortable levels, entail higher interest costs, and exert further pressure on net margins.

  • High Exports contribution - With over 60% of Sales, coming from ROW exports any changes in the regulatory/political environments of these countries may impact revenue prospects

  • Forex fluctuations -Forex volatility remains a significant risk to be managed in light of over 60% of Sales coming from Exports.

84

Comment received from a friend, who follows Ajanta Pharma:

On the US side, its seems early tocomment in definite mode… the big risk at this point in time is GDUFA… where USFDA is likely to collect a fee of ~$15,000 per ANDA filling, which is likely to be applicable by the end of June 2012.Hence, R&D expenses are expected further togo up.Second, the portfolio of 4-5( or even 10 )products in USis not significant and very less portion of that would be going to bottom line. Further,lot of success in that market will depend onits partners & expertise …which are not significant till date (in my view) . The approval of rest of ANDAswill comeby the end of 2013 and onwards…So net net…story on US front is likely to be watched carefully for next one year!!!No doubt that it is excellent story on domestic front & other exports!!!

85

I think the US market foray is just one part of ajanta story. I dont see too much positives or negatives coming out of it. If it works then company can claim to have unearthed a new avenue of growth. I dont think the company is going to have too much meaningful to show in terms of revenues or profits from the US foray till around fy 14-15.

As it is since past almost 10 years, they have been showing consistent growth in sales and profits without too much strain on the balance sheet. So the key monitorable in ajanta would be the routine sales and profit growth in Indian and other export markets where it has been growing.

And the way Indian markets are shaping up in terms of prescription drugs, there seems to be a long way to go for companies like ajanta.

Where one enters the scrip is one’s own risk reward equation, but if one were to look at EPS of around 75-78 considering a 20% growth for fy 13, then valuations seem fairly comfortable around cmp of 600-630 and all the more alluring if it were to go down to 550 and below.

1 Like
86

Agree with you Hitesh on above, and fresh entry points, etc.

Some risks, we should try to understand more:

1). If they pursue the ANDA-led US strategy too aggressively, there are inherent risks of the margin story deteriorating - R&D costs will soar…if they file 10 ANDAs each year…the filing charges have been revised recently. See the Fee rates at Pg 7 of doc

Establishment of Prescription Drug User Fee Rates for Fiscal Year 2012

I am not sure which fees are applicable. The lowest fees are Product fees - proposed at US$98,970 or close to 100,000. 10 filings may mean upward of 5 Crores …or an escalation of R&D budgets by 15% or so, at current levels. This is not taking into account the cost of the marketing/partnership set-up

2). If they pursue the Capex expansion aggressively

400 Cr or 200 Cr needed every year. That’s 4x current spends

Both these combined can pull down the growth lower than the 20% we are expecting.

Any other risks? Lets concentrate more on the Bear Case now, so we can quiz the Management properly.

87

Great work Donald as usual, I didn’t find any mention of the borrowing split (ECB $55million: rest Rupee debt) so sharing here along with other points.

As you have rightly pointed earlier, one thing of concern is the higher capex.

Management had earlier guided for 60Cr capex in FY12, which was mainly Maintenance Capex as per the requirements of US FDA, UK MHRA and WHO for the existing approved facilities. Also for Europe you need two separate regulatory approvals MHRA for UK and EMEA for rest of Europe.

Now going forward, the company is taking more debt ($55m ECB, will comprise around 75% of the 400Cr Capex) to meet the capex of ~400Cr over FY13 and FY14. Note the maintenance capex will be still there and might increase with increased charges as you have highlighted.

So if one allocates 60Cr as maintenance capex for each of FY13 and Fy14, so almost 280Cr is earmarked for the two facilities - one at Dahez SEZ, other yet to be determined (most likely in Gujarat).

Concerns:

)- Higher asset base to dampen return ratios.

)- Leverage to increase further. higher interest payments to dent Net Profit Margins.

)- Susceptibility to forex fluctuations : A falling rupee may play further spoil sport (interest payment on ECB) as Ajanta would not be having significant dollar revenue to act as natural hedge.

Note: Of the two drugs which have received ANDA approval, Risperidone & Levetiracetam, expected annual contribution is $2-2.5m.And that is the revenue only. Even at 6% cost of debt on ECB, annual payouts on $55 million would be $3.3 million+

)- At EPS of 65+ and dividend of 7.5 makes dividend payout very low. Company will most likely maintain similar dividends for FY13 and FY14, as most of retained earnings will go towards funding capex.

)- Sales force structuring and penetration is a different ball game altogether which is far dominated by analytical models (data driven) in the US market. Being part of teams who design and implement such models for Pharma majors in US and Europe, I myself have very much doubt that how much will a generic player be able to exert from that market.

)- Physician detailing and sales force structuring which works in India (for say Ajanta) will not even sustain forget being sufficient in markets like US and Europe. I think it is very important to discuss this with the management that how well are they aware of this risk.

)- Positioning their brands in a BCG matrix for each market is of critical importance. After all your Cash Cows should be melted to fund Stars and not Dogs masked as Question Marks.

88

Just a small typo. The capex split is 75:25 (debt:equity) so apart from the ECB funding of $55 million, rest would be funded from internal accruals (retained earnings). I have mentioned this at the end also, as a result of which dividend payout will remain constant over FY12-14.

89

Hi Guys,

Meeting with Ajanta Pharma Senior Management may be coming up next week - tentative.

Please fire away your questions and help us make the most of the opportunity.

Rgds

Donald

90

Guys,

Quick take on the Management Q&A

Ajanta has a small but formidable business with very clear strategic focus. Reason why they always seem to be able to launch 13-14 first time products every year. This is not an easy task, it is also clearly their USP - and gives them the first-mover window of opportunity from 6 months - to 1 year. They also have solid generic brands in their top 3 segments.

The US entry is not expected to add significantly. It is more form a market diversification perspective -as RoW market competitiveness will come under pressure inevitably. US market may become significant only in 4-5 years. They have tied up with 1 distributor in US - who will takes care of sales.

Visibility is strong. Product Pipeline is ready for next 2 years.

They know what they are doing. Ears to the ground, no big ambitions, no blockbuster drugs quest, just identifying small niche gaps and executing on that - gaps playing on patient convenience & compliance - which summed up the profile beautifully for us.

But for that, you will have to wait for the full Management Q&A. (may take upto 2 weeks), as we move on to Delhi next week.

I will be adding on declines.

Rgds

Donald

91

ajanta has come out with the expected good results for q1 fy 13.

qtr q1 fy 13 q4 fy 12 q1 fy 12

sales 171 172 127

Op profit 29.31 31.6 15.8

NP 19.58 23.6 12.53

Finance cost has gone up from 2.8 crores in q1 fy 12 to 15.95 crores in q1 fy 13 mainly due to forex losses on loans in foreign currency. This has been partially offset by forex gains on outstanding foreign currency debtors to the tune of 9.76 crores against 0.23 crores. This is a sort of natural hedge the company has.

Results are good but how much is factored into current price of 700 plus is something which one needs to consider.

Record date for stock split has been fixed on 10 th august 2012.

92

Hi Guys,

Sorry for the delay. I went down with Viral fever just as I left Delhi last week.

Ajanta Pharma Management Q&A , for your perusal

Dr Hitesh - First expert comments expected from you. Rudra you go next! and then we can all chip in, on our view of Conviction vs Valuation at current levels. Will be good if I can coax some of my Pharma Industry Insiders to comment:)

Rgds

Donald

93

welcome back donald! hope you have recovered well! we were waiting for the reports from the management Q&A’s you did. thanks for the wonderfulhelp you are doing for all the investors.

94

thanks donald for the q&a update.

some positives emerging out from it are:

1). company seems to be focussed and they dont seem to be too much carried away by their success.

2). US market foray which was feared to be a cash guzzler has been what we have been expecting-- a small step just to judge the depth of the waters.

3). management seems to be alive to the fact of demand rise-- they are anticipating higher capacity utilisations and are planning for next 5 years which shows them in good light.

4). if they can replicate the success in COD segments (cardio, ophthalmo and dermato) in other focus areas, like gastro, ortho etc the company can get another wave of strong growth.

negatives:

1). margins as the management says may have peaked and we should not expect them to improve from hereon.

2). debt overhang will increase and more worrisome is the currency impact on debt. if rupee weakens further their woes will increase. but if rupee strengthens as is expected, then it could be a masterstroke.

3). since company will be operating on a higher base, it needs to be seen what kind of growth momentum it shows going forward.

4). the undervaluation in the stock which was there at 200-300 levels when stock was available at 5-7 PE is not there any more. that leaves very little margin of safety.

I think fresh investment at current price is unlikely to yield spectacular returns (there could of course be upsides) as a lot of positives seem to be priced in. Since there is a lot of momentum in short term downsides look unlikely. there might be some activity and volatility with the stock going ex bonus.

regards

hitesh

95

Great points Hitesh and I will join you to wholeheartedly Congratulate Donald and team on this wonderful endeavor to serve the investor community.

Certain aspects which to point:

a) Ignoring the US market as just another market: (Either be there or Get out â No middle path strategy will work) The US market (~$330bn) contributes 40% of the global pharma sales (~$900bn). Drugs worth $60bn will be going off-patent over the next four years and generic utilization is likely to surge to 80% in CY12 from the current 76%.

Couple the two points, and we have a too big opportunity to ignore. From the Q&A it appears that company won’t invest significantly (be it distribution/ or even filing NDAs after cost hike) which seems prudent too. Segregating the USFDA approved facility and reserve it for production for developed markets is a step in the right direction.

What is strongly required is a definitive strategy for the US markets, striking long term partnerships which will eventually open up a steady stream of generic revenues (the current estimation is even a $40mn from $4mn annual sales of 10 ANDA approvals seems to be a long haul!) The company needs to decide and formulate a plan otherwise this may turn out to be cash guzzler without significant returns.

5 years down the line the company expects 40% of domestic revenue and 60% from RoW with significant contribution from US. Unless thereâs a concrete plan on US this may not fructify.

b)Clear strategies in emerging pharma nations like Brazil, Russia, China, Venezuela, Poland,Ukraine where market is growing at 15-17% as compared to 5-7% in US and EU. The non US EU RoW bucket (excl. India) should be the second largest revenue generator.

b) For a company of Ajantaâs size with strong focus on R&D moving production in house (as against 50% outsourcing) will definitely be a positive step in reducing time overhead of new launches and reducing IPR theft threats.

c) The absence of an active hedging policy is a real cause of concern. The companyâs current US$ earnings will be minimal as such the interest liability on the ECB loan may add a lot of volatility to the earnings. Given a scenario of falling rupee it may severely dent the bottom line

.

d) The company still has sufficient headroom to grow in the Cardio (31st) and Derma (18th ). Orthopedics and Gastro Intestinal (GI) also offers strong possibilities. Sub-therapeutic segments in autoimmune disorders like rheumatoid arthritis provides big window of opportunities.

The strong management with well laid out forward looking plans instills a lot of confidence. However pressures of debt funding coupled with margin stagnation, un-hedged forex risk, lack of dividend growth exerts a lot of pressure on strong upward price targets. Most likely this will be a steady compounder hence forth with buy on dips recommended rather than aggressive accumulation from current levels.

96

Thanks Hitesh & Rudra for the quick impressions.

I would like to take forward this discussion in 3 parts, if possible.

1). For someone who is holding on from lower levels - say 300+ or even the 550+ levels, is this a No-brainer hold & accummulate at dips. Do you see 25% compounding in earnings for next 2-3 years. Why, or why not?

2). For fresh purchases - a. If it’s a 25% compounder anyways, for a Pharma Company (and now we know its pedigree, strategy, R&D & execution strengths much better) why should this not be valued much better. If it delivers 25% compounding for next 2-3 years, why will it not be re-rated higher (remember we must differentiate the quality of business from a high-quality processor company being valued at 9-10x). A Pharma business acquisition value in domestic Indian market is very high. We have seen 9x -11x Sales in recent times. Today Ajanta is valued at less than 1.5x Sales!

3). Margin of Safety - Agreed, this is holding many of us back -because of the comfort of lower levels. But let us attack this after dissecting above 2 properly

Invite views, backed up by data - why and why not? I am tied up in too many things, have to update the other Q&As too, but will surely comeback with my projections on Ajanta in a day or two to provide some data-based scrutiny!

Cheers

Donald

97

Ajanta Pharma Stock Story updated from the latest Management Q&A.

This business surely looks good. Time to come back with some projections:)

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We need to ascertain, does Ajanta merits fresh incremental capital allocation at these levels ( 760 pre-split). Holding on to existing positions is a given, but considering the P/E re-rating to be almost done, now the prices will be driven by mostly by earnings.

We need put more and more emphasis on generic makers focusing on Oncology market as the opportunity is really huge. Catching on another budding story where the re-rating is yet to start is more important.

99

That’s exactly what I want to examine a bit more. I have heard many opine the re-rating in Ajanta is over!

Just what makes us sure the re-rating in Ajanta Pharma is over? Why should it be fully priced at 11x trailing or 8-9x 1 yr forward.

A pharma company of Ajanta Pharma’s recent track record, product pipeline, and importantly growth visibility should have enough steam left. If it keeps up the 35%+ gropwth track, why shouldn’t it quote 15x trailing or 12x forward?

Why should a Unichem merit 15x trailing but not Ajanta - Dr Hitesh? Or for that matter why should a Poly Medicure quote 19x trailing, but Ajanta should quote at only 11x trailing:)

We need to get more hands-dirty with lot more pharma companies like alembic, unichem, fdc, etc. and oncology focused guys as mentioned by Rudra.

Rudra - please takes some Oncology names besides Shilpa medicare, or any others.

100

Seems time to reduce Ajanta Pharma, and increase stake in other interesting pharma story like Alembic, FDC, Dishman, Granules, Strides, and Wockhardt.