ROCE numbers for Caplin have come down from 35%+ levels to 25-30% range due to expansion into new markets like US. Given the nature of competition in those markets and expanded working capital requirements this reduction in ROCE is expected.
However, it is still a 25%+ ROCE business and growing at 20-25% CAGR. Additionally, the high margin Latam business continues to grow fast and there is huge potential there - Brazil being the largest. I personally believe that a PE of 16x is very reasonable for the quality of business that it is. It still continues to deliver 30% operating margins, which many pharma companies with huge economies of scale find it difficult to achieve. I think the pharma cycle should start to do well after the recent beating due to price erosion in US, increase in raw material prices and supply chain issues.
At some point the market should start to give some premium to this company and the overall improvement in the pharma cycle should also help that. At WealthCulture we believe pharma companies that have less exposure to regulated markets will do well irrespective of the size of the company. Caplin should do well.
Disc: we are invested in Caplin in our personal and client accounts as well; this is not a reco
I would take that with a slight pinch of salt. About a year and a half ago they spoke about entering domestic market, then last year they discussed entering Russia. They keep exploring but entry usually takes time.
Given the nature of the business, entry will take time. Plus the current war-related tension would make anyone resist entering a country like Russia at this point in time.
Caplin got USFDA approval for Carboprost Tromethamine Injection for the treatment of
postpartum hemorrhage (PPH) (US sales data for PPH appears to be $55 million for the 12-month period ending Sep 2022)
I want to present work I’ve done on Caplin Steriles over the last quarter.
Why am I interested in Caplin Steriles?
Work on the US facing injectables division started nearly a decade ago, in 2014. It took them four years to start commercial production, and in 2023, they are on track to turning profitable this year.
They have scaled revenues tremendously well since 2018, and growth has come mainly through volumes. Newer molecules have the potential to raise realisations.
Year
Revenue (Cr.)
FY20
65
FY21
85
FY22
127
9MFY23
155
Caplin Steriles has losses of 25 Cr. as of FY22. This should have a direct impact on the consolidated PAT once they break even. In addition, they have 28 Cr. of deferred tax assets, which should give them a tax break initially when profits start to come in.
This is currently a 60-70% gross margin business, depending on whether R&D/ANDA filing expenses should be thought of as COGS. One wonders what the EBITDA profile could look like when it turns profitable, as Sakar, Gland and others are in the 45-55% gross margin bracket.
Key Data Points
Note: market share is of Indian injectable exports to US.
Molecule
Approval
CY22 Market Share
Number of Indian Competitors
Market Leader
Value of Indian Exports to US (Million)
Market Leader’s Share
Ketorolac
2017
15.00%
Only Gland
Gland
26.6
80%
Glycopyrrolate
2019
24%
6
Gland
6.7
29%
Tranexamic Acid
2019
5.00%
5
Immacule Lifesciences
6.3
50%
Verapamil
2020
6.10%
5
Glenmark
9
63%
Ropivacaine
2020
24%
2
Eugia Pharma
4.7
50%
Phenylephrine
2020
23%
3
Indoco Remedies
2.5
53%
Argatroban
2021
15%
3
Eugia Pharma
6.3
43%
Neostigmine
2021
33%
4
Caplin Steriles
1.8
33%
Milrinone
2021
10.00%
2
Gland
4
67%
Etomidate
2021
18%
3
Eugia Pharma
1.5
45%
Labetalol
2021
22%
Only Gland
Gland
1.9
80%
Carboprost
2021
New ANDA Q4FY23
Only Dr. Reddy’s
Dr. Reddy’s
18.1
100%
Ketorolac and Glycopyrrolate are the key molecules right now. Caplin has scaled other molecules well after approval.
Newer molecules have far higher realisations than older molecules. If product mix changes towards new molecules gradually, revenue can see improvement from both realisations and volumes.
Some clients in the US are listed. Caplin sells to Baxter Healthcare, Somerset Therapeutics and Eversana. Disclosures tell us that scale happens through milestones and revenue sharing. One can go through their concalls to understand outlook.
A number of molecules were only launched late in FY22 and are yet to come to scale.
Most of these molecules have a market size of $50-60 million in the US. Caplin looks to be targeting those where incumbents have 60%+ market share, and there are very few competitors.
Caplin Steriles’ volume CAGR from FY20-9MFY23 is around 34%.
Caplin Steriles is on track to reach 200 Cr. of revenues in FY23, and management explained their vision was to reach around the 700-800 Cr. mark in 3-4 years. This looks possible with scaling new ANDAs, having the two lines of capex come on stream in FY24. Things should also look better on profitability when the backward integration capex comes online through FY24 and FY25.
Disclosure: invested, no transactions in the last 30 days.
Its amateurish to bring in Marcellus investment decision. Stock has tripled after their exit and now after correcting to 14PE now, still it has doubled since then. Cash on book too significantly high. Thats what happens when investors do not take valuation into account but go by TREND. (These Investors exited right at the bottom of 12 PE due to 50% correction from 2018 high)
09.03.2023 CNBC
• Consistently gaining market share in launched products
• Caplin Steriles will cross 200 cr. in FY23 and can potentially reach 300 cr. in FY24
• Prices have bottomed out for several products in US, seeing pricing increase in some products
• EBITDA margin in US (ex of R&D) is already approaching parent level EBITDA margins
• Have not been audited by FDA since 2019
Disclosure: Invested (position size here, bought shares in last-30 days)
On 21st March, BSE sought clarification from company regarding movement in volume as there was a surge on 20th March…Caplin has not yet responded…could companies ignore such requests, would SEBI have a problem with it, can this be termed as non-compliance, is there a reason to worry?
Don’t think so. Never have I seen a company actually give a reasonable response to such a clarification. They always give vague statements like we have disclosed everything, price is determined by market forces etc. Don’t worry about it.
The exchange might update it lately, but company would surely respond with the clarification. Similar clarifications were also requested on Aug '22 & May '22.
Hi Chins, That was through gift and not market sale. I had already seen that. Can that trigger a spurt in volume. Please let me know if I am missing something…
