Fresenius kabi oncology

FRESENIUS KABI ONCOLOGY -FK ONCO

The company was the oncology division of Dabur Pharma and was then taken over by Fresenius Kabi Germany. Fresenius had 90% stake post the takeover but in month of Oct 12, to comply with SEBI norms the company sold stake in the market and brought down the stake to 81% currently.

Companyâs main focus area is oncology formulation and to a lesser extent APIs. It has formulation facilities at Himachal Pradesh and APIs facility in West Bengal. Capacities in both facilities have been enhanced recently. Formulations like injections, tablets etc contribute 88% whereas APIs contribute around 12%.

Currently company has around 40 formulations in form of IV and oral dosage forms.

GROWTH DRIVERS

Cancer drug demand is growing at 12% in US and around 16% in India.

Company has entered into contract manufacturing agreement with FK Germany.

It has disinvested its stake in FK Onco UK to FK Onco Germany.

It has entered into agreement with FK India pvt ltd to sell and market its products in India.

It is planning to enter the tough Japanese markets.

FINANCIALS:

Outstanding shares 15.82 crores of Rs 1 each.

Market cap at cmp of around 91-92 is 1450 crores, book value is 40.

Debt â long term debt at 95 crores and short term debt at 52 crores. Total debt is around 147 crores.

Last few quarters results

Qtr

Sales

Pbidt

Int

Pat

Dec 10

114

16.8

3.5

6.18

Mar 11

90

-12.4

4.82

3*

June 11

115

22.9

5.38

9.9

Sep 11

159

18.7

1.9

8.18

Dec 11

128

13.6

1.6

1.4

Mar 12

121

11.68

3.67

4.88

Jun 12

133

22.3

0

13

Sep 12

164

48

7.3

27

Looking at half yearly figures and full year figures,

Period

Sales

Pbidt

Int

Np

H1 fy 13

297

70

7.3

40

H1 fy 12

274

41

7

18

Fy 12

524

65.9

18

51

fy 11

412

73.6

18

49

Till now the company seemed to be in a consolidation phase preparing for next phase of growth. The FY 12 annual report shows the management in a very optimistic mood along with some developments which might trigger good growth in the future. Last two quarters seem to be validating the management talk of being ready for growth. Majority of companyâs revenues come from exports. With the company partnering FK Germany as a CRAMS partner, there is likely to be a steady stream of revenues . Company is likely to report steady earnings bcos the agreement with the parent company is on a cost plus basis and company does not have any risk of any litigations etc which other companies face in their business in US and other export markets.

TECHNICALS

Since Nov 2009, the stock price has been taking support around the 80 levels. Resistances have been in the range of 145 and 175. Currently stock has taken support at lower end of channel at around 80 levels and is consolidating. RSI indicates positive divergence as shown in the attached charts.

If the positive developments mentioned above play out, the stock at cmp offers a very good risk reward opportunity.

disc: starter position taken.


Companyâs â

Sales

|

Pbidt

|

Int

|

Pat

|

Dec 10

|

114

|

16.8

|

3.5

90

|

-12.4

|

4.82

|

115

|

22.9

|

5.38

|

159

|

18.7

|

1.9

|

128

|

13.6

|

1.6

|

121

|

11.68

|

3.67

|

133

|

22.3

|

0

|

164

|

48

|

7.3

|

Sales

|

Pbidt

|

Int

|

Np

|

297

|

70

|

7.3

|

274

|

41

|

7

|

524

|

65.9

|

18

|

412

|

73.6

|

18

companyâs 175.

Hi Hitesh,

Thanks for a detailed analysis. I spoke to one of my source in DRL’s oncology division who is in sales since more than 10 years and holds a senior position right now.

In his view Dabur’s oncology division used be a serious contender in market, but slipped to no. 5 or 6 in last few years. However, with a strong parentage they could bounce back.

Hence high probability of your thesis coming true if everything plays out as expected.

Regards,
Raj

isn’t a P/E of around 30 too high?

fy 13 expected eps is around 5 and hence pe based on fy 13 earnings is 18 times. for a pure oncology play with strong parentage like fk (it is a major stock in dax) this seems reasonable. a look at the charts reveals that it is at the lower end of market valuation and market perception.

low risk moderate return kind of situation.

Hi Hitesh Bhai,

I glanced through the latest AR. Just wanted to understand this - would this be like a R&D and manufacturing outsourcing arm of the parent?

Will this company be dependant on the parent for its margin improvement always and get a fare treatment?

Is the marketing company (Fresenius India Pvt Ltd) good enough and will there be compromise on margin due to this aswell?

Though a totally different industry, I am just thinking if it will have similar issues like Mphasis had when it practically became HP’s outsourcing operation.

Cheers

Vinod

VK Sharma of Hdfc securities whom I respect a lot ala you had recently recommended this stock as one of his strong new pick post good results.

However one of the popular blogspot valuepick dot blogspot has mentioned that Fresenius has recently launched its 100% subsidiary inIndia n ala P & G may launch its newer products through this subsidiary.this aspect needs to be investigated.

vinod,

FK Onco will be the purely exclusive oncology arm of FK in India. their marketing company in India will help in selling products of FK onco in India. This should be a win win for both companies.

Compromise on margins – I am not too worried bcos FK has a majority stake of close to 80% and I guess 75% post some time-- and hence they will not be too keen to get more margins from the company.

Manufacturing outsourcing and R&D for parent will be one part of business for FK Onco. the other more interesting business of oncology drug exports remains with FK onco.

I think company is on a cusp of strong growth having invested a lot in facilities and infrastructure. Sector itself is growing well.

Thank You Hitesh Bhai.

So another Unichem kind of scenario, investment done company all set for growth in alucrative pharma space. It looks attractive and good for a starter position for me.

Cheers

Vinod

Hi Hitesh Bhai,

If we rate Unichem and Ajanta with 10-marks on scale of 10, where does FK Onc recides on that scale??(OR its just 1 year bet)

Regards

sameer

Hi Hitesh bhai,

I have tracked and invested in this co earlier. I agree the potential is huge here and if one is to go by the Q2 nos, things seem to have got in place for them after a long time. But at the same time, I’ll like to share that there is quite a volatility in the earnings of this co. Somehow they haven’t delivered in past.

Also, sometime back this co did an unexpected thing of selling its equity to bring down its stake from 90 to 81% at a time when everyone was betting at delisting plays. And they made an announcement to sell when the price was at about 120 and they sold at about 80.

I feel they have taken this move to eventually delist this co. My thinking goes - earlier when they were holding 90% then to delist they needed 50% of outstanding equity i.e… another 5% stake and this would have been tough and expensive. While now, they can simply buy-back the stake the have sold and delist the co at the price they want. Reason - as per SEBI, one needs toachieve90% holding and buy 50% of out-standing shares to delist.

So this seems to be a risk to me. But again, the downside seems quite limited as the shouldn’t be delisting below 80-90 bucks in anyway.

Views Invited

Ayush

Hi Hitesh bhai,

I have tracked and invested in this co earlier. I agree the potential is huge here and if one is to go by the Q2 nos, things seem to have got in place for them after a long time. But at the same time, I’ll like to share that there is quite a volatility in the earnings of this co. Somehow they haven’t delivered in past.

Also, sometime back this co did an unexpected thing of selling its equity to bring down its stake from 90 to 81% at a time when everyone was betting at delisting plays. And they made an announcement to sell when the price was at about 120 and they sold at about 80.

I feel they have taken this move to eventually delist this co. My thinking goes - earlier when they were holding 90% then to delist they needed 50% of outstanding equity i.e… another 5% stake and this would have been tough and expensive. While now, they can simply buy-back the stake the have sold and delist the co at the price they want. Reason - as per SEBI, one needs toachieve90% holding and buy 50% of out-standing shares to delist.

So this seems to be a risk to me. But again, the downside seems quite limited as the shouldn’t be delisting below 80-90 bucks in anyway.

Views Invited

Ayush

sameer,

Compared to Unichem or ajanta, FK Onco is a totally different kettle of fish. You have to compare it to something like shilpa medicare or such other company.

Unichem currently remains my top pick in the pharma basket. ajanta i am worried about the impact of some tax related news on stock price if and when that happens.

downside wise as ayush mentions it there is very limited downside. if the performance shown in the sep quarter continues there could be good upsides ahead. but as mentioned by ayush again the earnings are quite lumpy and hence one would have to be on their toes.

regarding delisting theory put forward by ayush, I am not too sure that a company of the stature of FK would bother too much about a few crores here or there while going in for delisting. So I guess they might comply with the sebi guidelines and bring down their holding to 75% ultimately and remain listed. this is just a gut feeling.

Hello Hiteshji,

Prospect wise and basing on their filings and pipeline, isn’t Natco Pharma a much better bet in the Oncology space as compared to FK or Shilpa ??

Natco is expensive, but the chances of positive surprises are more there.

hitbhai,

I remember that you had Shilpa as a technical pick but somehow it’s struggling to cross 290-300. Would be nice to know your take on Shilpa at this time.

disc: invested in Shilpa

Hi Hitesh bhai,

I was reading about oncology market and found below list as the top in the market, most of them belongs to Roche

rudra,

I dont track natco too much so not much idea about comparisions here.

shilpa remains in a range of 275-290 and a breakout past 290 on a closing basis should start uptrend.

much should depend on the quarterly results.

Hi Vishal,

Understanding the Pharma sector is tricky. For example Swiss pharma giant Novartis owns 33% in Roche which again owns Biotech majors Genentech and Chugai Pharmaceuticals as subsidiaries :slight_smile:

Even you are the generic maker with first to file (called FTF in pharma parlance) ANDA, realizing the profits depends on a lot of other factors. You can go through the Lipitor case study for further insights on this.

**Pfizer was the innovator **: which had the patent on the blockbuster.

When the patent expires, for the next 6 months, the authorized generic (by the innovator) and company which was first to file ANDA gets the market.

Here **Watson pharma made the authorized generic **(right of innovator) in partnership with Pfizer

Ranbaxy had the FTF rights on this drug. But due to problems with USFDA regarding their facilities, they had to rope in Teva as partner in case their facilities were not approved till the end. Read more here Link: http://www.bloomberg.com/news/2011-12-02/teva-may-get-free-money-sharing-profit-on-ranbaxy-sales-of-lipitor-copy.html

In the end Ranbaxy’s wholly owned Ohm Laboratories facility in New Brunswick, New Jersey, was able to launch as well as market the product. (read Link: http://businesstoday.intoday.in/story/ranbaxy-launches-lipitor-in-us-markets/1/20566.html ) But they lost a large part of profits to Teva because of problems with facilities with USFDA and Teva rode on free profits.

Drug prices crash by 30-40% during the 6 month period post expiry with only 2 generic versions available and by 90-95% after that with market opened to all generic players.

So even though Natco holds FTF to key cancer drugs ( read through this comprehensive ICICI direct report Link: http://breport.myiris.com/ICICISL/NATPHARM_20120322.pdf , complex but will provide lot of clarity ) realization of those profits depends on a lot of other factors. Hence forecasting the realizable profit in the end and the value accretion to shareholders is really difficult.

Fantastic summary of the sector Rudraji. Thank you.

thanks rudra bhai for sharing knowledge!!