Dishman Carbogen Amcis CMP: ̀ 235; 1-year Target: ̀ 289
NSE
Sector Pharma
Recommendation BUY
Upside 23%
Stock Data
Sensex 35,850
52 Week h/l (`) 397 / 203
Market cap (`Cr) 3,798
BSE code 540701
NSE code DCAL
FV (`) 2
Div yield (%) 0.0
Shareholding Pattern
Mar-18 June-18 Sept-18
Promoters 61.4 61.4 61.4
DII+FII 22.5 20.7 19.6
Individuals 16.1 17.9 19.0
Source: www.bseindia.com
Share Price Trend
Prices as on 07/01/2019
Analyst– Shrikant Akolkar [email protected]
January 08, 2019
Dishman Carbogen Amcis Limited (DCAL), Ahmedabad based CRAMS
company, stands to benefit from commercialization of six molecules
and plans to foray in Vitamin-D business in India. We expect revenue
and PAT CAGR of 14.2% and 27.7% over FY19-21E, while EBITDA
margin expansion of ~140bps is projected over the same period. We
recommend BUY with target price of `289 (8x FY21E EV/EBITDA).
CRAMS business on improvement trajectory: DCAL expects to
commercialize six molecules over next 3-4 years, generating >$100mn
additional cumulative revenue in CRAMS going ahead. Nuzyra (one of
the six molecules), can generate $4-6mn revenue in FY20E. Further,
Zejula (current potential $20mn/year) can generate $70mn/year if
approved in expanded indications. Oncology is yet another opportunity
for DCAL as it is present in both Chemical and Biological verticals.
Focus on Vitamin-D analogues to continue: DCAL’s strategy to focus
on high margin Vitamin-D analogues has led to an improvement in its
segmental EBITDA margins from 13% (FY14) to 41.7% (Q2FY19). DCAL’s
plan to foray in domestic Vitamin-D analogues market is likely to
generate $4-6mn revenue in FY20E with EBITDA margins at 40%+.
Attractive valuations: DCAL’s revenue/PAT is expected to register
14.2%/27.7% CAGR over FY19-21E led by CRAMS and Vitamin-D
opportunity. Adj. ROE is expected to rise from 14.9% in FY19E to 15.6%
in FY21E. DCAL currently trades at 6.8x FY21E EV/EBITDA (>50%
discount to Divi’s Lab). We value DCAL at 8x FY21E EV/EBITDA to derive
a target price of `289 and recommend BUY on the stock.
Financial summary
Consolidated `cr FY18 FY19E FY20E FY21E
Revenue 1,695 1,901 2,165 2,478
Growth (%) yoy -1.1 12.1 13.9 14.4
EBITDA (%) 25.8 26.7 27.2 28.1
PAT 154.6 170.1 214.7 277.2
Growth (%) yoy 5.6 10.0 26.3 29.1
P/E (x) 24.6 22.3 17.7 13.7
Adj. ROE (%) 16.6 14.9 15.1 15.6
EV/EBITDA (x) 10.7 9.3 8.0 6.8
Adj. ROCE (%) 14.3 14.7 15.7 17.1
Source: Company, IIFL Research, ROCE and ROE adjusted for goodwill and amortization
32,000
33,500
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36,500
38,000
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Jan-18 May-18 Sep-18 Jan-19
Dishman Carbogen Sensex
Dishman Carbogen Amcis
Balance sheet snapshot
` Cr FY18 FY19E FY20E FY21E
Share Holders Funds 5,107 5,261 5,455 5,706
Total Liabilities 884 853 859 872
Sources of Funds 5,991 6,114 6,315 6,578
Fixed Assets 5,061 5,031 4,991 4,966
Other Assets 562 583 625 675
Net Current Assets 368 500 698 936
Application of Funds 5,991 6,114 6,315 6,578
Source: Company, IIFL Research
Company background
Dishman Carbogen Amcis Limited (DCAL), erstwhile Dishman
Pharmaceuticals & Chemicals, began operations in 1983 as a
manufacturer of quaternary ammonium and phosphate compounds.
The company ventured in Contract Research & Manufacturing Services
(CRAMS) space and acquired Dishman Carbogen Amcis in 2006. It now
has 10 manufacturing plants i.e. four in Switzerland, two in India, and
one each in France, UK, Netherlands and China. In 2016, Dishman
merged its operations with Cargoben to create vertical integration,
strengthen balance sheet and bring synergies in the business. DCAL has
capabilities in process research & development and works on projects
ranging from early to late stage clinical trials and commercial
manufacturing.
Exhibit 1: Business structure Exhibit 2: Revenue break-up (Q2FY19)
Source: IIFL, Company
DISHMAN CARBOGEN
CRAMs
Dishman India
Carbogen
CRAMs UK
Marketable molecules
Vitamin-D
Specialty Intermediates
Generic API
Disinfectants
Dishman India, 17%
CRAMs Switzerland,
52%
CRAMS –UK, 7% Vitamin D,
13%
Generic API, 4%
Disinfectants, 2%
Intermediaries, 6%
Dishman Carbogen Amcis
Industry tailwinds bode well for CRAMS sector
The CRAMS industry has growth tailwinds due to patent expiries of the
novel drugs of innovators. This has put pressure on innovators to
reduce costs while keep spending on R&D. The global market for
CRAMS is pegged at ~$154bn in 2018 and is estimated to grow at 13.6%
CAGR to reach ~$200bn by the end of 2020E. The CRAMS industry in
India is growing at a CAGR of 18% and is projected to reach ~$25bn by
2020E from ~$18bn in 2018.
The innovative drug research industry requires several rounds of
funding. Global environment for start-up healthcare funding, especially
that in the US, has remained robust. The pie of VC funding to
healthcare sector has been increasing steadily over the last five years.
This bodes well for companies like DCAL, as it services small biotech
and pharma companies.
Vertically integrated CRAMS business
DCAL has two separate businesses i.e. Carbogen Amcis AG and
Dishman (CRAMS India).
Carbogen: DCAL’s European subsidiary Carbogen is in the business of
contract research and development (CRO). Carbogen works with the
innovator pharma companies (early to mid-stages of a drug lifecycle)
and has 260+ scientists. Carbogen has a non-GMP manufacturing plant
in UK (Manchester) for captive consumption. Carbogen has 250+
innovator companies as its clients, of which 80-85% are the small
Exhibit 3: Rising pie of healthcare in VC funding Exhibit 4: VC investments in US Healthcare
Source: IIFL, Company
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5,000
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Q2
-15
Q3
-15
Q4
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Q1
-16
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-16
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in $
mn
Dishman Carbogen Amcis
pharma companies and start-ups and develop their drugs during
clinical trials.
Dishman: This is an Indian CRAMS arm which is in the contract
manufacturing business (CMO). Dishman starts commercial
manufacturing once innovator companies (Carbogen’s clients) get a
final regulatory approval for a drug. Due to presence in both CRO and
CMO, DCAL has maintained a full vertical integration and client
stickiness.
Exhibit 5: How DCAL ‘s two businesses operate
Source: IIFL, Company
Phase III pipeline can improve DCAL’s CRAMS business in India
DCAL has a pipeline of ~400 molecules of which 16-18 molecules are in
Phase III. Of this, nine are in late phase III trials, and DCAL expects 1-3
products to get commercialized each year ($3-4mn/molecule revenue
in the first year of launch). Assuming commercialization of six molecules
(post FDA approval), we believe that DCAL has a cumulative additional
revenue visibility of ~$100mn (~`700cr) over the next five years.
Carbogen Amcis
In R&D outsourcing business (Pre-clinical
to devopment)
Works with innovative pharma
companies
Has facilities in France, UK,
Netherlands and China
Has capabilities in ADC and HPAPI development
Dishman
In manufacturing outsourcing business
Works after Carbogen’s clients post FDA approval
Has facilities in India
Has manufacturing facilities in HPAPI
Dishman Carbogen Amcis
Company has already commercialized Niraparib (brand Zejula
marketed by Tesaro) and Bedaquiline (brand Sirturo marketed by
Janssen Therapeutics). DCAL expects peak sales of ~$20mn from Zejula
in the current indications. The drug is also tested in various other
indications and if it succeeds, DCAL’s estimate of peak sales from Zejula
will be ~$75mn. Tesaro has recently been acquired by GSK, which
improves prospects of Zejula’s commercial success.
The third molecule, Omadacycline (brand Nuzyra, company Paratek
Pharma), has been approved by USFDA in October 2018. It is indicated
in the treatment of Community-Acquired Bacterial Pneumonia (CABP)
and Acute Skin and Skin Structure Infections (ABSSSI). DCAL expects
revenue of $4-6mn in FY20E from Nuzyra and launch is expected in
early CY20E by Paratek.
Oncology - secular growth driver for pharma sector
In its CRAMS business DCAL is focusing on five therapeutic segments i.e.
Oncology, Cardiovascular (CVS), Central Nervous System (CNS),
Opthlmamology and orphan diseases. The Oncology segment remains
the key focus area for the company. Globally too, oncology is the key
R&D focus area. Oncology alone contributed 15% of the global
healthcare spending ($901bn) in 2017. This pie is expected to grow to
17% in 2022E when global healthcare spending will reach to $1,071bn.
Exhibit 7: Rising spending on Oncology
Segment 2017 2022E
CAGR (%) $bn Total (%) $bn Total (%)
Oncology 133 15 180 17 6.2 All others 768 85 891 83 3.0 Total 901 100 1,071 100 3.5
Source: Company, IIFL Research
Exhibit 6: Dishman’s disclosed product launches
Product API Indication Launch Company
Sirturo Bedaquiline Pulmonary multi drug resistant tuberculosis
CY16 Janssen Therapeutics
Zejula Niraparib Ovarian cancer (also tested in other indications)
CY18 Tesaro Inc. (Now GSK)
Nuzyra Omadacycline In phase III trials Q4FY19E Paratek Pharmaceuticals
Source: Company, IIFL Research
Dishman Carbogen Amcis
Within the Oncology segment, there is a higher demand for High
Potent drugs. These drugs are directly delivered to the target i.e. the
cancerous cells and they are effective even in smaller quantities. The
High Potent drug candidates, due to their better efficacy, are
increasing at faster pace in innovators’ pipeline, hence High Potent
APIs (HPAPI) market is also growing at a faster rate than other APIs.
The HPAPI market is expected to register ~10% CAGR from $17.6bn in
2018 to $25.9bn in 2022E. India + China, cumulatively accounted for
~5% of the global HPAPI supplies in CY17. This will grow to ~15% in
2026E. Indian companies, due to their low cost advantage, will gain
market share in HPAPIs.
HPAPIs – next growth opportunity for DCAL
DCAL’s pipeline has 20 molecules in early phase III and 18 molecules in
late phase III. Of this, 50% molecules are in Oncology segment clearly
indicating that DCAL will benefit from the rising R&D budgets of
pharma companies for Oncology. The aforesaid HPAPI opportunity is
also positive for DCAL, as Oncology is its largest revenue driver, which
contributed 45% of its CRAMS sales in FY18.
Exhibit 8: DCAL’s HPAPI facilities
Source: Company, IIFL Research
DCAL manufactures two types of HPAPIs i.e. (1) Chemical and (2)
Biological. In the Chemical HPAPIs, it has a manufacturing facility in
Bavla (Gujarat) from where it has started commercial manufacturing of
first HPAPI Niraparib. DCAL is expecting more molecules to be
commercialized in the future.
Dishman Carbogen Amcis
In the biological HPAPIs, DCAL is present through the Antibody Drug
Conjugates (ADCs) at its Riom (France) site. Company is currently
working on nine ADC projects across Phase II/III developments. It has
also recently completed a fresh capex in Switzerland for ADCs. This
facility will contribute $5mn in FY20E and this will increase going ahead
as it gets more projects.
Vitamin-D business benefitted due to restructuring
In its marketable molecules business, company has four sub segments
i.e. Vitamin-D, Generic API, disinfectants and intermediates (Shanghai
operations). In its Vitamin-D business, DCAL manufacture and markets
Vitamin-D and its analogues (Calciferol, Calcitriol, Alfacalcidol, etc.),
Cholesterol and Lanolin through Dishman Netherlands BV.
Dishman Netherlands was initially in Vitamin-D business, however due
to the low margins and Chinese competition, it moved away from
Vitamin-D products and started to focus on high margin Vitamin-D
analogues, which has applications in the nutritional and healthcare
space. Company currently focuses on the nutritional business
(unregulated opportunity) for which raw material is supplied from
Bavla plant. To capture the healthcare opportunity, Dishman
Netherlands is conducting clinical trials with Boston University and if it
succeeds, in the trials, it can capture the healthcare opportunity.
Exhibit 9: Improved profitability in Vitamin-D segment
Source: Company, IIFL Research
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cr
Revenue (Rs cr) EBITDA (Rs Cr) Margin (%)
Dishman Carbogen Amcis
Dishman Netherlands, due to focus on the analogues and vertical
integration, the company has been reporting consistent margin
improvements since FY15. Between FY15-H1FY19, margins of this
segment have improved by more than 2,200bps.
Vitamin-D to benefit from capex and foray in India
Vitamin-D is expected to be a sizable opportunity for DCAL as Vitamin-
D market is expected to post 11% CAGR to reach ~$2.5bn by 2020E.
Within this, Vitamin-D analogues are growing at a much faster rate.
Company will be able to capture this opportunity as it will commence
operations at its Bavla - Vitamin-D Soft Gel plant in Q4FY19E.
DCAL is also forward integrating in the domestic Vitamin-D business. It
has already secured the Indian FDA approval for its products and will
start selling Vitamin-D products through its own front end. Company
expects this business to generate revenue of $4-5mn in FY20E.
China facility to start meaningful contribution FY20E onwards
DCAL’s China (Shanghai) facility mainly supplies intermediates to
Carbogen Amcis. Shanghai facility is currently manufacturing complex
intermediates for three US clients of Carbogen Amcis, while three more
potential clients are in the pipeline. This facility has achieved
breakeven in FY18, however, it can offer strong operating leverage as
the plant currently operates at ~30% utilization. To improve the
utilization, company has moved one product from Bavla facility to
Shanghai facility. In FY19, DCAL started to serve two Chinese clients
from Shanghai.
Utilization will significantly improve once this facility receives USFDA
clearance after which company can start supplying APIs to the third
parties. Company is expecting USFDA inspection over next 12-15
months. Management has guided revenue of ~$15mn from this facility
over 2-3 years (FY18 revenue of $5mn). We estimate that utilization at
the Shanghai facility will increase to ~60% if the company achieves
~$15mn sales in FY21E.
Dishman Carbogen Amcis
Financial performance to improve with growth drivers in place
Over FY15-18, DCAL reported revenue CAGR of 2.2%, EBITDA margins
however, improved from 19.7% in FY15 to 25.8% in FY18 due to
improvement of profitability in Vitamin-D business. This strong
improvement in EBITDA margins, however did not translate equally in
its PAT CAGR of 8.9% over FY15-18. This subdued growth in PAT was
due to the rise in the amortization charges after merger of Carbogen
Amcis with Dishman. Adjusted for the amortization, PAT CAGR during
FY15-18 is 21.3%.
Due to the commercialization of two products from India CRAMS and
success of the Vitamin-D analogues business, DCAL’s performance has
shown significant improvement in H1FY19. Revenue grew by 18.7%
yoy, while PAT grew by 36.2% yoy. EBITDA margins improved from
25.9% in H1FY18 to 26.9% in H1FY19. Company has also consistently
reported positive free cash flows over FY12-18.
Going forward, we expect CRAMS India and Vitamin-D to drive DCAL’s
revenue growth. We project overall CRAMS revenue to grow by 10.8%
CAGR over FY19-21E due to (1) launch of six molecules, and (2) increase
in HPAPI revenue. Marketable molecules revenue is expected to grow
at 27.1% CAGR over FY19-21E due to (1) increase in Vitamin-D revenue
with soft gel facility commencement, (2) India front end opportunity,
and (3) improvement in China operations. Overall, we expect DCAL’s
revenue/PAT to register 14.2%/27.7% CAGR over FY19-21E. EBITDA
Exhibit 10: Revenue/PAT growth to accelerate Exhibit 11: Margins will improve further
Source: IIFL, Company
0
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FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Revenue (Rs cr) PAT (Rs cr)
8.9% CAGR
19.7
25.7 26.5 25.8 26.7 27.2 28.1
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FY15 FY16 FY17 FY18 FY19E FY20E FY21E
EBITDA (Rs cr) Margin (%)
Dishman Carbogen Amcis
margins are expected to improve from 25.8% in FY18 to 28.1% in
FY21E.
The company said that it expects `120cr/year maintenance capex and
`80cr/year maintenance capex over the next two years. The growth
capex will be used to 1) increase HPAPI lines at Bavla 2) add soft gel
capacity at Bavla 3) upgrade Carbogen’s custom synthesis facility and
4) enhance injectables capacity at the France facility. We estimate
DCAL to generate a free cash flow (FCF) of `550cr over FY19-21E vs.
FCF of `516cr over FY14-18.
Exhibit 12: How revenue mix will change over FY17-21E
Source: IIFL Research
Goodwill to provide tax benefits of `300cr over next 15 years
In order to derive the synergies from its two separate brands, erstwhile
Dishman Pharmaceuticals & Chemical (DPCL), in FY17, consolidated its
business with Carbogen Amcis to create Dishman Carbogen Amcis
Limited (DCAL). After this merger, company recorded goodwill of
`1,326.9cr, which will be amortized over the next 15 years, starting
from FY17. This will result in amortization charge of `88.5cr/year. Due
this merger, DCAL will receive tax benefits of ̀ 300cr over next 15 years.
As a result of this merger, asset turnover ratio stood at 0.3x in FY18.
Adjusted for goodwill, however tangible asset turnover is 1.0x in FY18.
The merger has also led to decline in its return ratios (ROE of 3% in
13 14 16 19 23
56 59 56 52 47
33 4 3 3
15 12 13 14 15
13 12 12 12 12
0
20
40
60
80
100
FY17 FY18 FY19E FY20E FY21E
Co
ntr
ibu
tio
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%)
CRAMS - India CRAMS – CAAG+RIOM CRAMS – UK Carbogen Netherlands Others
Dishman Carbogen Amcis
FY18). However, if adjusted for the goodwill and amortization, return
ratios show a different picture (ROE of 16.6% in FY18). The benefits of
restructuring are already reflected in its income statement as its
EBITDA margins have improved by 600bps in FY17. Between FY17-
H1FY19, the company has amortized a total of Rs221cr as amortization
of goodwill charges.
Exhibit 13: Merger has led to improvement in margin profile
Source: IIFL Research
Outlook and valuation
Owing to CRAMs, HPAPI and Vitamin-D opportunity, DCAL’s
revenue/PAT is expected to register 14.2%/27.7% CAGR over FY19-21E.
Adj. ROE is expected to rise from 14.9% in FY19E to 15.6% in FY21E.
DCAL currently trades at 6.8x FY21E EV/EBITDA, >50% discount to Divi’s
Lab. We believe that DCAL’s improving financials and growth prospects
offer margin of safety to enter at this valuation. We value DCAL at 8x
FY21E EV/EBITDA to derive a target price of `289 and recommend BUY
on the stock.
Key risks
Reduced R&D spending by the innovator pharma companies.
Delay in getting NDA approval by its clients.
Regulatory risk in form of adverse observations by USFDA,
especially at HPAPI plant in Bavla and Shanghai Plant in China.
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Gross margins EBITDA Margins
in %
FY15 FY16
1,352 bps
603 bps
Disclaimer
Recommendation Parameters for Fundamental/Technical Reports: Buy – Absolute return of over +10% Accumulate – Absolute return between 0% to +10% Reduce – Absolute return between 0% to -10% Sell – Absolute return below -10% Please refer to http://www.indiainfoline.com/research/disclaimer for recommendation parameter, analyst disclaimer and other disclosures. IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: U99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-22) 4249 9000 .Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22) 25806654 E-mail: [email protected] Website: www.indiainfoline.com, Refer www.indiainfoline.com for detail of Associates. Stock Broker SEBI Regn.: INZ000164132, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No. INA000000623, SEBI RA Regn.:- INH000000248 For Research related queries, write at [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91-22 4007 1000