Ajanta Pharma

Background

Ajanta Pharma ranks among the Top 50 Pharmaceutical companies in India (IMS ORG MAT March 2012) with sales growing at 27% CAGR over FY06-12.  More than 2000 Medical Representatives strength.

The company has one of the highest R&D spends among pharma companies of similar size, spending ~ 6.5% of Sales on R&D and has invested in over 200 skilled personnel with a 35000 sq feet dedicated R&D facility for working on API synthesis and finished formulations.
The Company operates 4 manufacturing facilities in India, 3 for formulations and 1 for APIs (for captive consumption). Another formulation manufacturing facility is located in Mauritius through its 100% subsidiary. The manufacturing facility at Paithan, Maharashtra is approved by USFDA, UKMHRA, WHO Geneva (pre qualification).

Main Products/Segments

Main Generic Brands:

  • Ophthalmology (Olopat, Diflucor, Zaha, Unibrom, Nepaflam)
  • Dermatology (Melacare, Pacroma, Salicia KT, Sunstop)
  • Cardiology (Atorfit CV, Met XL, Rosufit)
  • Anti-Malarials (Artefan – Artemether & Lumefentrine)
  • Gastroenterology (Lafutax – Lafutidine)
  • Male Erectile Dysfunction (Kamagra – Sildenafil Citrate)
In the Dermatology segment, the company ranks 18th and has 34 generic brands – with 4 leading brands and more than 10 first-time products. In the Opthalmalogy segment, the company is ranked 7th and has 30 generic brands – with 9 leading brands and more than 16 first-time products in India.  In the Cardiology segment, the company ranks 31st and has 51 generic brands – with 3 leading brands and more than 6 first-time products in India.

Main Markets/Customers

  • Mainly three segments – Dermatology (32% FY07-11 sales CAGR), Cardiology (24% FY07-11 sales CAGR) and Ophthalmology (23% FY07-11 sales CAGR).
  • 75% of Domestic Revenues come from top 3 segments of Ophthalmology, Dermatology and Cardiac. Balance 25% come from new segments like Orthopedics, Gastro Intestinal and the Institutional segment.
  • Sales are mostly from a prescription-based model as the company moved decisively in reducing its exposure to tender based sales (0% from last 3 years). Institutional Sales comprise some 20% of Sales (governed by rate contracts for Ajanta’s brands). Direct Sales force has gone up from 600 to 2000+ in last 3 years. Country-wide C&F Agents network caters to the domestic market.
  • ~60% of Sales from Exports : of which ~50% from Asia, ~30% from Africa, and rest from Latin America; No sales from US and EU currently. Present in around 25 countries in Africa, South East Asia, Middle East, Central Asia and Latin America. Each country is treated as a different market. 1 distributor for each country. With around 1300+ brand registrations across countries filed, the company also has another 1300 or so brands under approval to ensure future growth.

Bullish Viewpoints

  • Consistent Growth – Ajanta Pharma has had a great run over the last 10 Years. Sales have grown at 21% CAGR growing from 100 Cr in 2003 to 605 Cr in 2012 and Net Profits have ramped up much faster at a CAGR of 46% to 66Cr in 2012. Consolidated record is even better.
  • Margin Expansions – Operating margins touched ~21% and Net Margins crossed 11% for the first time in FY2012. The company has been consistently recording higher margins over the last many years moving up from 14% Operating margin and 5% Net margin levels in FYO6. This may be attributed to increasing “brand” value, gradual shift in business model(s), and operating scale efficiencies.
  • Strong Product Pipeline – Ajanta Pharma invests ~6.5% of Sales in R&D. It has over 1300 product registrations in different countries and a pending registration (filed) pipeline of over 1300 products. For the last few years, the company has been introducing more than 20 new products every year in the domestic market, many of them first-of-its kind in India.
  • Prescription-Sales shift – Ajanta Pharma has successfully transitioned to a prescription-sales model, from the earlier dependence on sales to government and institutions – which were lower-margin tender based business. The company has heavily invested in increasing its field force to over 2000 Medical representatives. Expansion of doctor base, coupled with increased prescription rate has led to significant gain in market share and improved ranking during the year (FY12 within Top 50, compared to 63 in FY11).
  • Direct-Sales led model – Interestingly, Ajanta Pharma has been relying on a direct-sales led model rather than a distributor led model, even in overseas markets. More than 90% of export sales reportedly are through the direct marketing network, with only 10% coming from distributors.
  • Focused therapeutic markets – The company follows a very country-specific and product-specific model. For example, it sells its Anti-malarial and specialty range of products in African markets, while in South East Asian markets cardiology, ophthalmology and dermatology products are sold. Similarly for Latin American market, the company sells cough syrup dosages predominantly. Thus rather than dumping all products to marketing team, selective penetration is attempted depending upon the demand for that particular market.
  • Backward Integration for API facilities -Ajanta Pharma invested in a state-of-the-art API (Active Pharmaceutical Ingredient) facility in Waluj, Aurangabad in FY10. While the company mainly depends on Chinese supplies for its API needs, this facility is critical in its objective of launching new first-time products in the country. In-house capabilities on this front enables it to maintain product confidentiality in the innovation and trial phases where API supplies may be unavailable/scarce. The facility is being used primarily for captive consumption.
  • Heavy investments in Capex – In the last 4 years Ajanta Pharma has spent upwards of 200 Cr in Capital expenditure, which has paid off handsomely, so far – upgrading the USFDA approved Paithan facility, setting up an API facility in Waluj, a newfully equipped R&D center in Mumbai and Warehousing infrastructure. It also acquired a formulations facility in Aurangabad to cater to semi-regulated markets. With the current and foreseen growth levels, the company envisages capacity peaking in next 2 years. The company has planned two separate manufacturing facilities – one for regulated markets & another for domestic & emerging export markets to be completed in 24 months with an investment of ~400 Cr. Funding through new debt, apart from internal accruals.
  • Improved Subsidiary Performance – Subsidiaries have started adding to the fizz – contributing 72 Cr (~12%) to the topline and 11 Cr (~17%) to the bottomline. Performance of its subsidiary in Mauritius has been excellent and the step down subsidiary in Philippines has also been able to improve its performance substantially making profit for the first time. US and UK subsidiaries continue to assist in regulatory work for product registrations in those countries.
  • Entry into developed markets – The company has made excellent progress on this front since FY10, when it first started filing ANDAs (Abbreviated New Drug Application) in the US Market. It has received approvals for the first 2 products and filed another 7 in FY12. The first 2 products are expected to be launched in 1QFY13. Management has guided for a ~$2.5-5 million annual sales from these mid-size product segments.
  • Strong Balance Sheet – With long term borrowings at 75 Cr and short-term borrowings of 87 Cr, the total debt-to equity stands at 0.6x. Long term debt-to-equity is at 0.28x which leaves plenty of room for further leveraging. The company is in a position to fund its growth plans comfortably.
  • Consistently increasing Dividends – Dividend Payout is low at ~13% of Earnings in FY12. But to its credit the company has been consistently increasing dividends over the last 5 years. Dividends went up from 2.93 Cr in FY08 to 8.78 Cr in FY12, at an impressive 31% CAGR.

Bearish Viewpoints

  • Likelihood of Abbreviated New Drug Application (ANDA) filing fees going up – Establishment of Generic Drug User Fee Rates for Fiscal Year 2012 has revised the rates of ANDA filings. This is likely to see a significant escalation in expenses and may cause the company to pursue a more moderate ANDA filing strategy.
  • 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 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.

Barriers to entry

  • Strong Brands –  Company’s leading brands listed in top 5 sub-therapeutic segments of
    • Ophthalmology (IMS Rank 7, Industry  ~800 Cr)- Olopat, Unibrom, Diflucor, Zaha and Nepaflam
    • Dermatology (IMS Rank 18, Industry ~2600 Cr) – Melacare, Pacroma, Salicia KT
    • Cardiology (IMS Rank 31, Industry ~5300 Cr ) – Atorfit CV, Met XL
  • Strong Direct Sales model – Over 2000 direct sales people to increase doctor reach and prescription sales. Going by the gain in market share and improved rankings, this model (invested in over the years), is working to the company’s advantage.
  • Lower Tax rates – The company’s locations continue to operate under MAT. Besides it also avails of R&D tax deductions (150%). Overall the tax rate is around 15-16%.

Interesting Viewpoints

  • Ajanta Pharma has received 2 Abbreviated New Drug Application (ANDA) approvals for Risperidone & Levetiracetam from the USFDA in FY12. It has also filed for another 7 ANDAs during FY12, taking the total ANDA Portfolio to 9. The company received its first product approval by USFDA in a record 16 months of filing the ANDAs.
  • Keppra® (Levetiracetam) 2011 net sales: € 966 millions by UCB Pharma Inc – the original patent holder.
  • Ajanta Pharma is expecting $2 -$2.5 million of annual revenue from both these products and is likely to launch both products that received approval in the first half of FY’13.
  • The company has guided to file 5-6 ANDAs every year with the USFDA, and to build up a portfolio of 20-25 products in the next 3-4 years in the U.S. market for potential contribution to its top line.
  • The company continues to launch new products in the market in different therapeutic segments. During FY12 the company launched 25 new products out of which 13 were first time in the country. (FY11 23 new products launched).

Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years


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