Dishman Pharmaceuticals and Chemicals

Investors with a long-term perspective can consider adding the stock of Dishman Pharmaceuticals and Chemicals to their portfolio. An established player in the contract research and manufacturing services (CRAMS) space, Dishman appears well-placed to benefit from the forced austerity drives of the global pharma majors. Driven by receding product lines, fewer blockbuster launches and patent expiries, global pharma companies are looking at ways to contain costs. When seen in this light, contracting research and manufacturing services to low-cost providers helps combat earnings slippages.

Strengthening demand apart, what also builds the case in favour of Dishman is its wide client network, falling dependence on Solvay for revenues and relatively cheap valuations. At the current market price of Rs 228, the stock trades at about 11 times its likely FY-10 per share earnings. Not only does this leave sufficient room for growth, it also compares favourably with some of its peers.

Abbott-Solvay deaL

The recent buyout of Solvay group’s pharma business by the US drug maker, Abbott, promises to provide the much-needed booster shot to Dishman, which derives over 15 per cent of its revenues from the former. For one, the contractual obligations of the Solvay Pharma entities, despite its acquisition by Abbott, have remained unchanged. This puts to rest concerns about the sustainability of Dishman’s revenue growth. It has a 10-year deal till 2013 with Solvay.

The deal is unlikely to have any near term adverse impact on Dishman in any case as the process of changing suppliers may have taken Abbott at least a year or two. Two, the deal also opens up a wide opportunity canvas for Dishman, given the larger market reach of the merged entity.

Though Dishman has indirectly been supplying to Abbott, the post-deal scenario may offer it a wider platform to test its working relations with the latter.
non-Solvay revenues

Dishman’s reducing dependence on Solvay for revenues is also a positive from over 80 per cent in 2003 to about 15 per cent now. In the process, it has also broad-based its client network that includes EU-based innovator firms such as AstraZeneca, Roche, Sanofi Aventis and Novartis.

The long-tenure contracts of innovator firms have also provided Dishman with relatively stable earnings — not to mention the benefits that accrue from a more diversified revenue basket. The company is also eyeing expanding its CRAMS presence in the key markets of the US and Japan. Though it may be a while before these efforts start paying off, the moves appear to be in the right direction.
Promising outlook

CRAMS, which made up over 73 per cent of the company’s overall revenues last year, is likely to remain its main growth driver. Helped by new contracts, fresh capacities and entry into new markets, Dishman’s management has given a guidance of 15 per cent top line growth this year. This appears achievable given the pipeline of orders.

Dishman is likely to begin the API production for Omeprazole tablets for AstraZeneca soon; the company has signed contracts to supply 14APIs to AZ and expects $10 million revenues for the current fiscal from this contract. It has also received an order from Novartis for a new drug intermediary, which is in Phase-III production. Its entry into high potency (hipo) products, which typically enjoy low-volumes but high-margins, also would begin significant contributions from next fiscal.

The company’s China facility, which is expected to become operational soon, may also help scale growth. The management has already seen a high interest for its facility from companies such as Johnson & Johnson , Novartis and GlaxoSmithKline . The company’s increasing focus on cholesterol, oncology and disinfectant businesses may only add to its overall growth dimension.
Scorecard

Dishman’s June quarter results were a tad disappointing; revenues fell 4 per cent as also sustainable profits (sans forex gains). However, bulk of the poor performance was due to lower off-take by Solvay in the quarter. This has now been addressed as the shipment of Eposartan to Solvay has resumed from June.

Dishman may even get an additional product (Propetal, proffering incremental revenues of €3.5 million) from Solvay. On a segmental basis, while the CRAMS revenue fell by 7.8 per cent, revenues from the MM (marketable molecules) segment grew 11 per cent. Lower sales made to Solvay during the quarter weighed on its margins too, which reduced by about five percentage points to 23.4 per cent.

via BL