Claris Lifesciences Ltd

Techno Funda Note
Jan 21, 2016
Claris Lifesciences Ltd (CLL)
RETAIL RESEARCH
Scrip Code
Industry
CMP
Recommendation
Sequential Targets
Stop Loss*
CLALIFEQNR
Pharmaceutical
Rs.187
Buy at CMP and add on dips in band of Rs. 159-171
Rs. 220 & Rs. 244
Rs. 144
Time Horizon
1-2 quarters
*on daily closing basis
Claris Lifesciences Limited (CLL) is a Pharma multi-business enterprise and the holding company of Claris Injectables (CIL), a
wholly-owned subsidiary engaged in Specialty Injectables business. It also holds 20% in Claris Otsuka Pvt. Ltd, a Joint Venture
with Japanese Otsuka Pharmaceutical Factory, Inc. & Mitsui & Co. Ltd. for Infusion business in India & Emerging Markets.
Price Chart
Triggers
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Stock Details
BSE Code
533288
NSE Code
Not Traded
Bloomberg
Price (Rs) as on 20 Jan,
2016
CLAR:IN
187.0
Equity Capital (Rs Cr)
54.6
Face Value (Rs)
10
Eq. Shares O/s (Cr)
5.46
Market Cap (Rs. Cr.)
1037.4
Book Value (Rs)
241.30
Avg. Volume (52 Week)
195617
52 wk H/L (Rs)
358.0/171.0
Shareholding Pattern
Indian Promoters
60.99
Institutions
13.04
Non Institutions
25.97
Zececa Mehta – Fundamental
Research Analyst
zececa.mehta@hdfcsec.com
RETAIL RESEARCH
Risks/Concerns
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Regulatory risks
Therapy Concentration
Corporate governance issues in the past –IT raids
Pledged shares by promoters
Conclusion and Recommendation
Claris is into generic injectables space which are difficult to manufacture and thus there is a real shortage of generic injectables
in the regulated markets. The company’s blockbuster drug propofol is going off patent and it will be one of the only
manufacturers of propofol in injectables. Claris has decided to concentrate on the regulated markets especially the US and
Europe. We feel investors could buy the stock at CMP and add on dips in the band of Rs. 159-171 (~6.5-7x FY17E Adj. EPS) for
sequential targets of Rs. 220-244 (~9-10.0x FY17E Adj. EPS) with stop loss of Rs. 144 on daily closing basis, in 1-2 quarters.
Financial Summary (Consolidated)
(As on Sept 30, 2015)
Total
20% holding in JV with Otsuka and Mitsui – can be unlocked at a good price over the medium term
CIL - Specialty Injectables business – Good revenue and margins earner
Propofol-current flagship product of CIL - robust growth ahead on back of USA launch
CIL stake/business could be sold off at a hefty price – resulting in value unlocking.
100
Particulars (Rs in Cr)
CY11
CY12
CY13
Total Operating Income
Operating Profit
OPM (%)
Other Income
Adjusted Profit After Tax
APATM (%)
Reported Profit After Tax
PATM (%)
Adjusted EPS (Rs.)
Reported EPS (Rs.)
740.5
245.6
33.2
16.0
126.3
17.1
126.3
17.1
19.8
19.8
767.4
264.8
34.5
10.3
103.9
13.5
103.9
13.5
16.3
16.3
667.8
166.5
24.9
43.4
70.4
10.5
84.4
12.6
11.0
13.2
FY15
(15 months)
799.8
155.5
19.4
86.3
156.7
19.6
149.5
18.7
23.0
21.9
FY16E
FY17E
766.9
186.7
24.3
49.3
118.4
15.4
70.3
9.2
21.7
12.9
820.5
211.0
25.7
59.2
133.0
16.2
99.0
12.1
24.4
18.1
(Source: Company, HDFCSec; E-Estimates)
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Company Profile
Claris Lifesciences Limited (CLL) is a Pharma multi-business enterprise and the holding company of Claris Injectables, a whollyowned subsidiary dealing in Specialty Injectables business. It also hold 20% stake in ‘Claris Otsuka’, a Joint Venture with Japanese
Otsuka Pharmaceutical Factory, Inc. & Mitsui & Co. Ltd. for Infusion business in India & Emerging Markets. Thus, CLL has three
segmental revenues, 1) the Specialty Injectables Business which is housed in a wholly owned subsidiary; Claris Injectables
Limited (CIL), 2) 20% stake in the joint venture with Otsuka and Mitsui for the infusion business in India and Emerging Markets
and 3) the Treasury and Cash management for the funds in the Holding company.
Claris Injectables Limited (CIL) is one of the largest sterile injectables pharmaceutical companies in India. The company
manufactures and/or markets products across various therapeutic segments including Anesthesia, Plasma Volume Expanders,
Blood Products, Parenteral, Infusion therapy, Anti-infective and Renal Care. A significant majority of these products are generic
drugs that are capable of being directly injected into the human body and predominantly used in the treatment of critical
illnesses.
The company has 3 manufacturing plants at its campus on the out skirts of Ahmedabad. With emphasis on Quality, Technology
& Innovation, Claris offers a range of niche technology-driven injectable products across delivery systems such as glass bottles,
glass vials and ampoules, and non-PVC/PVC bags. Claris sterile injectables facilities have been approved by regulatory authorities
including USFDA, MHRA (UK), TGA (Australia) and GCC FDCA. The company’s manufacturing capabilities have several times
received awards from prestigious institutions like Frost & Sullivan and IDMA.
Claris Otsuka Private Limited (COL) is a Joint Venture between Claris Lifesciences Ltd, India, Otsuka Pharmaceutical Factory Inc.,
Japan and Mitsui & Co. Ltd., japan for Claris’s Infusion Business in India and Emerging Markets. The company primarily
manufactures & markets products across multiple markets and therapeutic segments and has two manufacturing facilities in
Ahmedabad.
The company has products ranging across various therapeutic segments including infusion therapy, parenteral nutrition, antiinfectives and plasma volume expanders. The company offers injectables in various delivery systems such as glass and plastic
bottles (EURO Head and Nipple Head), ampoules and non PVC/PVC bags.
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Historic evolution of Claris Lifesciences Ltd
Products of Claris Injectables Ltd (CIL)
Anesthesia & Analgesia: The Company’s expertise in lipid-based technology has made it one of the few companies in the world
to manufacture propofol. Provive/Profol is an internationally accepted brand and the no. 1 brand of propofol in India as well as
diverse countries across Latin America, Asia, Africa and the CIS. Marketing Authorization Applications for propofol have been
filed in several EU countries, Australia and New Zealand.
The anesthesia basket has other products including Sedoz (midazolam), Ketajex (ketamine), Thiojex (thiopentone), Sensinil
(lidocaine) and Bupican (bupivacaine).
Blood Products: Claris' blood product range like Norglobin IVIG (human immunoglobulin) caters to the needs of patients with
immuno deficiency, which reduces their capacity to fight diseases. A number of new products are in the pipeline in this category.
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Anti-infectives: Claris has a wide range of broad-spectrum anti-infectives in its product basket. It has Ciproquin/Ciprox under
Quinolone; Meriva, Imira, Zepita under Beta Lactum; Flucanol in the anti-fungal category and Clinbact/Bacimycin under
Aminoglycoside
Plasma Volume Expanders: TetraHES is CIL’s brand for Tetrastarch, a variant of Hydroxyethyl Starch. It falls under the category
of colloidal Plasma Volume Expanders. It is used as Plasma Volume Expander/ Blood Substitute to maintain normal blood
pressure and volume in shock, hypovolemia, acute blood loss, hypotension, etc. It improves oxygen transport to all vital organs
of the body.
Renal & Transplant: Claris offers a dialysis and transplant range across systems, solutions, medicines, disposables and
equipment.
The transplant therapy range includes immunosuppresants Cyrin (cyclosporine), Limus (sirolimus) and Mygraft (mycophenolate
mofetil) as well as Renograf (multi organ perfusion solution). Claris is the first Indian company and one of the few in the world to
successfully manufacture Renograf.
Renal medicines include Epotin (erythropoietin), Kapstat (calcium polystyrene sulphonate), Essamin (essential amino acids),
Calbin (calcium acetate) and Ostriol (calcitriol).
Oncology: Claris launched its Oncology division with a vision and an endeavor to transform lives of cancer patients by offering
quality products at affordable price.
With its focus on drug delivery systems, innovative molecules and biotech products, Claris Oncology currently has a basket of
products, which caters to solid tumors, hematological malignancies and supportive therapies. In addition to this, it also plans to
launch many more molecules in coming months.
The company also plans of establishing a fully operational and GMP compliant, dedicated oncology-manufacturing facility which
would be equipped with the latest and state-of-the-art equipment.
Select Injectables: Claris also offers select injectables across few more therapeutic groups including anti-emetics, CNS,
Cardiology, anti-malaria, haematinics etc.
Products of Claris Otsuka Private Ltd (COL)
Infusion therapy: The company has a wide range of common solutions in infusion therapy in India.
Parenteral Nutrition: Parenteral nutrition, also known as intravenous feeding, is a method of getting nutrition into the body
through the veins. Claris Otsuka has a product range encompassing advanced delivery systems in double and triple chamber
bags like PNA, Celemix-G and TNA/TNA-Peri. TNA-Peri offers the unique advantage of an advanced triple chamber bag system,
with the convenience of peripheral administration.
Anti-infectives: Claris Otsuka has a wide range of broad-spectrum anti-infectives in its product basket. The quinolone range has
Ciprox (ciprofloxacin IV) and Curadex (ofloxacin IV). Metris (metronidazole IV) is an anaerobic antibacterial belonging to the
nitromidazole class of anti-infectives.
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Plasma Volume Expanders: The Plasma Volume Expander range from Claris Otsuka covers TetraHES (tetrastarch), Hestar 200
(pentastarch), Hestar 450 (hetastarch) and Microspan (dextran) in bags and bottles.
Shareholding Pattern
Particulars (%)
Indian Promoters
Mutual Funds/UTI/Banks
FIIs
Foreign Venture Capital Investors
Corporate
Public & Others
Totals
Sep-15
60.99
0.09
12.95
0.00
4.86
21.1
100.0
Jun-15
60.99
0.06
17.77
0.00
5.22
16.0
100.0
Mar-15
60.99
0.02
14.25
11.29
2.05
11.4
100.0
Dec-14
60.99
0.00
13.49
11.29
3.37
10.9
100.0
Sep-14
60.99
0.00
13.41
11.29
3.29
11.0
100.0
As on 30th September 2015 shareholding pattern, the following names hold significant stake in the company.
Particulars
Government Pension Fund Global
Orbimed Partners Mauritius Ltd
Privatban Kihng Zurich AG
Signet Healthcare Partners QP Partnership III LP
Barclays Capital Mauritius Ltd
Copthall Mauritius Investment Ltd
Total Foreign Funds Holding
% of total no. of shares
2.98
4.48
2.39
2.23
1.48
1.32
14.88
Triggers
20% holding in JV with Otsuka and Mitsui – can be unlocked at a good price over the medium term
During August 2013, Claris Lifesciences India (CLL) completed the transfer of its infusion business for India and emerging markets
to the joint venture (Claris-Otsuka) with Otsuka Pharmaceutical Factory, Japan (OPF) and Mitsui & Co, Japan (Mitsui). The
infusion business includes common solutions, anti-infective, plasma volume expanders and parenteral nutrition therapies for
India and emerging markets. Claris has transferred two of its existing plants to the joint venture. Claris will continue to hold a 20
per cent stake in the joint venture while Otsuka and Mitsui will hold 60 per cent and 20 per cent respectively. Claris had received
a total cash consideration of Rs 1050 crores as a part of the transaction from Claris-Otsuka. Claris-Otsuka was valued at Rs 1313
crores.
CLL has used the part of the cash consideration towards debt prepayment of around Rs 360 crores. CLL also did a buyback of up
to 92,50,000 equity shares at a price of Rs 250 per share (higher than the then prevailing market price). About Rs. 231 crore
were used for this buyback which was open from 8th May 2014 to 22nd May 2014. Equity share capital fell from Rs. 63.82 crore
to Rs. 54.57 crore. The remaining funds net of taxes and deal related expenses are being used to fund future growth of the
company.
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Accordingly then, CLL would focus on its specialty generic injectables business and shall intensify its growth in all international
markets, especially the regulated markets (including the US) through new product launches.
As per the JV arrangement, Claris-Otsuka shall co-brand its products in India and across Emerging Markets utilizing the
manufacturing and marketing competence of Claris. Claris-Otsuka to introduce OPF’s speciality products in India and Emerging
Markets. OPF to have an opportunity to leverage Claris-Otsuka’s manufacturing infrastructure and supply chain for its global
business. Claris-Otsuka to work on expanding product basket with speciality Infusion and Clinical Nutrition Products. OPF’s
global expertise in the Infusions business and Claris’ India advantage to be a huge advantage to Claris-Otsuka. The Claris-Otsuka
business shall be propelled to take advantage of the Infusions opportunity globally with OPF’s and Mitsui’s capabilities and
financials strengths.
Once the role of Claris in handholding/handover is complete, we think CLL can exit the JV and sell its 20% stake to the other
partners at similar or higher valuations. This could bring in cashflows and profits as the book value of the investment is Rs.2 cr.
During October 2014, CLL transferred its Specialty Injectable Business by way of slump sale to its wholly owned subsidiary viz.
Claris injectables Limited (CIL). Now CIL will focus on bagging products and other niche ‘difficult to manufacture’ products as well
as work on fast track growth opportunities via organic (capacity expansion and introduction of new delivery systems) and
inorganic (acquire products and ANDAs) routes.
CIL - Specialty Injectables business - Revenue earner
CIL is a wholly owned subsidiary company of CLL and is focused in the Specialty Injectables business. It has a diversified portfolio
with a therapeutic focus in segments like Anaesthesia & Analgesics, Anti-Infectives and Critical care & Renal. It has total of 51
products out of which 24% products represent the Anaesthesia & Analgesics, 27% comprise of Anti-Infectives and balance 49% is
Critical Care & Renal. It has a fully integrated Injectables platform starting from product development to sales, marketing &
distribution.
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CIL has a strong global commercial presence across 100 countries. As per FY15, the company garnered about 44% of its revenue
from Emerging Markets, about 30% of its revenue from USA, and 26% from Other Regulated Markets. CIL has a full –fledged
front-end presence in USA though the wholly owned subsidiary viz. Claris Lifesciences Inc., USA which has 11 employees
including 2 senior sales executives. Also in India, it has its own sales and marketing network. As far as the other countries are
concerned, the company goes through distributors.
Europe and ORM
EU (25), S. Korea, Canada,
Australia, Others (4)
Commercial Strategy
Distributors
Tier 1 Emerging Markets
Brazil, Philippines, Russia, Mexico,
Others (6)
Distributors
Other Emerging Markets
Venezuela, Peru, Colombia,
Ukraine, Others (58)
Distributors
Country managers based in India, managing
distributor relationships
Registrations in 25 European countries
Country manager based in the country
Operating business infrastructure in key Latin
American countries
Country managers based in India, managing
distributor relationships
CIL has 13 ANDAs approved in its name across eight molecules with a total filing of 43 ANDAs in the USA. It has a under
registration pipeline of 24 ANDAs across 21 molecules, having an estimated addressable market size of $2.2 billion. CIL is capable
of developing about 25 products per year including 12-15 products in the US market due to its strong R&D and regulatory
capabilities. The company is targeting a portfolio of 100 products by 2020 in USA.
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The world generic injectable market is dominated by the USA, which accounts for 51% of the entire market size, European Union
is second with 24% of the total Generic Injectables Market followed by EM at 20% and Other Regulated Markets at 5%. The
generic injectables market is estimated to be around US$ 8bn in the USA, this includes General Injectables at 73%, Oncology at
17%, Beta-lactam antibiotics at 8% and others at 2% of the total market.
Out of these segments, CIL’s products target the generic injectables segment which has a US$ 5 bn of market size. It has seen the
highest growth between the years 2010 and 2013. During this period the segment grew by 17% as compared to 7% of Oncology
and 8% in Beta-lactam antibiotics. This growth was on the back of better demand of products and improved pricing due to
shortages in the general injectables products.
Global Pharma Market : USD 770 bn
Global Injectables Market : USD 150 bn
Generic Injectables Market : USD 20 bn
Cef. Beta-lactam
Penam: USD 3 bn
Non-Targeted
Products: USD 3 bn
Selling:
USD 1 bn
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General Injectables:
USD 8 bn
Bio-Tech:
USD 4 bn
Oncology:
USD 5 bn
Targeted Products:
USD 5 bn
Developed/Filed:
USD 2 bn
Pipeline:
USD 2 bn
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Manufacturing facility plan
CIL has 3 manufacturing units spread across 166,800 sq. meters campus in Ahmedabad. 2 units are for FDF and one is for API
manufacturing. It has employed 524 full time employees including 249 in manufacturing and 275 in quality. The facilities are also
compliant with the regulators. There have been 3 successful FDA inspections in last three years. Also it has got approvals from
other key global regulatory agencies such as MHRA, TGA, ANVISA and GCC.
Manufacturing Area
Capabilities
Capacity
Key Regulatory Approvals
Clarion I - FDF Facility
14,400 sq. metres
Aqueous, emulsion
Bags, vials, ampoules
Clarion V - FDF Facility
13,145 sq. metres
Aqueous, lypholised
Ampoules, vials
5 lines
115 million units (2014)
4 lines (2 already in place)
200 million units (2014)
FDA, MHRA, TGA, ANVISA
MHRA Approved
Clarion III - API Facility
4,100 sq. metres
API production for:
Iron Sucrose
Hydroxyethyl Starch
Dexmeditomidine
Iron Sucrose - 1 ton per month
HES - 4 tons per month
Dexmeditomidine
FDA Approved
Propofol-current flagship product and robust growth ahead on back of USA launch
Propofol (generic version of Diprivan), a flagship product of Claris is an anaesthetic product which is widely replacing other
anaesthetic drugs as recovery from Propofol is more rapid and clear when compared to other anaesthetic drugs. Propofol is also
commonly used in veterinary medicine. Propofol has been referred to as milk of amnesia, because of the milk-like appearance of
its intravenous preparation. It is on the WHO Model List of Essential Medicines, the most important medications needed in a
health system. It also happens to be part of an industry wide drug shortage affecting hospitals throughout the US. Currently
there are three manufacturers making Propofol for the US market - Teva Pharmaceuticals, Hospira and Fresenius Kabi (as
Authorized Generic).
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The total market size of Propofol is about USD 575 mn with US having market size of USD 251 mn (as per IMS health data as of
June 2014) followed by EU & ORM at USD 184 mn and then EM at USD 145 mn. However, as per FY15 CIL’s sales of Propofol in
EU & ORM was Rs. 601 mn, in EM was Rs. 1093 mn. CIL does not supply in the USA. During December 2014, the company had
filed an ANDA for Propofol for injection, 10 mg/ml with USFDA with a Paragraph IV certification. However, Fresenius Kabi USA,
Inc. had filed a suit against the company to prevent it from commercializing its ANDA prior to the expiration of its existing
patent, on 1st December 2024. But in April 2015, Claris reached a settlement and license agreement and ended all the litigation
with Fresenius Kabi USA, Inc. CIL was then granted approval to sell its generic version of Propofol for Injection from 15th October
2016, prior to the expiry of December 2024.
Thus this would give advantage to CIL as it will be the only emerging market player to have approval and commercial sales in the
regulated markets, having over 8 years of experience in manufacturing and marketing Propofol. The company has approval in 86
countries with commercial sales in over 50 countries in 2013.
The total anaesthesia market has grown at a CAGR of 22% during 2010-2013. In that, Propofol has grown at a CAGR of 29% while
other anaesthesia products have grown at a CAGR of 19% during the same period as above. This gives Claris good opportunity to
tap the faster growing market of Propofol with an added advantage of USA sales which will commence soon as it has the
capacity to meet ~25% of the regulated markets requirement.
Iron Sucrose-Leading Market position
This medicine is used to treat "iron-poor" blood (anemia) in people with long-term kidney disease. One may need extra iron
because of blood loss during kidney dialysis. Iron is an important part of one’s red blood cells and is needed to transport oxygen
in the body. Many patients with kidney disease cannot get enough iron from food and require injections.
The global dialysis market is estimated at Rs. 369,600 crore in 2013 and is poised to grow at a CAGR of 6.2 percent from 2013 to
2018, to reach Rs. 499,260 crore by 2018.
Diabetes is the primary cause of CKD (Chronic Kidney Disease) in India. The condition accounts for 30 percent of all CKD cases, as
opposed to high blood pressure, which accounts for 20 percent of all cases. India is home to more than 60 million diabetics.
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Should current rates hold, the numbers of diabetics in India will be more than double by 2040. According to doctors, about onethird of these patients will go on to develop CKD.
The high incidence of kidney diseases can be attributed to inactive lifestyles, stress, smoking, and alcohol consumption.
Claris has USFDA approved own manufacturing of API along with finished formulation. It has a strong international presence and
is the only generic player in many countries including Brazil and South Africa. As far as US is concerned, there are currently no
generic players. However, by FY17 there would a 2-3 players entering the market. Claris expects to be amongst the three players
in this limited competition market. The global market size of iron sucrose is about USD 530 mn with USA comprising of USD 159
mn and has grown at a CAGR of 8% during 2010-13. During FY15, Claris did sales of about Rs 14 mn of iron sucrose in ORM and
about Rs. 88 mn in EM. It has a capacity to meet ~28% of the requirements of the regulated markets.
Other developments
Claris Lifesciences in Aug 2015 got a prior approval supplement (PAS) for resuming the supply of Furosemide injection in the US
market. The injection which is used to treat fluid retention has earlier faced supply issues from its raw material supplied, thus,
there was a gap in supplying the product to the US market; since January 2015. Claris is reported to have said that the same
product has faced supplying issues to the US market last year as well, though on interrupted occasions only, and has also
featured in the USFDA shortage list since June 2012. It was only in January 2014, Claris Lifesciences had received the US health
regulator’s nod to market Furosemide injection in the American market. The company had filed a PAS application to append an
additional supplier to the abbreviated new drug application (ANDA), this process was done for redundancy and to ensure a
consistent supply of the API for its finished formulation sold in the US. With this approval, alternative vendor has been appended
to the ANDA, this will allow the company to recommence its supplies to the US.
Technology Upgradation during FY15
During FY15, CLL introduced new technologies in the manufacturing facilities and the testing labs. Packing automation for
Propofol vials and other SVP products in ampoules and vials has resulted into significant increase in the packaging capacity.
Introduction of Automatic pouch making machines; which is used as secondary packaging material for Bags, has led to a cost
reduction and quality enhancement at a higher throughput in bags.
Introduction of new laboratory instruments and software implementations will improve the data capturing and recording
process for the company, this will help the company in the long run with respect to regulatory bodies’ requirements of having
systems in place to ensure data integrity.
During FY15 the company has installed two new lines in the new plant; Clarion 2; these line can manufacture products in
ampoules and vial for a fill volume of up to 10 ml, these are high spread lines with capacities to manufacture around 100 mn
units each per year. This plant has received approvals from MHRA.
CIL stake/business could be sold off at a hefty price – resulting in value unlocking.
In Feb 2015, media reported that several Indian pharma giants are competing with their global peers in the race to acquire the
generic sterile injectables business of Claris Lifesciences Ltd. The heightened interest in the business from strategic players also
coincided with global supply constraints of injectables -- drugs that are widely used through vials, syringes and bags, as well as
pumps used to deliver them and other fluids -- that had driven many recent transactions both in India and overseas, including
Pfizer's $17 billion takeover of Hospira.
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There are very few injectable businesses left in India that are independently owned after Mylan acquired Agila from Strides
Arcolab for $1.6 billion in 2013. Prior to that in 2009, Hospira had acquired Orchid's injectables business for $400 million.
Mylan's takeover of Agila was reportedly valued at 24x EBITDA & 8x revenues. Pfizer-Hospira deal, as per industry sources, was
at 20x EBITDA and 4x revenue multiple.
The total global injectable market is estimated at around $150 billion with lion's share being with innovators. The generic
injectable sector is estimated at around $20 billion as per various industry estimates and is a very attractive piece going forward.
In 2010, there were 178 drug shortages reported to the U.S. Food and Drug Administration (FDA), 132 of which involved sterile
injectable drugs. In 2011, there were 251 drug shortages reported, 183 of which involved sterile injectable drugs. In 2012, there
were 117 new drug shortages, 84 of which involved sterile injectable drugs and in 2013, there were 44 new drug shortages, 35 of
which involved sterile injectable drugs.
The injectable business of CLL had sales during fifteen months ended March 2015 of Rs. 517.3 crore and an EBITDA of Rs. 189.8
crore. In H1FY16, this business recorded sales of Rs.283 cr and EBITDA of Rs.101 cr.
Taking a conservative multiple of 3x Sales and 15x EBITDA, the value of this business could be between Rs.1700 cr to Rs.3000 cr.
This excludes the upside from Propofol opportunity.
CLL’s current market cap is ~Rs.1050 cr. Going by the past actions, shortage of injectables and interest of global and Indian
Pharma companies in acquiring sterile injectables business (though the issue of Form 483 in May 2015 cooled interest to some
extent), we feel that the management of CLL will actively seek to sell their entire/part stake in CIL (especially after the launch of
propofol in the US in Oct 2016). This could lead to value unlocking for the shareholders of CLL.
Unexpected adverse development on regulatory front (whether in line with the last Form 483 issued or otherwise) could be the
main hindrance to this value unlocking.
Financials
Consolidated net sales of CLL has grown from Rs. 658.38 crore for the twelve months ended December 2013 to Rs.780.11 crore
for the fifteen months ended March 2015. On July 31, 2013, the company entered into the Joint venture with Otsuka and Mitsui
and it transferred its infusion business for Domestic and certain emerging markets. Therefore, in the year 2013, sales for seven
months was inclusive of total infusion and injectable business while remaining five months of year was for speciality injectable
business and pass through of the international sales of COL. Similarly, for the period of fifteen months there were sales of
Speciality Injectable business and pass through sales of COL.
EBITDA margin (including exceptional item in CY13) reduced from 34% for the twelve months ended December 2013 to 31% for
the fifteen months ended March 2015.The reduction in EBITDA margin was on account of transfer of infusion business to COL.
However, the pass through sales continue through Claris without significant margin and therefore result into reduction in
EBITDA margin.
Profit after tax has changed from 13% for the twelve months ended December 2013 to 19% for the fifteen months ended March
2015.There has been an increase in the profit mainly on account of the reversal of deferred tax due to slump sale.
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Q2FY16 Review
For Q2FY16, CLL’s consolidated total income rose by 28% to Rs. 193.5 crore. As all the operating expenses as a percentage to
sales rose, operating profit de-grew by 15% YoY to Rs 32.8 crore and thus the OPM came in at 16.6%. Due to higher interest cost
(up by 31% YoY), PBT came in at Rs. 25.1 crore, down by 22% YoY, Adjusted PAT came in at about Rs. 26.7 crore, rise of 19% YoY
due to negative tax impact. However due to an extraordinary item of Rs. 37.83 crore due to the expenses incurred relating to
legal, professional, travelling and consultancy, etc on account of various Strategic and Management initiatives of which majority
expenses are of prior year/period, the company incurred loss at the bottomline of Rs. 24.1 crore.
Estimates
For FY16, we expect consolidated revenues to grow by 16% YoY to Rs. 766.9 crore driven by robust growth of about 35% in the
CIL business, due to USA. Due to the curtailment in the operating costs, the operating profit is expected to grow by 36% YoY to
Rs. 186.7 crore with OPM being 24.3%. PBT is expected to be at Rs. 151.8 crore and with tax rate of 22%, adjusted profit after tax
is expected at Rs. 118.4 crore. However due to an incidence of an extraordinary item in Q2FY16, reported PAT will come at Rs.
70.3 crore as against Rs. 149.5 crore (15 months ending March 2015). For FY17, we expect the total income to come in at Rs.
820.5 crore on the back of launch of Propofol by the company in Oct-Nov 2016 and also due to discontinuation of sales from COL
JV as indicated by the management. The operating profit is expected to come at Rs. 211 crore, up by 13% YoY. The adjusted PAT
is expected to report at Rs. 133.0 crore while the reported PAT is expected to come at Rs. 99.0 crore.
Risks/Concerns
Regulatory Risk: The company derives around 55% of its total revenue from the regulated markets (EU and the US). This exposes
the company to increased risk of compliance with current good manufacturing practices.
The US Food and Drug Administration (USFDA) had on November 1, 2010 issued a warning letter to the company along with an
import alert for violation of approved manufacturing norms at the company's Ahmedabad facility and also banned import of
products manufactured at the plant to the US. However in August 2012, the USFDA approved the corrective actions taken at its
plant in Ahmedabad thereby paving way for resumption of exports to the American market.
In May-15, Clarion I, Claris's only fully operational plant, was inspected by the USFDA. At the end of inspection, company has
received Form 483, which highlights details about non-compliance at the plant. There were five observations in the letter, of
which one is of critical nature. Form 483 in itself does not mean that company will not be able to sell products in the US,
however, if it is followed by a Warning letter (no new ANDA approvals from that plant) or an Import alert (complete stoppage of
supplies to US market), it can impact company's financials. Company is confident that they will not receive any warning letter or
import alert. More so, the changes which were required to get back in compliance are already in place. However, of the five
observations made, one is critical in nature and points towards data integrity. Hence, the risk of an adverse event will remain till
the company receives any formal confirmation from the USFDA.
Therapy Concentration: The company faces product concentration as its branded formulations basket has only three large
segments - anaesthesia, anti-infective and renal therapy. The company’s dependence on select brands exposes it to brand
concentration risks. Moreover, the company has limited diversification and growth plans for fast-growing lifestyle and critical
products.
RETAIL RESEARCH
Page | 13
IT Inspection outcome: During August 2015, the Income Tax department conducted search/survey at the company’s premises.
The company extended full support to the authorities. Any negative news regarding the search poses a risk to the company’s
image and raises doubts on corporate governance practices.
Forex fluctuation: Being an export oriented player and presence of substantial portion foreign debt in the balance sheet results
in relatively higher vulnerability to forex fluctuations.
Pledged shares: The promoters have pledged 17.8% of their holdings (12% of total equity). This poses a risk to its share price.
Conclusion and Recommendation
The pharma sector has huge potential and CLL is well poised to cater the huge opportunity in domestic and export market. Claris
is into generic injectables space which are difficult to manufacture and thus there is a real shortage of generic injectables in the
regulated markets. Though the company is vulnerable to FDA inspection, but till now, the company has not faced any major
hurdles as far as regulatory compliance is concerned. Also the company’s another blockbuster drug propofol is going off patent
and it will be one of the only manufacturers of propofol in injectables.
Claris has decided to concentrate on the regulated markets' especially the US and Europe. Claris is working towards filing 15+
ANDAs every year with an intention to reach a 100 ANDA pipeline in the next 3 years.
If we compare Claris to some of its peers in the pharma industry, CLL is available at comparatively lower valuation in terms of
P/E, P/B and Market Cap/Sales as shown in the below table. This is without considering the value of Claris Otsuka JV stake and
other investments on the books of CLL.
PAT
(Rs in Cr)
EPS
(Rs)
CMP as on
190116 (Rs)
PE
Companies
Total
Revenue
(Rs in Cr)
Claris Lifescience
Alkem Labs
Alembic Pharma
Indoco Remedies
799.8
3788.7
2056.1
857.0
149.5
462.6
282.9
82.8
27.4
38.7
15.0
9.0
190.0
1357.0
603.0
300.0
6.9
35.1
40.2
33.4
FY15
Book
value
P/BV
EV/EBITDA
Debt/Equity
Mkt
Cap/Sales
241.3
250.5
46.9
56.3
0.8
5.4
12.8
5.3
4.4
NA
21.6
20.5
0.3
0.4
0.2
0.2
1.3
4.3
5.5
3.2
Looking at the above, we feel risk bearing investors could buy the stock at CMP and add on dips in the band of Rs. 159-171 (~6.57x FY17E Adj. EPS) for sequential targets of Rs. 220-244 (~9-10.0x FY17E Adj. EPS) with stop loss of Rs. 144 on daily closing basis,
in 1-2 quarters.
At the current market price (of Rs 187) the company is trading at 8.62x its FY16E consolidated Adj. EPS of Rs. 21.7 and 7.66x its
FY17E consolidated Adj. EPS of Rs. 24.4.
RETAIL RESEARCH
Particulars (Rs in Cr)
CY11
CY12
CY13
Total Operating Income
740.5
767.4
667.8
FY15
(15 months)
799.8
FY16E
FY17E
766.9
820.5
Page | 14
Operating Profit
OPM (%)
Other Income
Adjusted Profit After Tax
APATM (%)
Reported Profit After Tax
PATM (%)
Adjusted EPS (Rs.)
Reported EPS (Rs.)
245.6
33.2
16.0
126.3
17.1
126.3
17.1
19.8
19.8
264.8
34.5
10.3
103.9
13.5
103.9
13.5
16.3
16.3
166.5
24.9
43.4
70.4
10.5
84.4
12.6
11.0
13.2
155.5
19.4
86.3
156.7
19.6
149.5
18.7
23.0
21.9
186.7
24.3
49.3
118.4
15.4
70.3
9.2
21.7
12.9
211.0
25.7
59.2
133.0
16.2
99.0
12.1
24.4
18.1
(Source: Company, HDFCSec, E: Estimates)
Financials
Quarterly (Consolidated)
Particulars (Rs cr)
Net Sales
Other Operating Income
Total Income
Raw Material Cost
Employee Expenses
Other Expenses
Total Expenditure
Operating Profit
Other Income
PBIDT
Interest
PBDT
Depreciation
PBT
Tax (including DT & FBT)
Adjusted Profit After Tax
Extraordinary Item
Reported PAT before share of associates
Profit/(Loss) Share of Associates
Reported PAT
EPS (Rs.)
Equity
OPM (%)
PATM (%)
Q2FY16
193.52
3.9
197.4
86.3
19.3
59.0
164.6
32.8
14.3
47.1
11.3
35.9
10.7
25.1
-1.6
26.7
-37.8
-11.1
-1.9
-13.0
-2.4
54.6
Q2FY15
162.09
4.0
166.1
70.7
13.3
43.4
127.4
38.7
12.9
51.5
8.6
42.9
10.7
32.3
9.9
22.4
0.0
22.4
-2.0
20.4
3.7
54.6
16.63
-6.61
23.29
12.27
% chg
19.4%
-1.5%
18.9%
22.1%
45.2%
35.9%
29.2%
-15.1%
11.0%
-8.6%
30.9%
-16.5%
0.6%
-22.1%
-116.3%
19.4%
-149.6%
-164.0%
bps
-666
-1887
Q1FY16
186.51
5.4
191.9
77.0
18.4
47.4
142.8
49.1
8.6
57.7
10.2
47.5
10.4
37.1
14.8
22.3
0.0
22.3
-2.0
20.3
3.7
54.6
25.58
10.57
% chg
3.8%
-28.2%
2.9%
12.0%
4.8%
24.5%
15.2%
-33.1%
66.6%
-18.3%
10.2%
-24.4%
3.5%
-32.3%
-110.9%
19.8%
-149.7%
-164.3%
bps
-895
-1717
H1FY16
380.03
9.3
389.4
163.3
37.7
106.4
307.4
81.9
22.9
104.8
21.5
83.3
21.1
62.2
13.2
49.1
-37.8
11.2
-4.0
7.2
1.3
54.6
H1CY14
313.15
9.3
322.4
142.5
34.6
78.1
255.3
67.2
25.9
93.0
17.7
75.3
21.0
54.3
15.8
38.5
0.0
38.5
-2.6
35.9
6.6
54.6
21.04
1.86
20.83
11.13
% chg
21.4%
0.8%
20.8%
14.6%
9.0%
36.2%
20.4%
22.0%
-11.5%
12.7%
21.5%
10.6%
0.5%
14.5%
-16.9%
27.4%
-70.8%
-79.8%
bps
21
-927
(Source: Company, HDFCSec)
RETAIL RESEARCH
Page | 15
Profit & Loss Account (Consolidated)
Particulars (Rs in Cr)
CY11
CY12
CY13
Total Operating Income
Total Operating Expenses
Operating Profit
Other Income
EBITDA
Interest
Depreciation
PBT
Tax (including FBT & DT)
Adjusted PAT
Exceptional Items/Prior period expenses
Reported PAT before share of associates
Profit/(Loss) Share of Associates
Reported PAT
740.5
494.9
245.6
16.0
261.6
55.4
54.7
151.5
25.2
126.3
0.0
126.3
0.0
126.3
767.4
502.6
264.8
10.3
275.1
65.1
74.3
135.8
31.9
103.9
0.0
103.9
0.0
103.9
667.8
501.2
166.5
43.4
210.0
52.2
65.4
92.4
22.1
70.4
15.1
85.4
-1.0
84.4
FY15
(15
months)
799.8
644.3
155.5
86.3
241.8
48.3
49.1
144.5
-12.2
156.7
0.0
156.7
-7.2
149.5
FY16E
FY17E
766.9
580.2
186.7
49.3
236.0
42.7
41.5
151.8
33.4
118.4
-45.0
73.4
-3.2
70.3
820.5
609.5
211.0
59.2
270.2
44.8
45.6
179.7
46.7
133.0
-30.0
103.0
-4.0
99.0
(Source: Company, HDFCSec, E: Estimates)
Balance Sheet (Consolidated)
RETAIL RESEARCH
FY15
(12
months)
663.2
526.0
137.2
66.5
203.6
39.5
38.9
125.2
-16.0
141.2
0.0
141.2
-5.1
136.1
Particulars (Rs in Cr)
CY11
CY12
CY13
FY15
(15 months)
FY16E
FY17E
Equity & Liabilities
Shareholders’ Funds
Share Capital
Reserves & Surplus
1052.1
63.8
988.3
1148.9
63.8
1085.1
1404.3
63.8
1340.5
1316.7
54.6
1262.1
1373.9
54.6
1319.3
1459.8
54.6
1405.2
Non-Current Liabilities
Long Term borrowings
Deferred Tax Liabilities (Net)
Other Long Term Liabilities
Long Term Provisions
252.0
181.7
60.1
3.4
6.7
381.1
299.0
71.4
1.3
9.3
192.0
126.8
58.8
0.0
6.4
293.1
273.4
9.7
0.0
10.0
291.3
259.8
20.0
0.0
11.5
279.6
254.6
13.0
0.0
12.0
Current Liabilities
Short Term Borrowings
Trade Payables
Other Current Liabilities
Short Term Provisions
426.5
189.5
94.5
116.3
26.2
472.4
200.4
107.1
144.8
20.1
514.6
105.5
91.7
227.0
90.4
574.0
183.9
126.8
253.3
10.0
608.4
154.7
216.2
220.3
17.1
669.6
167.1
242.1
242.4
18.0
Total Equity & Liabilities
1730.6
2002.3
2110.9
2183.8
2273.5
2409.0
Page | 16
Assets
Non-Current Assets
Fixed Assets
Gross Block
Depreciation
Net Block (Tangible Assets)
Intangible Assets
Capital Work-in-Progress
Long -term Loans and Advances
Other Non-Current Assets
968.9
705.2
894.1
231.1
663.1
0.2
41.9
0.0
262.0
1334.7
1044.9
1108.8
302.8
806.0
64.5
174.3
0.0
288.5
1149.0
744.9
734.2
230.0
504.2
67.4
173.3
209.5
194.7
1299.8
1077.1
911.7
31.8
880.0
194.3
2.8
202.3
15.3
1344.2
1098.8
1002.9
73.2
929.7
165.1
4.0
206.4
32.1
1390.2
1142.0
1123.3
118.9
1004.4
132.1
5.5
216.7
25.0
Current Assets
Current Investments
Inventories
Trade Receivables
Cash & Cash Equivalents
Short Term Loans & Advances
Other Current Assets
761.7
0.0
169.0
274.0
157.6
159.9
1.3
667.6
0.0
184.3
228.2
117.7
135.7
1.7
961.9
608.8
45.0
156.5
94.6
45.4
11.6
884.0
331.6
93.8
229.2
82.6
132.8
14.1
929.3
348.2
103.1
240.6
49.4
171.7
16.2
1018.8
383.0
115.5
257.5
63.5
180.3
19.0
Total Assets
1730.6
2002.3
2110.9
2183.8
2273.5
2409.0
(Source: Company, HDFCSec, E: Estimates)
Key Ratios (Consolidated)
Particulars
No of Equity Shares
Current Market Price
Market Capitalization
Enterprise Value
Adj. EPS
FD EPS
Cash EPS (PAT + Depreciation)
Adj. PE (x)
PE(x)
Book Value (Rs.)
P/BV (x)
OPM (%)
PBT (%)
NPM (%)
ROCE (%)
RETAIL RESEARCH
CY11
CY12
CY13
6.4
187.0
1193.4
1407.1
19.8
19.8
28.4
9.5
9.5
164.9
1.1
33.2
20.5
17.1
14.5
6.4
187.0
1193.4
1575.1
16.3
16.3
27.9
11.5
11.5
180.0
1.0
34.5
17.7
13.5
12.2
6.4
187.0
1193.4
722.3
11.0
13.2
23.5
17.0
14.1
220.0
0.8
24.9
13.8
12.6
8.8
FY15
(15 months)
5.5
187.0
1020.5
1063.6
23.0
27.4
36.4
8.1
6.8
241.3
0.8
19.4
18.1
18.7
10.9
FY16E
FY17E
5.5
187.0
1020.5
1037.3
21.7
12.9
20.5
8.6
14.5
251.8
0.7
24.3
19.8
9.2
10.9
5.5
187.0
1020.5
995.6
24.4
18.1
26.5
7.7
10.3
267.5
0.7
25.7
21.9
12.1
11.9
Page | 17
RONW (%)
Debt-Equity
Current Ratio
Mcap/Sales(x)
EV/EBITDA
One Year Price Chart
12.0
0.4
1.8
1.6
5.4
9.0
0.4
1.4
1.6
5.7
6.0
0.2
1.9
1.8
3.4
11.4
0.3
1.5
1.3
4.4
5.1
0.3
1.5
1.3
4.4
6.8
0.3
1.5
1.2
3.7
(Source: Company, HDFCSec, E: Estimates)
Technical Outlook on CLARIS LIFESCIENCES LTD:
RETAIL RESEARCH
Page | 18
Current Observation:






The attached weekly timeframe chart of Claris Lifesciences Ltd is indicating a larger consolidation pattern, which is forming over the last few months.
The stock price has been moving in a converging triangle type pattern (green dashed converging trend lines) and currently placed near the lower end of a
triangle pattern around Rs.178-180 levels.
We observe a formation of long lower shadows near the support of ascending trend line (lower end of triangle), which is suggesting possibility of emergence of
buying interest from the lower levels.
Previously, such long lower shadow formation has resulted in a near term bottom reversal pattern in the stock price and led to a sharp upside bounce back in
the stock price.
The weekly 14 period RSI (weekly RSI data is less) has been moving in a bullish high low range of around 70-40 levels. Currently, the weekly RSI is placed at the
lower bullish range of 40 levels. Hence, one may expect upside rebound in the weekly RSI and that expected pattern of RSI could mean upside bounce back in
the stock price for near term.
The overall positive chart and momentum pattern is suggesting a long trade setup in Claris Lifesciences Ltd for near term. One can buy at CMP and add more on
dips around Rs.159-171 levels and hold for the upside targets of around Rs.226-245 for the next 1-2 quarters. Place a stoploss of Rs.144, as per daily closing
basis.
RETAIL RESEARCH
Page | 19
Fundamental Research Analyst: Zececa Mehta (zececa.mehta@hdfcsec.com)
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website:
www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com.
______________________________________________________________________________________________________________________________________________________________________________________________
"HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475."
Disclosure:
We /I, (Zececa Mehta), (MMS), authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify
that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1%
or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any
material conflict of interest. Any holding in stock – No
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This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may not match or may
be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.
RETAIL RESEARCH
Page | 20