praveen
25-05-2008, 10:14 PM
Compiled report
Jubilant Organosys is a leading pharmaceutical service provider of end to end services from drug discovery, synthesis of complex intermediates and API’s (active pharmaceutical ingredients), to finished dosage forms. The company has two major lines of business one the Pharmaceutical & Life sciences Product and Service (PLSPS) and Industrial & Performance Products (IPP). The PLSPS provides CRAMS, drug discovery and development service and dosage form. IPP manufactures industrial products and performance polymers. Outsourcing market for the Indian pharmaceutical industry is expected to grow from $1.27bn in 2007 to $3.33bn by 2010, a CAGR of ~38%. Likewise, the Indian CRAMs market is also likely to grow at a CAGR of 37.7% from $1.21bn in 2007 to $3.16bn in 2010. Jubilant is well positioned to tap this potential and has the ability to provide service right up the value chain to global pharmaceutical companies as per their requirements.
Industry
The global agenda for the Pharmaceuticals and Life Sciences sector is being increasingly determined by emerging economies. Supported by rising income levels and greater access to healthcare services, countries such as India and China are expected to account for as much as 30% of the overall growth of the Industry going ahead. Rising R&D costs, low productivity and sagging bottom lines, have forced major pharmaceutical companies across the world to outsource part of their research and manufacturing activities to low-cost countries, thereby saving cost and time. The global pharmaceutical outsourcing market was worth USD57.2 billion in 2007. It is expected to grow at a CAGR of 10% to reach $76 billion by 2010. Global market for Contract Research and Manufacturing Services (CRAMS) in 2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market, contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract manufacturing was USD38.89 billion accounting for the major share (approximately 68%) of the total global sharmaceutical outsourcing market. India is leveraging upon its low-cost, high-quality manufacturing base to rapidly establish global credentials in the field of Pharmaceuticals and Life Science Products with the largest number of US FDA approved manufacturing plants (approx. 80) outside the US and strong technical skills. India thus presents demonstrable benefits in meeting outsourcing needs across the Pharmaceuticals and Life Sciences value chain. It is projected that the country's share in the global pharmaceuticals outsourcing will double by the year 2010 from approx. 2.2% at present to 4.4%. Given the number of therapies slated to go off patent in the coming years, drug innovator companies, which are facing imminent decline in turnover and earnings, appear to have even fewer avenues to supplement their corporate growth. In 2006, these companies lost US$23 billion due to products losing patent protection, regulatory uncertainties, less-than-exciting pipelines, and a new mood on the part of healthcare authorities. Product innovation pipelines continue to run thin even as mounting regulatory concerns around drug safety and mandatory disclosures are seen driving up R&D costs. The year 2006 also witnessed increased instances when governments, concerned about managing costs associated with healthcare programmes, have stepped in to regulate drug prices. For example, some countries in Europe have announced incentives for the use of generic products by physicians, pharmacists and patients. Further, industry players are frequently being called upon to share evidence that therapies are delivering on the 'value for money' proposition. Such steps are likely to have the effect of moderating the natural market growth arising on account of firstly, an ageing population (requiring healthcare and medication) and secondly, product innovation, across most of Europe and other parts of the developed world. On the whole, Drug innovator companies are critically reassessing their models to arrive at suitable means to counter the effects of such measures on business growth.
Once again, this brings into sharp focus, the distinct advantages offered by countries such as India for Drug Discovery and Research. Buoyed by supportive policies, the Indian clinical research industry can today offer cost reduction benefits up to 50%-60% to a pharmaceutical company in the U.S. These benefits are magnified in the light of factors such as availability of a vast and genetically diverse population which has never been exposed to modern medicine on one hand and a growing breed of clinical specialists, who can conduct clinical trials, on the other.
With the top 40 pharmaceutical companies spending as much as US$50 billion a year on research, the potential for outsourced Drug Discovery and Development Services remains large. The cost incurred on clinical services amounts to roughly US$260 million per drug. With the overall outsourcing pie estimated at US$64 billion by the year 2010, the opportunity for outsourced contract research (discovery and clinical research) alone has been estimated at US$29 billion by the year 2010, whereas that for contract manufacturing and custom chemical synthesis is projected at US$35 billion.
In a significant move, the government of India has slashed the tax levied on pharmaceutical products manufactured in the country by 50%, reduced the federal value added tax by 2% and extended tax concessions to the pharma and biotech research companies which take up outsourced research works. Some of these measures are likely to spur the growth of the Contract Research and Manufacturing
Services (CRAMS) sector in India.
Company
Jubilant Organosys Limited (JOL) is an integrated pharmaceutical industry player with a wide range of products and services for global life sciences companies. The company is one of the largest Custom Research and Manufacturing Services (CRAMS) and Drug Discovery and Development Services companies in India. The company strives to accelerate the process of pharmaceutical drug discovery by partnering with innovator pharmaceutical companies offering them products and services across the drug discovery process. JOL have a presence across the pharmaceuticals value chain ranging from drug discovery services, custom research and manufacturing services, advance intermediates and fine chemicals to active pharmaceutical ingredients, dosage forms and regulatory affairs services. They also enjoy leadership in Industrial Products and Performance Polymers products in India.
These businesses offer products and services to meet the demands of the Pharmaceuticals, Agrochemicals, Construction, Food & Beverages, Textile, Tyres and Paper & Packaging industries.
The company is the leading manufacturer - worldwide - in distinct product segments including selective APIs, Pyridine and its derivatives, Solid Polyvinyl Acetate, Vinyl Pyridine Latex and Organic intermediates such as Ethyl Acetate, Acetic Anhydride and Acetaldehyde. Jubilant recently raised its capacity of pyridine by 24% to 42000 TPA. Jubilant has over 150 derivatives in its product basket that are used in 229 APIs & 17 agro chemical products.
In 2007 the company has completed the acquisition of Hollister-Stier along with a capacity expansion, from 48mn vials to 120mn vials which has strengthened its capability in contract manufacturing especially that of injectables. It also signed a long term order with Syngenta for the supply of pyridines to be executed over 5 years. Commissioning of Roorkee facility with a capacity of 1 billion tablets and capsules is also under way.
Jubilant Biosys Ltd. - A subsidiary of Jubilant Organosys, Jubilant Biosys provides Discovery Informatics products and services and collaborative drug discovery services that include pre-clinical, in-vivo and formulation services. It also provides Discovery Research Services, which is driven by the concept of Structure Directed Drug Design. JOL currently holds 66.98% of the equity of Jubilant Biosys.
Jubilant Chemsys Ltd - This wholly owned subsidiary of JOL offers medicinal chemistry services to drug discovery companies on Full Time Equivalent or molecule basis. It also works closely with Jubilant Biosys in collaborative drug discovery research services areas.
Key Investment Arguments
Jubilant Organosys has a market cap of Rs. 5187.7cr, average daily volume of 45969 shares for the last six months and net sales of Rs. 1976.7cr during FY08.
It’s EBITDA and Net profit margins were at 23.3% and 14.5% resp. in 2007. Margins have improved in FY08 to 27.2% and 20.4% respectively.
The company has achieved a 5-year CAGR of 23.2% in revenues, 31.9% in EBITDA and 52.9% in Net Profits. Its operating cash flows have grown consistently at a CAGR of 48.3% p.a. over the last 4 year period from FY03 to FY07.
Jubilant trades at a PE multiple of 12.9 based on FY08 EPS, Price to Book ratio of 3.7 on FY08 book-value and Price to Sales ratio of 2.6 based on FY08 net sales. The company trades at a significant discount to its peers such as Divis Labs, Dishman Pharma, Matrix Labs, Piramal Healthcare, etc on the valuation front.
Debt-equity ratio of Jubilant was 1.2 in FY07. Interest coverage ratio has also improved constantly over the last 3-4 years and lies at 32.3 in FY08.
Jubilant is vertically integrated and is the lowest cost yet most profitable producer of pyridine and its derivatives which find application in manufacture of over 229 APIs. Jubilant is the only company to provide outsourcing to innovator of branded drug in injectables. This kind of outsourcing is currently not being undertaken in India by any Indian company.
Pharmaceutical and Life Science Products (PLSPS) division is growing at 60% y-o-y and CRAMS which is growing at 75% y-o-y is a part of PLSPS business including Holister-Stier.
The company has a capacity of 42000mtpa for fine chemicals, intermediates and API’s which is fully utilized and is planning to increase the capacity to 62000mtpa in the next 2 years. It has limited exposure to volatile businesses like dosage forms at approx. 3% of its total revenues. Jubilant also enjoys strong customer relationships with 15 of top 20 pharmaceutical and 7 of the top 10 agrochemical companies.
Jubilant’s CRAMS business has clear growth visibility in the form of a “multi-million” dollar 5-year contract with Syngenta to supply pyridines.
Jubilant has been steadily increasing the share of Pharma and life science products (PLSP) business in its total revenues. PLSP is a high margin business contributing PBIT margin of more than 30%. In FY08, Jubilant has derived of 61.5% of its revenues from PLSP and the rest from the industrial chemicals and performance polymers (IPP) division, on a consolidated basis. On a standalone basis, PLSP contributes 51.6% of the total revenues.
Jubilant has its own generic business, wherein it has capabilities to sell its own APIs and some of the formulations. The company also has presence in the contract research space through its subsidiaries - Biosys, Chemsys, and Clinsys. It has recently decided to venture into the healthcare segment by setting up hospitals in West Bengal.
The company expects its revenues to grow by approx. 35% in FY09 (without accounting for the proposed acquisition of Draxis) Operating profit and net profit margins are expected to expand too. The company will continue with its focus on life sciences business with special emphasis on outsourcing, focused in CRAMS, Drug Discovery & Development Service (DDDS) and its international business. Even revenues from Single Super Phospate (SSP) in its IPP division are expected to more than double on account of commissioning of new plant in Rajasthan and favorable government subsidy policy to increase revenues and margins in agri business.
Key Concerns
The generics business has become very competitive; Any delay in filing/launching or a litigation loss would affect the timing and quantum of revenues and profits. Inability to integrate and exploit the synergies with its acquired subsidiaries could hurt profitability too.
The company recorded a foreign exchange loss of Rs. 26.1cr on its foreign currency borrowings in the 4th quarter, compared with a gain of Rs. 45.8cr in the corresponding period a year ago. Sharp fluctuations in the currency can thus affect the financial performance of the company to a certain extent.
Latest Development
Jubilant had recently agreed to acquire Draxis Health which is a Canada – based company with two operating divisions – Draxis Pharma (sterile and non-sterile products) and Draximage (radio pharmaceuticals) for US$255 million. The acquisition, likely to be completed by June 2008, will enable Jubilant to consolidate its presence in the sterile injectable space post its acquisition of Hollister–Stier in April 2007, while diversifying its presence into radio pharma product. Draxis Pharma operates in the US$10bn Contract Manufacturing Outsourcing (CMO) market with a strong pipeline of sterile and non sterile product offerings. Draxis shares a healthy relationship with innovator pharma companies and has recently announced a US$ 120mn 5-year contract with J&J Consumer Companies starting 2009. Draximage operates in the high entry barrier, US$1.5bn radio pharma market and has strong in-house research capabilities for product development. It has a robust pipeline of products which includes a late 2008 launch of generic ‘cardiolite’ used for diagnosing cardiovascular diseases, valued at US$700mn globally. In addition, Draximage is working on launching Moll fill Technetium Generator which has a market
size of US$167mn.
Jubilant Organosys has acquired Speciality Molecules Pvt. Ltd, a niche manufacturer of speciality intermediates, for Rs. 20cr. The acquired company is engaged in the business of developing, manufacturing and selling speciality intermediates, which include primarily pyridine derivatives that are used in pharmaceuticals and other life sciences industry.
Conclusion
On the basis of research, we feel that this is a good stock to buy at the current market price. If everything goes well, the price is likely to appreciate to Rs. 512, within 12-18 months, translating into a gain of about 45%.
Jubilant Organosys is a leading pharmaceutical service provider of end to end services from drug discovery, synthesis of complex intermediates and API’s (active pharmaceutical ingredients), to finished dosage forms. The company has two major lines of business one the Pharmaceutical & Life sciences Product and Service (PLSPS) and Industrial & Performance Products (IPP). The PLSPS provides CRAMS, drug discovery and development service and dosage form. IPP manufactures industrial products and performance polymers. Outsourcing market for the Indian pharmaceutical industry is expected to grow from $1.27bn in 2007 to $3.33bn by 2010, a CAGR of ~38%. Likewise, the Indian CRAMs market is also likely to grow at a CAGR of 37.7% from $1.21bn in 2007 to $3.16bn in 2010. Jubilant is well positioned to tap this potential and has the ability to provide service right up the value chain to global pharmaceutical companies as per their requirements.
Industry
The global agenda for the Pharmaceuticals and Life Sciences sector is being increasingly determined by emerging economies. Supported by rising income levels and greater access to healthcare services, countries such as India and China are expected to account for as much as 30% of the overall growth of the Industry going ahead. Rising R&D costs, low productivity and sagging bottom lines, have forced major pharmaceutical companies across the world to outsource part of their research and manufacturing activities to low-cost countries, thereby saving cost and time. The global pharmaceutical outsourcing market was worth USD57.2 billion in 2007. It is expected to grow at a CAGR of 10% to reach $76 billion by 2010. Global market for Contract Research and Manufacturing Services (CRAMS) in 2007 is estimated to be USD55.48 billion. Out of the total global CRAMS market, contract research was USD16.58 billion, growing at a CAGR of 13.8% and contract manufacturing was USD38.89 billion accounting for the major share (approximately 68%) of the total global sharmaceutical outsourcing market. India is leveraging upon its low-cost, high-quality manufacturing base to rapidly establish global credentials in the field of Pharmaceuticals and Life Science Products with the largest number of US FDA approved manufacturing plants (approx. 80) outside the US and strong technical skills. India thus presents demonstrable benefits in meeting outsourcing needs across the Pharmaceuticals and Life Sciences value chain. It is projected that the country's share in the global pharmaceuticals outsourcing will double by the year 2010 from approx. 2.2% at present to 4.4%. Given the number of therapies slated to go off patent in the coming years, drug innovator companies, which are facing imminent decline in turnover and earnings, appear to have even fewer avenues to supplement their corporate growth. In 2006, these companies lost US$23 billion due to products losing patent protection, regulatory uncertainties, less-than-exciting pipelines, and a new mood on the part of healthcare authorities. Product innovation pipelines continue to run thin even as mounting regulatory concerns around drug safety and mandatory disclosures are seen driving up R&D costs. The year 2006 also witnessed increased instances when governments, concerned about managing costs associated with healthcare programmes, have stepped in to regulate drug prices. For example, some countries in Europe have announced incentives for the use of generic products by physicians, pharmacists and patients. Further, industry players are frequently being called upon to share evidence that therapies are delivering on the 'value for money' proposition. Such steps are likely to have the effect of moderating the natural market growth arising on account of firstly, an ageing population (requiring healthcare and medication) and secondly, product innovation, across most of Europe and other parts of the developed world. On the whole, Drug innovator companies are critically reassessing their models to arrive at suitable means to counter the effects of such measures on business growth.
Once again, this brings into sharp focus, the distinct advantages offered by countries such as India for Drug Discovery and Research. Buoyed by supportive policies, the Indian clinical research industry can today offer cost reduction benefits up to 50%-60% to a pharmaceutical company in the U.S. These benefits are magnified in the light of factors such as availability of a vast and genetically diverse population which has never been exposed to modern medicine on one hand and a growing breed of clinical specialists, who can conduct clinical trials, on the other.
With the top 40 pharmaceutical companies spending as much as US$50 billion a year on research, the potential for outsourced Drug Discovery and Development Services remains large. The cost incurred on clinical services amounts to roughly US$260 million per drug. With the overall outsourcing pie estimated at US$64 billion by the year 2010, the opportunity for outsourced contract research (discovery and clinical research) alone has been estimated at US$29 billion by the year 2010, whereas that for contract manufacturing and custom chemical synthesis is projected at US$35 billion.
In a significant move, the government of India has slashed the tax levied on pharmaceutical products manufactured in the country by 50%, reduced the federal value added tax by 2% and extended tax concessions to the pharma and biotech research companies which take up outsourced research works. Some of these measures are likely to spur the growth of the Contract Research and Manufacturing
Services (CRAMS) sector in India.
Company
Jubilant Organosys Limited (JOL) is an integrated pharmaceutical industry player with a wide range of products and services for global life sciences companies. The company is one of the largest Custom Research and Manufacturing Services (CRAMS) and Drug Discovery and Development Services companies in India. The company strives to accelerate the process of pharmaceutical drug discovery by partnering with innovator pharmaceutical companies offering them products and services across the drug discovery process. JOL have a presence across the pharmaceuticals value chain ranging from drug discovery services, custom research and manufacturing services, advance intermediates and fine chemicals to active pharmaceutical ingredients, dosage forms and regulatory affairs services. They also enjoy leadership in Industrial Products and Performance Polymers products in India.
These businesses offer products and services to meet the demands of the Pharmaceuticals, Agrochemicals, Construction, Food & Beverages, Textile, Tyres and Paper & Packaging industries.
The company is the leading manufacturer - worldwide - in distinct product segments including selective APIs, Pyridine and its derivatives, Solid Polyvinyl Acetate, Vinyl Pyridine Latex and Organic intermediates such as Ethyl Acetate, Acetic Anhydride and Acetaldehyde. Jubilant recently raised its capacity of pyridine by 24% to 42000 TPA. Jubilant has over 150 derivatives in its product basket that are used in 229 APIs & 17 agro chemical products.
In 2007 the company has completed the acquisition of Hollister-Stier along with a capacity expansion, from 48mn vials to 120mn vials which has strengthened its capability in contract manufacturing especially that of injectables. It also signed a long term order with Syngenta for the supply of pyridines to be executed over 5 years. Commissioning of Roorkee facility with a capacity of 1 billion tablets and capsules is also under way.
Jubilant Biosys Ltd. - A subsidiary of Jubilant Organosys, Jubilant Biosys provides Discovery Informatics products and services and collaborative drug discovery services that include pre-clinical, in-vivo and formulation services. It also provides Discovery Research Services, which is driven by the concept of Structure Directed Drug Design. JOL currently holds 66.98% of the equity of Jubilant Biosys.
Jubilant Chemsys Ltd - This wholly owned subsidiary of JOL offers medicinal chemistry services to drug discovery companies on Full Time Equivalent or molecule basis. It also works closely with Jubilant Biosys in collaborative drug discovery research services areas.
Key Investment Arguments
Jubilant Organosys has a market cap of Rs. 5187.7cr, average daily volume of 45969 shares for the last six months and net sales of Rs. 1976.7cr during FY08.
It’s EBITDA and Net profit margins were at 23.3% and 14.5% resp. in 2007. Margins have improved in FY08 to 27.2% and 20.4% respectively.
The company has achieved a 5-year CAGR of 23.2% in revenues, 31.9% in EBITDA and 52.9% in Net Profits. Its operating cash flows have grown consistently at a CAGR of 48.3% p.a. over the last 4 year period from FY03 to FY07.
Jubilant trades at a PE multiple of 12.9 based on FY08 EPS, Price to Book ratio of 3.7 on FY08 book-value and Price to Sales ratio of 2.6 based on FY08 net sales. The company trades at a significant discount to its peers such as Divis Labs, Dishman Pharma, Matrix Labs, Piramal Healthcare, etc on the valuation front.
Debt-equity ratio of Jubilant was 1.2 in FY07. Interest coverage ratio has also improved constantly over the last 3-4 years and lies at 32.3 in FY08.
Jubilant is vertically integrated and is the lowest cost yet most profitable producer of pyridine and its derivatives which find application in manufacture of over 229 APIs. Jubilant is the only company to provide outsourcing to innovator of branded drug in injectables. This kind of outsourcing is currently not being undertaken in India by any Indian company.
Pharmaceutical and Life Science Products (PLSPS) division is growing at 60% y-o-y and CRAMS which is growing at 75% y-o-y is a part of PLSPS business including Holister-Stier.
The company has a capacity of 42000mtpa for fine chemicals, intermediates and API’s which is fully utilized and is planning to increase the capacity to 62000mtpa in the next 2 years. It has limited exposure to volatile businesses like dosage forms at approx. 3% of its total revenues. Jubilant also enjoys strong customer relationships with 15 of top 20 pharmaceutical and 7 of the top 10 agrochemical companies.
Jubilant’s CRAMS business has clear growth visibility in the form of a “multi-million” dollar 5-year contract with Syngenta to supply pyridines.
Jubilant has been steadily increasing the share of Pharma and life science products (PLSP) business in its total revenues. PLSP is a high margin business contributing PBIT margin of more than 30%. In FY08, Jubilant has derived of 61.5% of its revenues from PLSP and the rest from the industrial chemicals and performance polymers (IPP) division, on a consolidated basis. On a standalone basis, PLSP contributes 51.6% of the total revenues.
Jubilant has its own generic business, wherein it has capabilities to sell its own APIs and some of the formulations. The company also has presence in the contract research space through its subsidiaries - Biosys, Chemsys, and Clinsys. It has recently decided to venture into the healthcare segment by setting up hospitals in West Bengal.
The company expects its revenues to grow by approx. 35% in FY09 (without accounting for the proposed acquisition of Draxis) Operating profit and net profit margins are expected to expand too. The company will continue with its focus on life sciences business with special emphasis on outsourcing, focused in CRAMS, Drug Discovery & Development Service (DDDS) and its international business. Even revenues from Single Super Phospate (SSP) in its IPP division are expected to more than double on account of commissioning of new plant in Rajasthan and favorable government subsidy policy to increase revenues and margins in agri business.
Key Concerns
The generics business has become very competitive; Any delay in filing/launching or a litigation loss would affect the timing and quantum of revenues and profits. Inability to integrate and exploit the synergies with its acquired subsidiaries could hurt profitability too.
The company recorded a foreign exchange loss of Rs. 26.1cr on its foreign currency borrowings in the 4th quarter, compared with a gain of Rs. 45.8cr in the corresponding period a year ago. Sharp fluctuations in the currency can thus affect the financial performance of the company to a certain extent.
Latest Development
Jubilant had recently agreed to acquire Draxis Health which is a Canada – based company with two operating divisions – Draxis Pharma (sterile and non-sterile products) and Draximage (radio pharmaceuticals) for US$255 million. The acquisition, likely to be completed by June 2008, will enable Jubilant to consolidate its presence in the sterile injectable space post its acquisition of Hollister–Stier in April 2007, while diversifying its presence into radio pharma product. Draxis Pharma operates in the US$10bn Contract Manufacturing Outsourcing (CMO) market with a strong pipeline of sterile and non sterile product offerings. Draxis shares a healthy relationship with innovator pharma companies and has recently announced a US$ 120mn 5-year contract with J&J Consumer Companies starting 2009. Draximage operates in the high entry barrier, US$1.5bn radio pharma market and has strong in-house research capabilities for product development. It has a robust pipeline of products which includes a late 2008 launch of generic ‘cardiolite’ used for diagnosing cardiovascular diseases, valued at US$700mn globally. In addition, Draximage is working on launching Moll fill Technetium Generator which has a market
size of US$167mn.
Jubilant Organosys has acquired Speciality Molecules Pvt. Ltd, a niche manufacturer of speciality intermediates, for Rs. 20cr. The acquired company is engaged in the business of developing, manufacturing and selling speciality intermediates, which include primarily pyridine derivatives that are used in pharmaceuticals and other life sciences industry.
Conclusion
On the basis of research, we feel that this is a good stock to buy at the current market price. If everything goes well, the price is likely to appreciate to Rs. 512, within 12-18 months, translating into a gain of about 45%.