We had a meeting with the management of Dishman Pharma (DPL) to understand its business model and upcoming growth catalysts. Based on our discussions, we believe the company over the last few years has progressively strengthened its positioning in CRAMS segment. The client profile of DPL is now well diversified, with Top 10 clients contributing just 35% to its sales.
-- With ongoing addition of new clients every year, DPL is in a very strong position to drive business growth in CRAMS space. In Vitamin D space, where the company witnessed competitive pressure, it has shifted the focus on lower volume and higher margin Vitamin D analogue business. Except for custom synthesis, where DPL is operating at nearly 100% of its capacity, it has enough capacity available in all other business segments to support top-line growth. Overall, in the next three years, DPL's top-line growth should range anywhere between high single-digit to mid-teens. Bottom-line growth will outpace top-line growth of the company.
Following are the key takeaways from the meeting: CRAMS business will continue to grow: DPL's revenues should continue to grow over the next few years as custom synthesis/contract research business is getting stronger driven by a growing client base. The custom synthesis business now has 13 projects in late Phase-3 pipeline, and this base is growing every year. As the Phase-3 pipeline feeds commercial manufacturing business of DPL, one can look forward to meaningful growth in commercial manufacturing business as well.
Commercial manufacturing enjoys higher EBITDA margin. Custom research business is relatively de-risked as of now because Top 10 clients account for just 35% of DPL's overall business. The management intends to have 60% of its CRAMS business coming from custom synthesis as this will ensure that commercial manufacturing prospects continue to improve with time. Bottom-line growth likely to clearly outpace top-line growth: Bottom-line growth may outpace top-line growth because of : 1) Improved capacity utilisation in commercial manufacturing segment – DPL continues to improve its utilisation of commercial manufacturing capacity.
Going forward, there is enough room for the company to expand its revenues without any significant capacity enhancement. 2) Improved business mix – We expect the contribution of commercial manufacturing to overall business to increase with time. DPL has 13 late Phase -3 assets. All of these could be filed latest by the end of FY18. Assuming a 50% success rate, one can expect about six to seven molecules going into commercial scale manufacturing over the next two to three years.
The company currently garners around US$4mn per commercialised API in contract manufacturing revenues. Hence, assuming approval of six APIs by FY19, we expect a net addition of around US$25mn to DPL's revenues. 3) Savings in financial costs - There could be significant expansion in net profit in FY18 by virtue of savings in interest costs. About Rs250mn-Rs300mn savings in interest costs are expected by FY18 through:
Refinancing of Rs2bn debt at a lower cost (from 12% to 3%). This should translate into savings of Rs180mn. Part of US dollar-denominated debt at LIBOR + 4% should come down to 3%.
Retirement of about Rs1bn debt in FY17 should yield savings of Rs80mn-Rs100mn. Potential windfall gains from commercialisation of lucrative Phase-3 pipeline asset: DPL expects one of its custom synthesis clients to receive US Food and Drug Administration or USFDA's approval for a potential mega blockbuster molecule in early FY18. The client has already chosen DPL for providing commercial quantity of API of the compound.
As the compound has achieved fast-track status, the approval prospects are very high. We expect quick ramp-up in sales of the compound as fast-track status is granted to drugs that address an unmet need and treats a serious life-threatening condition. According to DPL, the client is also pursuing the same molecule in several other indications in oncology, in late stage studies. If the molecule is successful in all studies, peak sales of the molecule could run into several billions of dollars. DPL hopes to capture around 2.5% of sales value of the compound as commercial manufacturing revenues. Thus, basically one can look forward to DPL garnering anything between US$25mn to US$75mn in revenues from contract manufacturing
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