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Dishman Carbogen Amcis CMP: ̀ 235; 1-year Target: ̀ 289

NSE

Sector Pharma

Recommendation BUY

Upside 23%

Stock Data

Sensex 35,850

52 Week h/l (`) 397 / 203

Market cap (`Cr) 3,798

BSE code 540701

NSE code DCAL

FV (`) 2

Div yield (%) 0.0

Shareholding Pattern

Mar-18 June-18 Sept-18

Promoters 61.4 61.4 61.4

DII+FII 22.5 20.7 19.6

Individuals 16.1 17.9 19.0

Source: www.bseindia.com

Share Price Trend

Prices as on 07/01/2019

Analyst– Shrikant Akolkar [email protected]

January 08, 2019

Dishman Carbogen Amcis Limited (DCAL), Ahmedabad based CRAMS

company, stands to benefit from commercialization of six molecules

and plans to foray in Vitamin-D business in India. We expect revenue

and PAT CAGR of 14.2% and 27.7% over FY19-21E, while EBITDA

margin expansion of ~140bps is projected over the same period. We

recommend BUY with target price of `289 (8x FY21E EV/EBITDA).

CRAMS business on improvement trajectory: DCAL expects to

commercialize six molecules over next 3-4 years, generating >$100mn

additional cumulative revenue in CRAMS going ahead. Nuzyra (one of

the six molecules), can generate $4-6mn revenue in FY20E. Further,

Zejula (current potential $20mn/year) can generate $70mn/year if

approved in expanded indications. Oncology is yet another opportunity

for DCAL as it is present in both Chemical and Biological verticals.

Focus on Vitamin-D analogues to continue: DCAL’s strategy to focus

on high margin Vitamin-D analogues has led to an improvement in its

segmental EBITDA margins from 13% (FY14) to 41.7% (Q2FY19). DCAL’s

plan to foray in domestic Vitamin-D analogues market is likely to

generate $4-6mn revenue in FY20E with EBITDA margins at 40%+.

Attractive valuations: DCAL’s revenue/PAT is expected to register

14.2%/27.7% CAGR over FY19-21E led by CRAMS and Vitamin-D

opportunity. Adj. ROE is expected to rise from 14.9% in FY19E to 15.6%

in FY21E. DCAL currently trades at 6.8x FY21E EV/EBITDA (>50%

discount to Divi’s Lab). We value DCAL at 8x FY21E EV/EBITDA to derive

a target price of `289 and recommend BUY on the stock.

Financial summary

Consolidated `cr FY18 FY19E FY20E FY21E

Revenue 1,695 1,901 2,165 2,478

Growth (%) yoy -1.1 12.1 13.9 14.4

EBITDA (%) 25.8 26.7 27.2 28.1

PAT 154.6 170.1 214.7 277.2

Growth (%) yoy 5.6 10.0 26.3 29.1

P/E (x) 24.6 22.3 17.7 13.7

Adj. ROE (%) 16.6 14.9 15.1 15.6

EV/EBITDA (x) 10.7 9.3 8.0 6.8

Adj. ROCE (%) 14.3 14.7 15.7 17.1

Source: Company, IIFL Research, ROCE and ROE adjusted for goodwill and amortization

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Dishman Carbogen Sensex

mailto:[email protected]

Dishman Carbogen Amcis

Balance sheet snapshot

` Cr FY18 FY19E FY20E FY21E

Share Holders Funds 5,107 5,261 5,455 5,706

Total Liabilities 884 853 859 872

Sources of Funds 5,991 6,114 6,315 6,578

Fixed Assets 5,061 5,031 4,991 4,966

Other Assets 562 583 625 675

Net Current Assets 368 500 698 936

Application of Funds 5,991 6,114 6,315 6,578

Source: Company, IIFL Research

Company background

Dishman Carbogen Amcis Limited (DCAL), erstwhile Dishman

Pharmaceuticals & Chemicals, began operations in 1983 as a

manufacturer of quaternary ammonium and phosphate compounds.

The company ventured in Contract Research & Manufacturing Services

(CRAMS) space and acquired Dishman Carbogen Amcis in 2006. It now

has 10 manufacturing plants i.e. four in Switzerland, two in India, and

one each in France, UK, Netherlands and China. In 2016, Dishman

merged its operations with Cargoben to create vertical integration,

strengthen balance sheet and bring synergies in the business. DCAL has

capabilities in process research & development and works on projects

ranging from early to late stage clinical trials and commercial

manufacturing.

Exhibit 1: Business structure Exhibit 2: Revenue break-up (Q2FY19)

Source: IIFL, Company

DISHMAN CARBOGEN

CRAMs

Dishman India

Carbogen

CRAMs UK

Marketable molecules

Vitamin-D

Specialty Intermediates

Generic API

Disinfectants

Dishman India, 17%

CRAMs Switzerland,

52%

CRAMS –UK, 7% Vitamin D,

13%

Generic API, 4%

Disinfectants, 2%

Intermediaries, 6%


Industry tailwinds bode well for CRAMS sector

The CRAMS industry has growth tailwinds due to patent expiries of the

novel drugs of innovators. This has put pressure on innovators to

reduce costs while keep spending on R&D. The global market for

CRAMS is pegged at ~$154bn in 2018 and is estimated to grow at 13.6%

CAGR to reach ~$200bn by the end of 2020E. The CRAMS industry in

India is growing at a CAGR of 18% and is projected to reach ~$25bn by

2020E from ~$18bn in 2018.

The innovative drug research industry requires several rounds of

funding. Global environment for start-up healthcare funding, especially

that in the US, has remained robust. The pie of VC funding to

healthcare sector has been increasing steadily over the last five years.

This bodes well for companies like DCAL, as it services small biotech

and pharma companies.

Vertically integrated CRAMS business

DCAL has two separate businesses i.e. Carbogen Amcis AG and

Dishman (CRAMS India).

Carbogen: DCAL’s European subsidiary Carbogen is in the business of

contract research and development (CRO). Carbogen works with the

innovator pharma companies (early to mid-stages of a drug lifecycle)

and has 260+ scientists. Carbogen has a non-GMP manufacturing plant

in UK (Manchester) for captive consumption. Carbogen has 250+

innovator companies as its clients, of which 80-85% are the small

Exhibit 3: Rising pie of healthcare in VC funding Exhibit 4: VC investments in US Healthcare


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in $

mn


pharma companies and start-ups and develop their drugs during

clinical trials.

Dishman: This is an Indian CRAMS arm which is in the contract

manufacturing business (CMO). Dishman starts commercial

manufacturing once innovator companies (Carbogen’s clients) get a

final regulatory approval for a drug. Due to presence in both CRO and

CMO, DCAL has maintained a full vertical integration and client

stickiness.

Exhibit 5: How DCAL ‘s two businesses operate


Phase III pipeline can improve DCAL’s CRAMS business in India

DCAL has a pipeline of ~400 molecules of which 16-18 molecules are in

Phase III. Of this, nine are in late phase III trials, and DCAL expects 1-3

products to get commercialized each year ($3-4mn/molecule revenue

in the first year of launch). Assuming commercialization of six molecules

(post FDA approval), we believe that DCAL has a cumulative additional

revenue visibility of ~$100mn (~`700cr) over the next five years.

Carbogen Amcis

In R&D outsourcing business (Pre-clinical

to devopment)

Works with innovative pharma

companies

Has facilities in France, UK,

Netherlands and China

Has capabilities in ADC and HPAPI development

Dishman

In manufacturing outsourcing business

Works after Carbogen’s clients post FDA approval

Has facilities in India

Has manufacturing facilities in HPAPI


Company has already commercialized Niraparib (brand Zejula

marketed by Tesaro) and Bedaquiline (brand Sirturo marketed by

Janssen Therapeutics). DCAL expects peak sales of ~$20mn from Zejula

in the current indications. The drug is also tested in various other

indications and if it succeeds, DCAL’s estimate of peak sales from Zejula

will be ~$75mn. Tesaro has recently been acquired by GSK, which

improves prospects of Zejula’s commercial success.

The third molecule, Omadacycline (brand Nuzyra, company Paratek

Pharma), has been approved by USFDA in October 2018. It is indicated

in the treatment of Community-Acquired Bacterial Pneumonia (CABP)

and Acute Skin and Skin Structure Infections (ABSSSI). DCAL expects

revenue of $4-6mn in FY20E from Nuzyra and launch is expected in

early CY20E by Paratek.

Oncology - secular growth driver for pharma sector

In its CRAMS business DCAL is focusing on five therapeutic segments i.e.

Oncology, Cardiovascular (CVS), Central Nervous System (CNS),

Opthlmamology and orphan diseases. The Oncology segment remains

the key focus area for the company. Globally too, oncology is the key

R&D focus area. Oncology alone contributed 15% of the global

healthcare spending ($901bn) in 2017. This pie is expected to grow to

17% in 2022E when global healthcare spending will reach to $1,071bn.

Exhibit 7: Rising spending on Oncology

Segment 2017 2022E

CAGR (%) $bn Total (%) $bn Total (%)

Oncology 133 15 180 17 6.2 All others 768 85 891 83 3.0 Total 901 100 1,071 100 3.5


Exhibit 6: Dishman’s disclosed product launches

Product API Indication Launch Company

Sirturo Bedaquiline Pulmonary multi drug resistant tuberculosis

CY16 Janssen Therapeutics

Zejula Niraparib Ovarian cancer (also tested in other indications)

CY18 Tesaro Inc. (Now GSK)

Nuzyra Omadacycline In phase III trials Q4FY19E Paratek Pharmaceuticals



Within the Oncology segment, there is a higher demand for High

Potent drugs. These drugs are directly delivered to the target i.e. the

cancerous cells and they are effective even in smaller quantities. The

High Potent drug candidates, due to their better efficacy, are

increasing at faster pace in innovators’ pipeline, hence High Potent

APIs (HPAPI) market is also growing at a faster rate than other APIs.

The HPAPI market is expected to register ~10% CAGR from $17.6bn in

2018 to $25.9bn in 2022E. India + China, cumulatively accounted for

~5% of the global HPAPI supplies in CY17. This will grow to ~15% in

2026E. Indian companies, due to their low cost advantage, will gain

market share in HPAPIs.

HPAPIs – next growth opportunity for DCAL

DCAL’s pipeline has 20 molecules in early phase III and 18 molecules in

late phase III. Of this, 50% molecules are in Oncology segment clearly

indicating that DCAL will benefit from the rising R&D budgets of

pharma companies for Oncology. The aforesaid HPAPI opportunity is

also positive for DCAL, as Oncology is its largest revenue driver, which

contributed 45% of its CRAMS sales in FY18.

Exhibit 8: DCAL’s HPAPI facilities


DCAL manufactures two types of HPAPIs i.e. (1) Chemical and (2)

Biological. In the Chemical HPAPIs, it has a manufacturing facility in

Bavla (Gujarat) from where it has started commercial manufacturing of

first HPAPI Niraparib. DCAL is expecting more molecules to be

commercialized in the future.


In the biological HPAPIs, DCAL is present through the Antibody Drug

Conjugates (ADCs) at its Riom (France) site. Company is currently

working on nine ADC projects across Phase II/III developments. It has

also recently completed a fresh capex in Switzerland for ADCs. This

facility will contribute $5mn in FY20E and this will increase going ahead

as it gets more projects.

Vitamin-D business benefitted due to restructuring

In its marketable molecules business, company has four sub segments

i.e. Vitamin-D, Generic API, disinfectants and intermediates (Shanghai

operations). In its Vitamin-D business, DCAL manufacture and markets

Vitamin-D and its analogues (Calciferol, Calcitriol, Alfacalcidol, etc.),

Cholesterol and Lanolin through Dishman Netherlands BV.

Dishman Netherlands was initially in Vitamin-D business, however due

to the low margins and Chinese competition, it moved away from

Vitamin-D products and started to focus on high margin Vitamin-D

analogues, which has applications in the nutritional and healthcare

space. Company currently focuses on the nutritional business

(unregulated opportunity) for which raw material is supplied from

Bavla plant. To capture the healthcare opportunity, Dishman

Netherlands is conducting clinical trials with Boston University and if it

succeeds, in the trials, it can capture the healthcare opportunity.

Exhibit 9: Improved profitability in Vitamin-D segment


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FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

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Revenue (Rs cr) EBITDA (Rs Cr) Margin (%)


Dishman Netherlands, due to focus on the analogues and vertical

integration, the company has been reporting consistent margin

improvements since FY15. Between FY15-H1FY19, margins of this

segment have improved by more than 2,200bps.

Vitamin-D to benefit from capex and foray in India

Vitamin-D is expected to be a sizable opportunity for DCAL as Vitamin-

D market is expected to post 11% CAGR to reach ~$2.5bn by 2020E.

Within this, Vitamin-D analogues are growing at a much faster rate.

Company will be able to capture this opportunity as it will commence

operations at its Bavla - Vitamin-D Soft Gel plant in Q4FY19E.

DCAL is also forward integrating in the domestic Vitamin-D business. It

has already secured the Indian FDA approval for its products and will

start selling Vitamin-D products through its own front end. Company

expects this business to generate revenue of $4-5mn in FY20E.

China facility to start meaningful contribution FY20E onwards

DCAL’s China (Shanghai) facility mainly supplies intermediates to

Carbogen Amcis. Shanghai facility is currently manufacturing complex

intermediates for three US clients of Carbogen Amcis, while three more

potential clients are in the pipeline. This facility has achieved

breakeven in FY18, however, it can offer strong operating leverage as

the plant currently operates at ~30% utilization. To improve the

utilization, company has moved one product from Bavla facility to

Shanghai facility. In FY19, DCAL started to serve two Chinese clients

from Shanghai.

Utilization will significantly improve once this facility receives USFDA

clearance after which company can start supplying APIs to the third

parties. Company is expecting USFDA inspection over next 12-15

months. Management has guided revenue of ~$15mn from this facility

over 2-3 years (FY18 revenue of $5mn). We estimate that utilization at

the Shanghai facility will increase to ~60% if the company achieves

~$15mn sales in FY21E.


Financial performance to improve with growth drivers in place

Over FY15-18, DCAL reported revenue CAGR of 2.2%, EBITDA margins

however, improved from 19.7% in FY15 to 25.8% in FY18 due to

improvement of profitability in Vitamin-D business. This strong

improvement in EBITDA margins, however did not translate equally in

its PAT CAGR of 8.9% over FY15-18. This subdued growth in PAT was

due to the rise in the amortization charges after merger of Carbogen

Amcis with Dishman. Adjusted for the amortization, PAT CAGR during

FY15-18 is 21.3%.

Due to the commercialization of two products from India CRAMS and

success of the Vitamin-D analogues business, DCAL’s performance has

shown significant improvement in H1FY19. Revenue grew by 18.7%

yoy, while PAT grew by 36.2% yoy. EBITDA margins improved from

25.9% in H1FY18 to 26.9% in H1FY19. Company has also consistently

reported positive free cash flows over FY12-18.

Going forward, we expect CRAMS India and Vitamin-D to drive DCAL’s

revenue growth. We project overall CRAMS revenue to grow by 10.8%

CAGR over FY19-21E due to (1) launch of six molecules, and (2) increase

in HPAPI revenue. Marketable molecules revenue is expected to grow

at 27.1% CAGR over FY19-21E due to (1) increase in Vitamin-D revenue

with soft gel facility commencement, (2) India front end opportunity,

and (3) improvement in China operations. Overall, we expect DCAL’s

revenue/PAT to register 14.2%/27.7% CAGR over FY19-21E. EBITDA

Exhibit 10: Revenue/PAT growth to accelerate Exhibit 11: Margins will improve further


0

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FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Revenue (Rs cr) PAT (Rs cr)

8.9% CAGR

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EBITDA (Rs cr) Margin (%)


margins are expected to improve from 25.8% in FY18 to 28.1% in

FY21E.

The company said that it expects `120cr/year maintenance capex and

`80cr/year maintenance capex over the next two years. The growth

capex will be used to 1) increase HPAPI lines at Bavla 2) add soft gel

capacity at Bavla 3) upgrade Carbogen’s custom synthesis facility and

4) enhance injectables capacity at the France facility. We estimate

DCAL to generate a free cash flow (FCF) of `550cr over FY19-21E vs.

FCF of `516cr over FY14-18.

Exhibit 12: How revenue mix will change over FY17-21E

Source: IIFL Research

Goodwill to provide tax benefits of `300cr over next 15 years

In order to derive the synergies from its two separate brands, erstwhile

Dishman Pharmaceuticals & Chemical (DPCL), in FY17, consolidated its

business with Carbogen Amcis to create Dishman Carbogen Amcis

Limited (DCAL). After this merger, company recorded goodwill of

`1,326.9cr, which will be amortized over the next 15 years, starting

from FY17. This will result in amortization charge of `88.5cr/year. Due

this merger, DCAL will receive tax benefits of ̀ 300cr over next 15 years.

As a result of this merger, asset turnover ratio stood at 0.3x in FY18.

Adjusted for goodwill, however tangible asset turnover is 1.0x in FY18.

The merger has also led to decline in its return ratios (ROE of 3% in

13 14 16 19 23

56 59 56 52 47

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FY17 FY18 FY19E FY20E FY21E

Co

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CRAMS - India CRAMS – CAAG+RIOM CRAMS – UK Carbogen Netherlands Others


FY18). However, if adjusted for the goodwill and amortization, return

ratios show a different picture (ROE of 16.6% in FY18). The benefits of

restructuring are already reflected in its income statement as its

EBITDA margins have improved by 600bps in FY17. Between FY17-

H1FY19, the company has amortized a total of Rs221cr as amortization

of goodwill charges.

Exhibit 13: Merger has led to improvement in margin profile

Source: IIFL Research

Outlook and valuation

Owing to CRAMs, HPAPI and Vitamin-D opportunity, DCAL’s

revenue/PAT is expected to register 14.2%/27.7% CAGR over FY19-21E.

Adj. ROE is expected to rise from 14.9% in FY19E to 15.6% in FY21E.

DCAL currently trades at 6.8x FY21E EV/EBITDA, >50% discount to Divi’s

Lab. We believe that DCAL’s improving financials and growth prospects

offer margin of safety to enter at this valuation. We value DCAL at 8x

FY21E EV/EBITDA to derive a target price of `289 and recommend BUY

on the stock.

Key risks

Reduced R&D spending by the innovator pharma companies.

Delay in getting NDA approval by its clients.

Regulatory risk in form of adverse observations by USFDA,

especially at HPAPI plant in Bavla and Shanghai Plant in China.

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Gross margins EBITDA Margins

in %

FY15 FY16

1,352 bps

603 bps

Disclaimer

Recommendation Parameters for Fundamental/Technical Reports: Buy – Absolute return of over +10% Accumulate – Absolute return between 0% to +10% Reduce – Absolute return between 0% to -10% Sell – Absolute return below -10% Please refer to http://www.indiainfoline.com/research/disclaimer for recommendation parameter, analyst disclaimer and other disclosures. IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: U99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-22) 4249 9000 .Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22) 25806654 E-mail: [email protected] Website: www.indiainfoline.com, Refer www.indiainfoline.com for detail of Associates. Stock Broker SEBI Regn.: INZ000164132, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No. INA000000623, SEBI RA Regn.:- INH000000248 For Research related queries, write at [email protected] For Sales and Account related information, write to customer care: [email protected] or call on 91-22 4007 1000

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