Published on 16/03/2017 2:43:42 PM | Source: SPA Securities Ltd
Update On Vivimed Labs Ltd - SPA Sec
Vivimed Labs is a Hyderabad based manufacturer focused on pharmaceutical and speciality chemical sector. Company has 11 manufacturing plants (eight domestic and three overseas) across three continents. The healthcare vertical is engaged in the custom manufacturing, APIs and formulations for leading generics-manufacturing companies. The specialty chemicals segment produces active ingredients for a range of home, personal care and industrial products. In our recent interaction, management sounded optimistic about pharma driven revenue growth and maintaining lighter balance sheet.
Divestment to deleverage and refocus
In FY16, Vivimed divested a part of its Specialty Chemical business (comprising Home and Personal Care segments) to Clariant India for consideration of INR 3.25bn. This divestment was to reduce debt and to refocus on pharma and speciality chemical segments. With this divestment, Vivimed plans to focus on growing Pharmaceutical API, CMO and Finished Dosage formulations businesses in regulated markets. In speciality chemicals, company has retained niche business like photochromic, imaging chemicals, anti-microbial, hair colour etc. to drive growth and profitability. Divested product lines had a revenue of ~INR 1,450 mn with an EBIDTA margin of ~20%. Vivimed has managed to reduce net debt from INR 9850 mn in FY15 to INR 8075 mn in H1FY17 and further decline is expected till INR 7000 mn by Q4FY17. Vivimed also sold branded ophthalmic formulations business (Klar Sehen Pvt ltd) for consideration of INR 730 mn in H1FY17 which will further help in debt reduction.
Company manufactures APIs and formulations across diverse therapeutic segments and has a strong marketing presence across regulated and emerging markets. Vivimed partners with leading global pharmaceutical companies for custom manufacturing (CMO) assignments for APIs and generic formulations. It is associated with companies like Novartis, CIPLA, Wockhardt etc. and ~55-60% manufacturing capacity is used for contract manufacturing (gets fixed margins). Company is planning to reduce exposure of CMO (currently ~30% of pharma revenue; EBITDAM 16-18%) and focus on high margin API/formulation business.
Company manufactures APIs across 15+ therapeutic segments from three facilities (in Spain and Mexico). Anti-ulcer is a key therapeutic segment followed by anthelmintic, antidepressants, anti-infectives, anti-HIV etc. Company has relationships with 100+ customers across 70 countries and has filed 50+ DMFs with the USFDA and 150+ active DMFs worldwide. Vivimed has received ANDA for five products in US and it has commercialized 4 products namely Losartan, Donepezil, Amlodipine and Metronidazole. With increasing ANDA product launches, Alathur capacity utilization is expected to jump ~55-60% by FY18 vizaviz current ~35% utilization. In spite of competitive market, management expects steady (10- 15%) growth from formulation business. Vivimed plans to focus on molecules going off patent in FY18-19 and has 5-6 molecules in pipeline which will be commercialized in next 2-3 years.
The company had two facilities for Speciality Chemicals, Hyderabad and Bidar, of which Hyderabad facility will be transferred to Clariant post the sale of a portion of a speciality chemical business. Company has retained niche business like photochromic, imaging chemicals, anti-microbial, hair colour etc. Vivimed is in advanced talks with Japanese client for supplying key photochromic products. Company expects significant revenue contribution from photochromic with premium margins (~45-50%) in coming years. Vivimed has long standing relationships with companies like P&G, L'Oreal, Johnson & Johnson etc. for hair dyes and microbial segment. Company is working on complete range of photochromic products and other hair/shampoo related products to expand product/consumer base in coming years.
Outlook and valuation
Vivimed transformed from a speciality chemicals to Pharma Company between FY11-16. It acquired Uquifa in FY11 and further acquired USFDA approved formulations facility from Activis in Alatur. It operates from four USFDA approved facilities in Spain (2), Mexico and Alathur, Tamil Nadu. Inorganic expansion resulted in 31% revenue CAGR in pharmaceutical segment. With increasing ANDA approvals, capacity of Alathur plant (2 bn SODs) will be better utilized. We expect healthy ~15% growth from pharma and formulations division in coming years. Divestment in speciality chemicals would result in revenue decline of ~INR 1450mn but management is confident to reach same revenue levels (~INR 3500 mn, current INR ~2000mn) and achieve better margins in 2 years by expanding speciality chemicals business. Company plans to maintain D/E of 1.5-1.7x as no major capex is expected in FY18. Company has ROE/ROCE of 16.5%/11% and is trading at TTM P/E of 7x.
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