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Life Sciences: An ever growing opportunity

Around 40% of new drugs are Fluorinated Pharmaceuticals

* From the first fluoro-pharmaceutical drug in CY54 – Florinef, fluoro compounds have found an ever increasing acceptance in new Pharmaceutical drugs. Around 40% of new registered drugs are fluoro-pharmaceutical drugs. Even the largest selling drug of all times – Lipitor – is a fluoro-pharmaceutical drug.

* NFIL, with nearly five decades of experience in fluorination, is expected to benefit from the growing usage of fluoro-pharmaceuticals. The company is building an INR2b multi-purpose plant (MPP) by 1HFY23. The MPP would exploit opportunities in Life Sciences and Crop Protection, with an expected asset turnover of ~1.4x (i.e. ~25% of total revenue in FY21).

* While other segments like fluoro-agrochem and new age Fluorochemicals (for example HPP) would contribute to NFIL’s growth, this research, in particular, takes a look at the vast opportunity in the Life Sciences segment.

Why is fluorine finding increased usage in Pharmaceutical drugs?

* Pharmaceutical drugs can be oxidized by liver enzymes or other substances, thereby decreasing the bioavailability of the drugs. However, the introduction of a fluorine atom makes the drug resistant to metabolic degradation. This increases the bioavailability of the drug at the site of required action. A classic example is Ezetimibe – introduction of a fluorine atom raised the bioavailability by 50x.

* Fluorine is the most reactive element. Introduction of fluorine increases the lipophilicity of the drug, or the ability to be absorbed by lipids/fats. The second generation of quinolones – fluoroquinolones like ciprofloxacin, norfloxacin, etc. are good examples.

* Fluorine demonstrates antibacterial activity. Fluorinated quinolones show much better antibacterial properties than non-fluoro quinolones.

Rising prominence of fluoro-pharmaceutical drugs

* Munenori Inoue et al in their research paper analyzed all Pharmaceutical drugs registered globally since CY91. Their conclusion suggests that ~20% of all registered drugs are fluoro-pharmaceuticals.

* Due to their properties listed above, fluorine finds increased usage – almost 43% of drugs registered in CY19 are fluoro-pharmaceuticals, a sharp rise from 34% in CY15. These are across therapeutic categories like Antimicrobial, Antitumor, and Anti-inflammatory usage. During CY15-19, fluoropharmaceuticals commanded a whopping 60% market share in total registered drugs globally.

* Although Biologics is gaining prominence against small-molecule drugs, fluorine remains an attractive candidate for drug development in the future. As synthetic methods for formation of fluorinated heterocyclic compounds progress, fluorine-based drug discovery would increase in the future.

Valuation and view – huge growth opportunities ahead

* While it is difficult to forecast the market size of fluorinated Pharmaceuticals, global Pharma CRAMS is expected to clock 6.2% CAGR over CY21-26E, reaching USD170b. While the global API industry is expected to grow at 6% CAGR, the same in India is expected to outshine at 9.6% over CY21-26E. 

* Going forward, NFIL intends to leverage its R&D capabilities and deep fluorination expertise to partner with global companies, which will aid growth. It currently has three R&D centers with 120 employees in Surat, Devas, and Manchester. The management is evaluating the prospects of another R&D center for the Specialty Chemicals segment on the outskirts of Mumbai. Over the near-to-medium term, it plans to add another 30-80 people in this department.

* NFIL is working with a large consulting firm to synergize Specialty Chemicals (Pharma) and CRAMs together. CGMP4 could be another potential growth opportunity over the next couple of years. However, it will be considered only after debottlenecking of the CGMP3 facility.

* The management plans on developing new molecules in the HPP segment for various other players. It is looking to offer a full range of products in this category.

* The stock is trading at 45x/38x FY23E/FY24E EPS of INR89/INR105, with an expected improvement in return ratios to ~22% (up 500bp v/s FY21), despite huge capex (INR7b) over the next three years.

* We value NFIL at 40x FY24E EPS to arrive at our TP of INR4,195. We maintain our Neutral rating owing to the limited upside. We await a right entry point, highlighting our aforementioned optimism on fluorination chemistry.

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