Claris Lifesciences Ltd Report

RETAIL RESEARCH Page | 1

Claris Lifesciences Ltd (CLL)

Scrip Code Industry CMP Recommendation Sequential Targets Stop Loss* Time Horizon

CLALIFEQNR Pharmaceutical Rs.187 Buy at CMP and add on dips in band of Rs. 159-171 Rs. 220 & Rs. 244 Rs. 144 1-2 quarters *on daily closing basis

Claris Lifesciences Limited (CLL) is a Pharma multi-business enterprise and the holding company of Claris Injectables (CIL), a wholly-owned subsidiary engaged in Specialty Injectables business. It also holds 20% in Claris Otsuka Pvt. Ltd, a Joint Venture with Japanese Otsuka Pharmaceutical Factory, Inc. & Mitsui & Co. Ltd. for Infusion business in India & Emerging Markets. Triggers

20% holding in JV with Otsuka and Mitsui – can be unlocked at a good price over the medium term CIL - Specialty Injectables business – Good revenue and margins earner Propofol-current flagship product of CIL - robust growth ahead on back of USA launch CIL stake/business could be sold off at a hefty price – resulting in value unlocking.

Risks/Concerns

Regulatory risks Therapy Concentration Corporate governance issues in the past –IT raids Pledged shares by promoters

Conclusion and Recommendation Claris is into generic injectables space which are difficult to manufacture and thus there is a real shortage of generic injectables in the regulated markets. The company’s blockbuster drug propofol is going off patent and it will be one of the only manufacturers of propofol in injectables. Claris has decided to concentrate on the regulated markets especially the US and Europe. We feel investors could buy the stock at CMP and add on dips in the band of Rs. 159-171 (~6.5-7x FY17E Adj. EPS) for sequential targets of Rs. 220-244 (~9-10.0x FY17E Adj. EPS) with stop loss of Rs. 144 on daily closing basis, in 1-2 quarters.

Financial Summary (Consolidated)

Particulars (Rs in Cr) CY11 CY12 CY13 FY15 (15 months)

FY16E FY17E

Total Operating Income 740.5 767.4 667.8 799.8 766.9 820.5

Operating Profit 245.6 264.8 166.5 155.5 186.7 211.0

OPM (%) 33.2 34.5 24.9 19.4 24.3 25.7

Other Income 16.0 10.3 43.4 86.3 49.3 59.2

Adjusted Profit After Tax 126.3 103.9 70.4 156.7 118.4 133.0

APATM (%) 17.1 13.5 10.5 19.6 15.4 16.2

Reported Profit After Tax 126.3 103.9 84.4 149.5 70.3 99.0

PATM (%) 17.1 13.5 12.6 18.7 9.2 12.1

Adjusted EPS (Rs.) 19.8 16.3 11.0 23.0 21.7 24.4

Reported EPS (Rs.) 19.8 16.3 13.2 21.9 12.9 18.1 (Source: Company, HDFCSec; E-Estimates)

RETAIL RESEARCH

Techno Funda Note Jan 21, 2016

Price Chart

Stock Details

BSE Code 533288

NSE Code Not Traded

Bloomberg CLAR:IN

Price (Rs) as on 20 Jan, 2016 187.0

Equity Capital (Rs Cr) 54.6

Face Value (Rs) 10

Eq. Shares O/s (Cr) 5.46

Market Cap (Rs. Cr.) 1037.4

Book Value (Rs) 241.30

Avg. Volume (52 Week) 195617

52 wk H/L (Rs) 358.0/171.0

Shareholding Pattern

(As on Sept 30, 2015)

Indian Promoters 60.99

Institutions 13.04

Non Institutions 25.97

Total 100

Zececa Mehta – Fundamental

Research Analyst

[email protected]


Company Profile Claris Lifesciences Limited (CLL) is a Pharma multi-business enterprise and the holding company of Claris Injectables, a wholly-owned subsidiary dealing in Specialty Injectables business. It also hold 20% stake in ‘Claris Otsuka’, a Joint Venture with Japanese Otsuka Pharmaceutical Factory, Inc. & Mitsui & Co. Ltd. for Infusion business in India & Emerging Markets. Thus, CLL has three segmental revenues, 1) the Specialty Injectables Business which is housed in a wholly owned subsidiary; Claris Injectables Limited (CIL), 2) 20% stake in the joint venture with Otsuka and Mitsui for the infusion business in India and Emerging Markets and 3) the Treasury and Cash management for the funds in the Holding company. Claris Injectables Limited (CIL) is one of the largest sterile injectables pharmaceutical companies in India. The company manufactures and/or markets products across various therapeutic segments including Anesthesia, Plasma Volume Expanders, Blood Products, Parenteral, Infusion therapy, Anti-infective and Renal Care. A significant majority of these products are generic drugs that are capable of being directly injected into the human body and predominantly used in the treatment of critical illnesses. The company has 3 manufacturing plants at its campus on the out skirts of Ahmedabad. With emphasis on Quality, Technology & Innovation, Claris offers a range of niche technology-driven injectable products across delivery systems such as glass bottles, glass vials and ampoules, and non-PVC/PVC bags. Claris sterile injectables facilities have been approved by regulatory authorities including USFDA, MHRA (UK), TGA (Australia) and GCC FDCA. The company’s manufacturing capabilities have several times received awards from prestigious institutions like Frost & Sullivan and IDMA. Claris Otsuka Private Limited (COL) is a Joint Venture between Claris Lifesciences Ltd, India, Otsuka Pharmaceutical Factory Inc., Japan and Mitsui & Co. Ltd., japan for Claris’s Infusion Business in India and Emerging Markets. The company primarily manufactures & markets products across multiple markets and therapeutic segments and has two manufacturing facilities in Ahmedabad. The company has products ranging across various therapeutic segments including infusion therapy, parenteral nutrition, anti-infectives and plasma volume expanders. The company offers injectables in various delivery systems such as glass and plastic bottles (EURO Head and Nipple Head), ampoules and non PVC/PVC bags.


Historic evolution of Claris Lifesciences Ltd Products of Claris Injectables Ltd (CIL) Anesthesia & Analgesia: The Company’s expertise in lipid-based technology has made it one of the few companies in the world to manufacture propofol. Provive/Profol is an internationally accepted brand and the no. 1 brand of propofol in India as well as diverse countries across Latin America, Asia, Africa and the CIS. Marketing Authorization Applications for propofol have been filed in several EU countries, Australia and New Zealand. The anesthesia basket has other products including Sedoz (midazolam), Ketajex (ketamine), Thiojex (thiopentone), Sensinil (lidocaine) and Bupican (bupivacaine). Blood Products: Claris' blood product range like Norglobin IVIG (human immunoglobulin) caters to the needs of patients with immuno deficiency, which reduces their capacity to fight diseases. A number of new products are in the pipeline in this category.


Anti-infectives: Claris has a wide range of broad-spectrum anti-infectives in its product basket. It has Ciproquin/Ciprox under Quinolone; Meriva, Imira, Zepita under Beta Lactum; Flucanol in the anti-fungal category and Clinbact/Bacimycin under Aminoglycoside Plasma Volume Expanders: TetraHES is CIL’s brand for Tetrastarch, a variant of Hydroxyethyl Starch. It falls under the category of colloidal Plasma Volume Expanders. It is used as Plasma Volume Expander/ Blood Substitute to maintain normal blood pressure and volume in shock, hypovolemia, acute blood loss, hypotension, etc. It improves oxygen transport to all vital organs of the body. Renal & Transplant: Claris offers a dialysis and transplant range across systems, solutions, medicines, disposables and equipment. The transplant therapy range includes immunosuppresants Cyrin (cyclosporine), Limus (sirolimus) and Mygraft (mycophenolate mofetil) as well as Renograf (multi organ perfusion solution). Claris is the first Indian company and one of the few in the world to successfully manufacture Renograf. Renal medicines include Epotin (erythropoietin), Kapstat (calcium polystyrene sulphonate), Essamin (essential amino acids), Calbin (calcium acetate) and Ostriol (calcitriol). Oncology: Claris launched its Oncology division with a vision and an endeavor to transform lives of cancer patients by offering quality products at affordable price. With its focus on drug delivery systems, innovative molecules and biotech products, Claris Oncology currently has a basket of products, which caters to solid tumors, hematological malignancies and supportive therapies. In addition to this, it also plans to launch many more molecules in coming months. The company also plans of establishing a fully operational and GMP compliant, dedicated oncology-manufacturing facility which would be equipped with the latest and state-of-the-art equipment. Select Injectables: Claris also offers select injectables across few more therapeutic groups including anti-emetics, CNS, Cardiology, anti-malaria, haematinics etc. Products of Claris Otsuka Private Ltd (COL) Infusion therapy: The company has a wide range of common solutions in infusion therapy in India. Parenteral Nutrition: Parenteral nutrition, also known as intravenous feeding, is a method of getting nutrition into the body through the veins. Claris Otsuka has a product range encompassing advanced delivery systems in double and triple chamber bags like PNA, Celemix-G and TNA/TNA-Peri. TNA-Peri offers the unique advantage of an advanced triple chamber bag system, with the convenience of peripheral administration. Anti-infectives: Claris Otsuka has a wide range of broad-spectrum anti-infectives in its product basket. The quinolone range has Ciprox (ciprofloxacin IV) and Curadex (ofloxacin IV). Metris (metronidazole IV) is an anaerobic antibacterial belonging to the nitromidazole class of anti-infectives.


Plasma Volume Expanders: The Plasma Volume Expander range from Claris Otsuka covers TetraHES (tetrastarch), Hestar 200 (pentastarch), Hestar 450 (hetastarch) and Microspan (dextran) in bags and bottles. Shareholding Pattern

Particulars (%) Sep-15 Jun-15 Mar-15 Dec-14 Sep-14

Indian Promoters 60.99 60.99 60.99 60.99 60.99

Mutual Funds/UTI/Banks 0.09 0.06 0.02 0.00 0.00

FIIs 12.95 17.77 14.25 13.49 13.41

Foreign Venture Capital Investors 0.00 0.00 11.29 11.29 11.29

Corporate 4.86 5.22 2.05 3.37 3.29

Public & Others 21.1 16.0 11.4 10.9 11.0

Totals 100.0 100.0 100.0 100.0 100.0

As on 30th September 2015 shareholding pattern, the following names hold significant stake in the company.

Particulars % of total no. of shares

Government Pension Fund Global 2.98

Orbimed Partners Mauritius Ltd 4.48

Privatban Kihng Zurich AG 2.39

Signet Healthcare Partners QP Partnership III LP 2.23

Barclays Capital Mauritius Ltd 1.48

Copthall Mauritius Investment Ltd 1.32

Total Foreign Funds Holding 14.88

Triggers 20% holding in JV with Otsuka and Mitsui – can be unlocked at a good price over the medium term During August 2013, Claris Lifesciences India (CLL) completed the transfer of its infusion business for India and emerging markets to the joint venture (Claris-Otsuka) with Otsuka Pharmaceutical Factory, Japan (OPF) and Mitsui & Co, Japan (Mitsui). The infusion business includes common solutions, anti-infective, plasma volume expanders and parenteral nutrition therapies for India and emerging markets. Claris has transferred two of its existing plants to the joint venture. Claris will continue to hold a 20 per cent stake in the joint venture while Otsuka and Mitsui will hold 60 per cent and 20 per cent respectively. Claris had received a total cash consideration of Rs 1050 crores as a part of the transaction from Claris-Otsuka. Claris-Otsuka was valued at Rs 1313 crores. CLL has used the part of the cash consideration towards debt prepayment of around Rs 360 crores. CLL also did a buyback of up to 92,50,000 equity shares at a price of Rs 250 per share (higher than the then prevailing market price). About Rs. 231 crore were used for this buyback which was open from 8th May 2014 to 22nd May 2014. Equity share capital fell from Rs. 63.82 crore to Rs. 54.57 crore. The remaining funds net of taxes and deal related expenses are being used to fund future growth of the company.


Accordingly then, CLL would focus on its specialty generic injectables business and shall intensify its growth in all international markets, especially the regulated markets (including the US) through new product launches. As per the JV arrangement, Claris-Otsuka shall co-brand its products in India and across Emerging Markets utilizing the manufacturing and marketing competence of Claris. Claris-Otsuka to introduce OPF’s speciality products in India and Emerging Markets. OPF to have an opportunity to leverage Claris-Otsuka’s manufacturing infrastructure and supply chain for its global business. Claris-Otsuka to work on expanding product basket with speciality Infusion and Clinical Nutrition Products. OPF’s global expertise in the Infusions business and Claris’ India advantage to be a huge advantage to Claris-Otsuka. The Claris-Otsuka business shall be propelled to take advantage of the Infusions opportunity globally with OPF’s and Mitsui’s capabilities and financials strengths. Once the role of Claris in handholding/handover is complete, we think CLL can exit the JV and sell its 20% stake to the other partners at similar or higher valuations. This could bring in cashflows and profits as the book value of the investment is Rs.2 cr. During October 2014, CLL transferred its Specialty Injectable Business by way of slump sale to its wholly owned subsidiary viz. Claris injectables Limited (CIL). Now CIL will focus on bagging products and other niche ‘difficult to manufacture’ products as well as work on fast track growth opportunities via organic (capacity expansion and introduction of new delivery systems) and inorganic (acquire products and ANDAs) routes.

CIL - Specialty Injectables business - Revenue earner CIL is a wholly owned subsidiary company of CLL and is focused in the Specialty Injectables business. It has a diversified portfolio with a therapeutic focus in segments like Anaesthesia & Analgesics, Anti-Infectives and Critical care & Renal. It has total of 51 products out of which 24% products represent the Anaesthesia & Analgesics, 27% comprise of Anti-Infectives and balance 49% is Critical Care & Renal. It has a fully integrated Injectables platform starting from product development to sales, marketing & distribution.


CIL has a strong global commercial presence across 100 countries. As per FY15, the company garnered about 44% of its revenue from Emerging Markets, about 30% of its revenue from USA, and 26% from Other Regulated Markets. CIL has a full –fledged front-end presence in USA though the wholly owned subsidiary viz. Claris Lifesciences Inc., USA which has 11 employees including 2 senior sales executives. Also in India, it has its own sales and marketing network. As far as the other countries are concerned, the company goes through distributors.

Commercial Strategy

Europe and ORM EU (25), S. Korea, Canada, Australia, Others (4)

Distributors Country managers based in India, managing distributor relationships

Registrations in 25 European countries

Tier 1 Emerging Markets Brazil, Philippines, Russia, Mexico, Others (6)

Distributors Country manager based in the country

Operating business infrastructure in key Latin American countries

Other Emerging Markets Venezuela, Peru, Colombia, Ukraine, Others (58)

Distributors Country managers based in India, managing distributor relationships

CIL has 13 ANDAs approved in its name across eight molecules with a total filing of 43 ANDAs in the USA. It has a under registration pipeline of 24 ANDAs across 21 molecules, having an estimated addressable market size of $2.2 billion. CIL is capable of developing about 25 products per year including 12-15 products in the US market due to its strong R&D and regulatory capabilities. The company is targeting a portfolio of 100 products by 2020 in USA.


The world generic injectable market is dominated by the USA, which accounts for 51% of the entire market size, European Union is second with 24% of the total Generic Injectables Market followed by EM at 20% and Other Regulated Markets at 5%. The generic injectables market is estimated to be around US$ 8bn in the USA, this includes General Injectables at 73%, Oncology at 17%, Beta-lactam antibiotics at 8% and others at 2% of the total market. Out of these segments, CIL’s products target the generic injectables segment which has a US$ 5 bn of market size. It has seen the highest growth between the years 2010 and 2013. During this period the segment grew by 17% as compared to 7% of Oncology and 8% in Beta-lactam antibiotics. This growth was on the back of better demand of products and improved pricing due to shortages in the general injectables products.

Global Pharma Market : USD 770 bn

Global Injectables Market : USD 150 bn

Generic Injectables Market : USD 20 bn

Cef. Beta-lactam Penam: USD 3 bn

General Injectables: USD 8 bn

Oncology: USD 5 bn

Bio-Tech: USD 4 bn

Non-Targeted Products: USD 3 bn

Targeted Products: USD 5 bn

Selling: USD 1 bn

Developed/Filed: USD 2 bn

Pipeline: USD 2 bn


Manufacturing facility plan

CIL has 3 manufacturing units spread across 166,800 sq. meters campus in Ahmedabad. 2 units are for FDF and one is for API manufacturing. It has employed 524 full time employees including 249 in manufacturing and 275 in quality. The facilities are also compliant with the regulators. There have been 3 successful FDA inspections in last three years. Also it has got approvals from other key global regulatory agencies such as MHRA, TGA, ANVISA and GCC.

Clarion I - FDF Facility Clarion V - FDF Facility Clarion III - API Facility

Manufacturing Area 14,400 sq. metres 13,145 sq. metres 4,100 sq. metres

Capabilities

Aqueous, emulsion Aqueous, lypholised API production for:

Bags, vials, ampoules Ampoules, vials Iron Sucrose

Hydroxyethyl Starch

Dexmeditomidine

Capacity

5 lines 4 lines (2 already in place) Iron Sucrose - 1 ton per month

115 million units (2014) 200 million units (2014) HES - 4 tons per month

Dexmeditomidine

Key Regulatory Approvals FDA, MHRA, TGA, ANVISA MHRA Approved FDA Approved

Propofol-current flagship product and robust growth ahead on back of USA launch Propofol (generic version of Diprivan), a flagship product of Claris is an anaesthetic product which is widely replacing other anaesthetic drugs as recovery from Propofol is more rapid and clear when compared to other anaesthetic drugs. Propofol is also commonly used in veterinary medicine. Propofol has been referred to as milk of amnesia, because of the milk-like appearance of its intravenous preparation. It is on the WHO Model List of Essential Medicines, the most important medications needed in a health system. It also happens to be part of an industry wide drug shortage affecting hospitals throughout the US. Currently there are three manufacturers making Propofol for the US market - Teva Pharmaceuticals, Hospira and Fresenius Kabi (as Authorized Generic).


The total market size of Propofol is about USD 575 mn with US having market size of USD 251 mn (as per IMS health data as of June 2014) followed by EU & ORM at USD 184 mn and then EM at USD 145 mn. However, as per FY15 CIL’s sales of Propofol in EU & ORM was Rs. 601 mn, in EM was Rs. 1093 mn. CIL does not supply in the USA. During December 2014, the company had filed an ANDA for Propofol for injection, 10 mg/ml with USFDA with a Paragraph IV certification. However, Fresenius Kabi USA, Inc. had filed a suit against the company to prevent it from commercializing its ANDA prior to the expiration of its existing patent, on 1st December 2024. But in April 2015, Claris reached a settlement and license agreement and ended all the litigation with Fresenius Kabi USA, Inc. CIL was then granted approval to sell its generic version of Propofol for Injection from 15th October 2016, prior to the expiry of December 2024. Thus this would give advantage to CIL as it will be the only emerging market player to have approval and commercial sales in the regulated markets, having over 8 years of experience in manufacturing and marketing Propofol. The company has approval in 86 countries with commercial sales in over 50 countries in 2013. The total anaesthesia market has grown at a CAGR of 22% during 2010-2013. In that, Propofol has grown at a CAGR of 29% while other anaesthesia products have grown at a CAGR of 19% during the same period as above. This gives Claris good opportunity to tap the faster growing market of Propofol with an added advantage of USA sales which will commence soon as it has the capacity to meet ~25% of the regulated markets requirement.

Iron Sucrose-Leading Market position This medicine is used to treat "iron-poor" blood (anemia) in people with long-term kidney disease. One may need extra iron because of blood loss during kidney dialysis. Iron is an important part of one’s red blood cells and is needed to transport oxygen in the body. Many patients with kidney disease cannot get enough iron from food and require injections. The global dialysis market is estimated at Rs. 369,600 crore in 2013 and is poised to grow at a CAGR of 6.2 percent from 2013 to 2018, to reach Rs. 499,260 crore by 2018. Diabetes is the primary cause of CKD (Chronic Kidney Disease) in India. The condition accounts for 30 percent of all CKD cases, as opposed to high blood pressure, which accounts for 20 percent of all cases. India is home to more than 60 million diabetics.


Should current rates hold, the numbers of diabetics in India will be more than double by 2040. According to doctors, about one-third of these patients will go on to develop CKD. The high incidence of kidney diseases can be attributed to inactive lifestyles, stress, smoking, and alcohol consumption. Claris has USFDA approved own manufacturing of API along with finished formulation. It has a strong international presence and is the only generic player in many countries including Brazil and South Africa. As far as US is concerned, there are currently no generic players. However, by FY17 there would a 2-3 players entering the market. Claris expects to be amongst the three players in this limited competition market. The global market size of iron sucrose is about USD 530 mn with USA comprising of USD 159 mn and has grown at a CAGR of 8% during 2010-13. During FY15, Claris did sales of about Rs 14 mn of iron sucrose in ORM and about Rs. 88 mn in EM. It has a capacity to meet ~28% of the requirements of the regulated markets. Other developments Claris Lifesciences in Aug 2015 got a prior approval supplement (PAS) for resuming the supply of Furosemide injection in the US market. The injection which is used to treat fluid retention has earlier faced supply issues from its raw material supplied, thus, there was a gap in supplying the product to the US market; since January 2015. Claris is reported to have said that the same product has faced supplying issues to the US market last year as well, though on interrupted occasions only, and has also featured in the USFDA shortage list since June 2012. It was only in January 2014, Claris Lifesciences had received the US health regulator’s nod to market Furosemide injection in the American market. The company had filed a PAS application to append an additional supplier to the abbreviated new drug application (ANDA), this process was done for redundancy and to ensure a consistent supply of the API for its finished formulation sold in the US. With this approval, alternative vendor has been appended to the ANDA, this will allow the company to recommence its supplies to the US. Technology Upgradation during FY15 During FY15, CLL introduced new technologies in the manufacturing facilities and the testing labs. Packing automation for Propofol vials and other SVP products in ampoules and vials has resulted into significant increase in the packaging capacity. Introduction of Automatic pouch making machines; which is used as secondary packaging material for Bags, has led to a cost reduction and quality enhancement at a higher throughput in bags. Introduction of new laboratory instruments and software implementations will improve the data capturing and recording process for the company, this will help the company in the long run with respect to regulatory bodies’ requirements of having systems in place to ensure data integrity. During FY15 the company has installed two new lines in the new plant; Clarion 2; these line can manufacture products in ampoules and vial for a fill volume of up to 10 ml, these are high spread lines with capacities to manufacture around 100 mn units each per year. This plant has received approvals from MHRA. CIL stake/business could be sold off at a hefty price – resulting in value unlocking. In Feb 2015, media reported that several Indian pharma giants are competing with their global peers in the race to acquire the generic sterile injectables business of Claris Lifesciences Ltd. The heightened interest in the business from strategic players also coincided with global supply constraints of injectables -- drugs that are widely used through vials, syringes and bags, as well as pumps used to deliver them and other fluids -- that had driven many recent transactions both in India and overseas, including Pfizer's $17 billion takeover of Hospira.


There are very few injectable businesses left in India that are independently owned after Mylan acquired Agila from Strides Arcolab for $1.6 billion in 2013. Prior to that in 2009, Hospira had acquired Orchid's injectables business for $400 million. Mylan's takeover of Agila was reportedly valued at 24x EBITDA & 8x revenues. Pfizer-Hospira deal, as per industry sources, was at 20x EBITDA and 4x revenue multiple. The total global injectable market is estimated at around $150 billion with lion's share being with innovators. The generic injectable sector is estimated at around $20 billion as per various industry estimates and is a very attractive piece going forward. In 2010, there were 178 drug shortages reported to the U.S. Food and Drug Administration (FDA), 132 of which involved sterile injectable drugs. In 2011, there were 251 drug shortages reported, 183 of which involved sterile injectable drugs. In 2012, there were 117 new drug shortages, 84 of which involved sterile injectable drugs and in 2013, there were 44 new drug shortages, 35 of which involved sterile injectable drugs. The injectable business of CLL had sales during fifteen months ended March 2015 of Rs. 517.3 crore and an EBITDA of Rs. 189.8 crore. In H1FY16, this business recorded sales of Rs.283 cr and EBITDA of Rs.101 cr. Taking a conservative multiple of 3x Sales and 15x EBITDA, the value of this business could be between Rs.1700 cr to Rs.3000 cr. This excludes the upside from Propofol opportunity. CLL’s current market cap is ~Rs.1050 cr. Going by the past actions, shortage of injectables and interest of global and Indian Pharma companies in acquiring sterile injectables business (though the issue of Form 483 in May 2015 cooled interest to some extent), we feel that the management of CLL will actively seek to sell their entire/part stake in CIL (especially after the launch of propofol in the US in Oct 2016). This could lead to value unlocking for the shareholders of CLL. Unexpected adverse development on regulatory front (whether in line with the last Form 483 issued or otherwise) could be the main hindrance to this value unlocking. Financials Consolidated net sales of CLL has grown from Rs. 658.38 crore for the twelve months ended December 2013 to Rs.780.11 crore for the fifteen months ended March 2015. On July 31, 2013, the company entered into the Joint venture with Otsuka and Mitsui and it transferred its infusion business for Domestic and certain emerging markets. Therefore, in the year 2013, sales for seven months was inclusive of total infusion and injectable business while remaining five months of year was for speciality injectable business and pass through of the international sales of COL. Similarly, for the period of fifteen months there were sales of Speciality Injectable business and pass through sales of COL. EBITDA margin (including exceptional item in CY13) reduced from 34% for the twelve months ended December 2013 to 31% for the fifteen months ended March 2015.The reduction in EBITDA margin was on account of transfer of infusion business to COL. However, the pass through sales continue through Claris without significant margin and therefore result into reduction in EBITDA margin. Profit after tax has changed from 13% for the twelve months ended December 2013 to 19% for the fifteen months ended March 2015.There has been an increase in the profit mainly on account of the reversal of deferred tax due to slump sale.


Q2FY16 Review For Q2FY16, CLL’s consolidated total income rose by 28% to Rs. 193.5 crore. As all the operating expenses as a percentage to sales rose, operating profit de-grew by 15% YoY to Rs 32.8 crore and thus the OPM came in at 16.6%. Due to higher interest cost (up by 31% YoY), PBT came in at Rs. 25.1 crore, down by 22% YoY, Adjusted PAT came in at about Rs. 26.7 crore, rise of 19% YoY due to negative tax impact. However due to an extraordinary item of Rs. 37.83 crore due to the expenses incurred relating to legal, professional, travelling and consultancy, etc on account of various Strategic and Management initiatives of which majority expenses are of prior year/period, the company incurred loss at the bottomline of Rs. 24.1 crore. Estimates For FY16, we expect consolidated revenues to grow by 16% YoY to Rs. 766.9 crore driven by robust growth of about 35% in the CIL business, due to USA. Due to the curtailment in the operating costs, the operating profit is expected to grow by 36% YoY to Rs. 186.7 crore with OPM being 24.3%. PBT is expected to be at Rs. 151.8 crore and with tax rate of 22%, adjusted profit after tax is expected at Rs. 118.4 crore. However due to an incidence of an extraordinary item in Q2FY16, reported PAT will come at Rs. 70.3 crore as against Rs. 149.5 crore (15 months ending March 2015). For FY17, we expect the total income to come in at Rs. 820.5 crore on the back of launch of Propofol by the company in Oct-Nov 2016 and also due to discontinuation of sales from COL JV as indicated by the management. The operating profit is expected to come at Rs. 211 crore, up by 13% YoY. The adjusted PAT is expected to report at Rs. 133.0 crore while the reported PAT is expected to come at Rs. 99.0 crore. Risks/Concerns Regulatory Risk: The company derives around 55% of its total revenue from the regulated markets (EU and the US). This exposes the company to increased risk of compliance with current good manufacturing practices. The US Food and Drug Administration (USFDA) had on November 1, 2010 issued a warning letter to the company along with an import alert for violation of approved manufacturing norms at the company's Ahmedabad facility and also banned import of products manufactured at the plant to the US. However in August 2012, the USFDA approved the corrective actions taken at its plant in Ahmedabad thereby paving way for resumption of exports to the American market. In May-15, Clarion I, Claris's only fully operational plant, was inspected by the USFDA. At the end of inspection, company has received Form 483, which highlights details about non-compliance at the plant. There were five observations in the letter, of which one is of critical nature. Form 483 in itself does not mean that company will not be able to sell products in the US, however, if it is followed by a Warning letter (no new ANDA approvals from that plant) or an Import alert (complete stoppage of supplies to US market), it can impact company's financials. Company is confident that they will not receive any warning letter or import alert. More so, the changes which were required to get back in compliance are already in place. However, of the five observations made, one is critical in nature and points towards data integrity. Hence, the risk of an adverse event will remain till the company receives any formal confirmation from the USFDA. Therapy Concentration: The company faces product concentration as its branded formulations basket has only three large segments - anaesthesia, anti-infective and renal therapy. The company’s dependence on select brands exposes it to brand concentration risks. Moreover, the company has limited diversification and growth plans for fast-growing lifestyle and critical products.


IT Inspection outcome: During August 2015, the Income Tax department conducted search/survey at the company’s premises. The company extended full support to the authorities. Any negative news regarding the search poses a risk to the company’s image and raises doubts on corporate governance practices. Forex fluctuation: Being an export oriented player and presence of substantial portion foreign debt in the balance sheet results in relatively higher vulnerability to forex fluctuations. Pledged shares: The promoters have pledged 17.8% of their holdings (12% of total equity). This poses a risk to its share price. Conclusion and Recommendation The pharma sector has huge potential and CLL is well poised to cater the huge opportunity in domestic and export market. Claris is into generic injectables space which are difficult to manufacture and thus there is a real shortage of generic injectables in the regulated markets. Though the company is vulnerable to FDA inspection, but till now, the company has not faced any major hurdles as far as regulatory compliance is concerned. Also the company’s another blockbuster drug propofol is going off patent and it will be one of the only manufacturers of propofol in injectables. Claris has decided to concentrate on the regulated markets' especially the US and Europe. Claris is working towards filing 15+ ANDAs every year with an intention to reach a 100 ANDA pipeline in the next 3 years. If we compare Claris to some of its peers in the pharma industry, CLL is available at comparatively lower valuation in terms of P/E, P/B and Market Cap/Sales as shown in the below table. This is without considering the value of Claris Otsuka JV stake and other investments on the books of CLL.

Companies

FY15

Total Revenue (Rs in Cr)

PAT (Rs in Cr)

EPS (Rs)

CMP as on 190116 (Rs)

PE Book value

P/BV EV/EBITDA Debt/Equity Mkt Cap/Sales

Claris Lifescience 799.8 149.5 27.4 190.0 6.9 241.3 0.8 4.4 0.3 1.3

Alkem Labs 3788.7 462.6 38.7 1357.0 35.1 250.5 5.4 NA 0.4 4.3

Alembic Pharma 2056.1 282.9 15.0 603.0 40.2 46.9 12.8 21.6 0.2 5.5

Indoco Remedies 857.0 82.8 9.0 300.0 33.4 56.3 5.3 20.5 0.2 3.2

Looking at the above, we feel risk bearing investors could buy the stock at CMP and add on dips in the band of Rs. 159-171 (~6.5-7x FY17E Adj. EPS) for sequential targets of Rs. 220-244 (~9-10.0x FY17E Adj. EPS) with stop loss of Rs. 144 on daily closing basis, in 1-2 quarters. At the current market price (of Rs 187) the company is trading at 8.62x its FY16E consolidated Adj. EPS of Rs. 21.7 and 7.66x its FY17E consolidated Adj. EPS of Rs. 24.4.


FY16E FY17E

Total Operating Income 740.5 767.4 667.8 799.8 766.9 820.5


Operating Profit 245.6 264.8 166.5 155.5 186.7 211.0

OPM (%) 33.2 34.5 24.9 19.4 24.3 25.7

Other Income 16.0 10.3 43.4 86.3 49.3 59.2

Adjusted Profit After Tax 126.3 103.9 70.4 156.7 118.4 133.0

APATM (%) 17.1 13.5 10.5 19.6 15.4 16.2

Reported Profit After Tax 126.3 103.9 84.4 149.5 70.3 99.0

PATM (%) 17.1 13.5 12.6 18.7 9.2 12.1

Adjusted EPS (Rs.) 19.8 16.3 11.0 23.0 21.7 24.4

Reported EPS (Rs.) 19.8 16.3 13.2 21.9 12.9 18.1 (Source: Company, HDFCSec, E: Estimates)

Financials Quarterly (Consolidated)

Particulars (Rs cr) Q2FY16 Q2FY15 % chg Q1FY16 % chg H1FY16 H1CY14 % chg

Net Sales 193.52 162.09 19.4% 186.51 3.8% 380.03 313.15 21.4%

Other Operating Income 3.9 4.0 -1.5% 5.4 -28.2% 9.3 9.3 0.8%

Total Income 197.4 166.1 18.9% 191.9 2.9% 389.4 322.4 20.8%

Raw Material Cost 86.3 70.7 22.1% 77.0 12.0% 163.3 142.5 14.6%

Employee Expenses 19.3 13.3 45.2% 18.4 4.8% 37.7 34.6 9.0%

Other Expenses 59.0 43.4 35.9% 47.4 24.5% 106.4 78.1 36.2%

Total Expenditure 164.6 127.4 29.2% 142.8 15.2% 307.4 255.3 20.4%

Operating Profit 32.8 38.7 -15.1% 49.1 -33.1% 81.9 67.2 22.0%

Other Income 14.3 12.9 11.0% 8.6 66.6% 22.9 25.9 -11.5%

PBIDT 47.1 51.5 -8.6% 57.7 -18.3% 104.8 93.0 12.7%

Interest 11.3 8.6 30.9% 10.2 10.2% 21.5 17.7 21.5%

PBDT 35.9 42.9 -16.5% 47.5 -24.4% 83.3 75.3 10.6%

Depreciation 10.7 10.7 0.6% 10.4 3.5% 21.1 21.0 0.5%

PBT 25.1 32.3 -22.1% 37.1 -32.3% 62.2 54.3 14.5%

Tax (including DT & FBT) -1.6 9.9 -116.3% 14.8 -110.9% 13.2 15.8 -16.9%

Adjusted Profit After Tax 26.7 22.4 19.4% 22.3 19.8% 49.1 38.5 27.4%

Extraordinary Item -37.8 0.0 0.0 -37.8 0.0

Reported PAT before share of associates -11.1 22.4 -149.6% 22.3 -149.7% 11.2 38.5 -70.8%

Profit/(Loss) Share of Associates -1.9 -2.0 -2.0 -4.0 -2.6

Reported PAT -13.0 20.4 -164.0% 20.3 -164.3% 7.2 35.9 -79.8%

EPS (Rs.) -2.4 3.7 3.7 1.3 6.6

Equity 54.6 54.6 54.6 54.6 54.6

bps bps bps

OPM (%) 16.63 23.29 -666 25.58 -895 21.04 20.83 21

PATM (%) -6.61 12.27 -1887 10.57 -1717 1.86 11.13 -927 (Source: Company, HDFCSec)


Profit & Loss Account (Consolidated)

Particulars (Rs in Cr) CY11 CY12 CY13 FY15 (12

months)

FY15 (15

months)

FY16E FY17E

Total Operating Income 740.5 767.4 667.8 663.2 799.8 766.9 820.5

Total Operating Expenses 494.9 502.6 501.2 526.0 644.3 580.2 609.5

Operating Profit 245.6 264.8 166.5 137.2 155.5 186.7 211.0

Other Income 16.0 10.3 43.4 66.5 86.3 49.3 59.2

EBITDA 261.6 275.1 210.0 203.6 241.8 236.0 270.2

Interest 55.4 65.1 52.2 39.5 48.3 42.7 44.8

Depreciation 54.7 74.3 65.4 38.9 49.1 41.5 45.6

PBT 151.5 135.8 92.4 125.2 144.5 151.8 179.7

Tax (including FBT & DT) 25.2 31.9 22.1 -16.0 -12.2 33.4 46.7

Adjusted PAT 126.3 103.9 70.4 141.2 156.7 118.4 133.0

Exceptional Items/Prior period expenses 0.0 0.0 15.1 0.0 0.0 -45.0 -30.0

Reported PAT before share of associates 126.3 103.9 85.4 141.2 156.7 73.4 103.0

Profit/(Loss) Share of Associates 0.0 0.0 -1.0 -5.1 -7.2 -3.2 -4.0

Reported PAT 126.3 103.9 84.4 136.1 149.5 70.3 99.0 (Source: Company, HDFCSec, E: Estimates)

Balance Sheet (Consolidated)


FY16E FY17E

Equity & Liabilities

Shareholders’ Funds 1052.1 1148.9 1404.3 1316.7 1373.9 1459.8

Share Capital 63.8 63.8 63.8 54.6 54.6 54.6

Reserves & Surplus 988.3 1085.1 1340.5 1262.1 1319.3 1405.2

Non-Current Liabilities 252.0 381.1 192.0 293.1 291.3 279.6

Long Term borrowings 181.7 299.0 126.8 273.4 259.8 254.6

Deferred Tax Liabilities (Net) 60.1 71.4 58.8 9.7 20.0 13.0

Other Long Term Liabilities 3.4 1.3 0.0 0.0 0.0 0.0

Long Term Provisions 6.7 9.3 6.4 10.0 11.5 12.0

Current Liabilities 426.5 472.4 514.6 574.0 608.4 669.6

Short Term Borrowings 189.5 200.4 105.5 183.9 154.7 167.1

Trade Payables 94.5 107.1 91.7 126.8 216.2 242.1

Other Current Liabilities 116.3 144.8 227.0 253.3 220.3 242.4

Short Term Provisions 26.2 20.1 90.4 10.0 17.1 18.0

Total Equity & Liabilities 1730.6 2002.3 2110.9 2183.8 2273.5 2409.0


Assets

Non-Current Assets 968.9 1334.7 1149.0 1299.8 1344.2 1390.2

Fixed Assets 705.2 1044.9 744.9 1077.1 1098.8 1142.0

Gross Block 894.1 1108.8 734.2 911.7 1002.9 1123.3

Depreciation 231.1 302.8 230.0 31.8 73.2 118.9

Net Block (Tangible Assets) 663.1 806.0 504.2 880.0 929.7 1004.4

Intangible Assets 0.2 64.5 67.4 194.3 165.1 132.1

Capital Work-in-Progress 41.9 174.3 173.3 2.8 4.0 5.5

Long -term Loans and Advances 0.0 0.0 209.5 202.3 206.4 216.7

Other Non-Current Assets 262.0 288.5 194.7 15.3 32.1 25.0

Current Assets 761.7 667.6 961.9 884.0 929.3 1018.8

Current Investments 0.0 0.0 608.8 331.6 348.2 383.0

Inventories 169.0 184.3 45.0 93.8 103.1 115.5

Trade Receivables 274.0 228.2 156.5 229.2 240.6 257.5

Cash & Cash Equivalents 157.6 117.7 94.6 82.6 49.4 63.5

Short Term Loans & Advances 159.9 135.7 45.4 132.8 171.7 180.3

Other Current Assets 1.3 1.7 11.6 14.1 16.2 19.0

Total Assets 1730.6 2002.3 2110.9 2183.8 2273.5 2409.0 (Source: Company, HDFCSec, E: Estimates)

Key Ratios (Consolidated)

Particulars CY11 CY12 CY13 FY15 (15 months)

FY16E FY17E

No of Equity Shares 6.4 6.4 6.4 5.5 5.5 5.5

Current Market Price 187.0 187.0 187.0 187.0 187.0 187.0

Market Capitalization 1193.4 1193.4 1193.4 1020.5 1020.5 1020.5

Enterprise Value 1407.1 1575.1 722.3 1063.6 1037.3 995.6

Adj. EPS 19.8 16.3 11.0 23.0 21.7 24.4

FD EPS 19.8 16.3 13.2 27.4 12.9 18.1

Cash EPS (PAT + Depreciation) 28.4 27.9 23.5 36.4 20.5 26.5

Adj. PE (x) 9.5 11.5 17.0 8.1 8.6 7.7

PE(x) 9.5 11.5 14.1 6.8 14.5 10.3

Book Value (Rs.) 164.9 180.0 220.0 241.3 251.8 267.5

P/BV (x) 1.1 1.0 0.8 0.8 0.7 0.7

OPM (%) 33.2 34.5 24.9 19.4 24.3 25.7

PBT (%) 20.5 17.7 13.8 18.1 19.8 21.9

NPM (%) 17.1 13.5 12.6 18.7 9.2 12.1

ROCE (%) 14.5 12.2 8.8 10.9 10.9 11.9


RONW (%) 12.0 9.0 6.0 11.4 5.1 6.8

Debt-Equity 0.4 0.4 0.2 0.3 0.3 0.3

Current Ratio 1.8 1.4 1.9 1.5 1.5 1.5

Mcap/Sales(x) 1.6 1.6 1.8 1.3 1.3 1.2

EV/EBITDA 5.4 5.7 3.4 4.4 4.4 3.7 (Source: Company, HDFCSec, E: Estimates)

One Year Price Chart

Technical Outlook on CLARIS LIFESCIENCES LTD:


Current Observation:

The attached weekly timeframe chart of Claris Lifesciences Ltd is indicating a larger consolidation pattern, which is forming over the last few months. The stock price has been moving in a converging triangle type pattern (green dashed converging trend lines) and currently placed near the lower end of a

triangle pattern around Rs.178-180 levels. We observe a formation of long lower shadows near the support of ascending trend line (lower end of triangle), which is suggesting possibility of emergence of

buying interest from the lower levels. Previously, such long lower shadow formation has resulted in a near term bottom reversal pattern in the stock price and led to a sharp upside bounce back in

the stock price. The weekly 14 period RSI (weekly RSI data is less) has been moving in a bullish high low range of around 70-40 levels. Currently, the weekly RSI is placed at the

lower bullish range of 40 levels. Hence, one may expect upside rebound in the weekly RSI and that expected pattern of RSI could mean upside bounce back in the stock price for near term.

The overall positive chart and momentum pattern is suggesting a long trade setup in Claris Lifesciences Ltd for near term. One can buy at CMP and add more on dips around Rs.159-171 levels and hold for the upside targets of around Rs.226-245 for the next 1-2 quarters. Place a stoploss of Rs.144, as per daily closing basis.


Fundamental Research Analyst: Zececa Mehta ([email protected]) HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: [email protected]. ______________________________________________________________________________________________________________________________________________________________________________________________

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Claris Lifesciences Ltd Report