Healing The Contaminated Financials
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India is among the top six global pharmaceutical producers in the world. The country’s pharmaceutical industry accounts for about 1.4 per cent of the global pharmaceutical industry in value terms and 10 per cent in volume terms. Manufacturing costs in India are approximately 35 to 40 per cent of those in the US due to low installation and manufacturing costs. India ranks amongst the top global generic formulation exporters in volume terms. India’s pharmaceutical exports stood at Rs 96,000 crore in FY15 with an approximate increment of 2.2 per cent on a yearly basis. India’s pharmaceutical sales are expected to reach USD 27 billion by 2016. In this context of an impressively growing industry, we are presenting here an analysis of Jubilant Life Sciences, a company which has attracted considerable attention in the last one month.
About JLL
Jubilant Life Sciences (JLL) is an integrated global pharmaceutical and life sciences company engaged in the manufacture and supply of APIs, solid dosage formulations, specialty pharmaceuticals and life science ingredients. It also provides services in contract manufacturing and drug discovery solutions. The company’s strength lies in its unique offerings of pharmaceutical and life sciences’ products and services across the value chain. With 10 world-class manufacturing facilities in India, US and Canada and a team of about 6,000 multicultural people across the globe, the company is committed to deliver value to its customers spread across over 100 countries. The company is well-recognised as a ‘Partner of Choice’ by leading pharmaceutical and life sciences’ companies globally.
The Business
JLL has an integrated business model which offers products across the entire value chain and helps to reduce dependency on external supplies. The company has a global competitive edge on account of cost efficiencies and vertical integration. During FY15, JLL completed the consolidation of all its pharmaceutical businesses under Jubilant Pharmaceuticals, Singapore with effect from July 1, 2014. The company has incorporated a separate management team to focus on respective segmental growth. Given below are the details of each segment:
I. Pharmaceuticals
A. Generics
JLL has manufacturing facilities for generics in Salisbury, USA and Roorkee, Uttarakhand, India. The company has a manufacturing facility for APIs at Nanjangud, Karnataka, India.
·Active Pharmaceutical Ingredients: There are 39 commercial APIs, including 21 in North America, 24 in Europe and 26 in ROW.
·Solid Dosage Formulations: There are 48 commercial products, including more than 20 in North America, 29 in Europe and 26 in ROW. The company has launched new products like Bupropion in the US, Amlodipine and Losartan HCTZ in Canada and many others in emerging markets. It has also bagged six approvals across regions including two in NA (Canada-Oxcarba) and US (Levofloxacin) and four in Europe.
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B. Specialty Pharmaceuticals
JLL has a manufacturing facility at Kirkland, Canada for radiopharmaceuticals and CMO of sterile injectables. The company also has a manufacturing facility in Spokane, USA for allergy therapy products.
·Radiopharmaceuticals: It serves markets globally and is a market leader in North America in four nuclear medicine segments. The product’s clinical applications include diagnostic imaging for cardiology, oncology, lung, kidney, brain and bone, as well as radiotherapy for thyroid and cancer.
·Allergy Therapy Products: The company’s HollisterStier Allergy Business Division has been a leader in the US’ immunotherapy industry for more than 90 years.
·Contract Manufacturing of Sterile Injectables: The company’s Spokane facility has been upgraded to the status of Voluntary Action Indicated (VAI) and normalisation of operations at this site are underway.
C. Drug Discovery Solutions and Indian Branded Pharmaceuticals
JLL provides discovery solutions in bioinformatics, chemoinformatics and crystallography structure-directed molecular design. The company also provides Indian branded pharmaceuticals.
II. Life Science Business
JLL has a manufacturing facility at Nira, Maharashtra for life science products. It also has a manufacturing facility at Samlaya, Gujarat for nutrition products. The company has a manufacturing facility for vitamins and Pyridine derivatives at Bharuch, Gujarat and Ambernath, Maharashtra . JLL has largest manufacturing facility in the world for Pyridine and its derivatives in Gajraula, Uttar Pradesh.
A. Advanced Intermediates, Specialty Ingredients
JLL is globally the foremost manufacturer of Pyridine and its 14 derivatives. It offers 167 Pyridine and Piperidine-based products through in-house R&D and has global leadership in 12 of them. JLL also offers crop science ingredients like agroactives and key advance intermediates for the agrochemical industry. The company has benefited from full backward integration in Pyridine, Picolines and derivatives and provides cost-effective product mix for crop science ingredients.
B. Nutritional Products
With backward integration up to the initial raw material stage and global scale of operation, JLL delivers Niacinamide and Niacin. Its product base has Choline Chloride, specialty feed additives and vitamins.
C. Life Sciences Chemicals
JLL offers a basket of Acetyl products which include Ethyl Acetate, Acetic Anhydride, Acetic Acid, MCAA (Monochloroacetic Acid), SMCA (Sodium Monochloro Acetate) and Acetaldehyde.
Phenomenal Q1 Performance
Considering the latest quarter’s result, JLL’s revenue was flat at Rs 1,459 crore with marginal lowering by 0.99 per cent in Q1 FY16 on a yearly basis. However, the company’s total expenditure declined by 14.95 per cent to Rs 1,129 crore in Q1 FY16 as compared to the same period in the previous fiscal year. Hence its EBITDA was boosted by 126.39 per cent to Rs 329.42 crore in Q1 FY16 because of operational efficiency and good price realisations by the company. JLL’s EBITDA margin expanded by 1,271 basis points to 22.59 per cent on a yearly basis. The company’s net profit increased considerably by 2,579.08 per cent to Rs 128 crore in Q1 FY16 on a yearly basis. Its net profit margin expanded by 846 basis points to 8.78 per cent in Q1 FY16 as compared to the same period in the previous financial year.
Considering segment-wise revenue, JLL earned 51 per cent from its pharmaceutical segment to the extent of Rs 741 crore and 49 per cent from the life sciences’ segment at Rs 719 crore in Q1 FY16. Under the pharmaceutical segment, only 5 per cent comes from India at Rs 39 crore while 95 per cent is contributed from the international markets at Rs 702 crore. Under the life sciences’ segment, 51 per cent was derived from India at Rs 363 crore and 49 per cent was contributed from the international markets at Rs 355 crore in Q1 FY16.
Poor Yearly Performance
JLL has displayed an incremental financial performance over the last five years. The company’s revenue has witnessed 11.1 per cent CAGR growth in recent years. Its EBITDA has also been growing at 4.46 per cent CAGR over the previous five fiscal years. However, the last financial year’s performance was disappointing for the shareholders. JLL’s revenue increased by 0.39 per cent to Rs 5,826 crore in FY15 on a yearly basis. The company’s EBITDA reduced by 31.59 per cent to Rs 689 crore in FY15 as compared to the previous financial year. JLL's PBT declined by 80.55 per cent to Rs 40.32 crore in FY15 on a yearly basis as interest expense increased by 9.77 per cent to Rs 355 crore during the fiscal year. The company posted net loss of Rs 57.76 crore in FY15 while it registered net profit of Rs 109 crore in FY14.
Debt Burden
JLL’s total debt increased by 9.05 per cent to Rs 4,973 crore in FY15 as compared to the previous financial year. The company’s net debt stood at Rs 4,391 crore as of Q1 FY16. Its blended interest rate works out to 8 per cent for the borrowings. Geography-wise, JLL has interest rate per annum at 12 per cent for rupee loan and 5 per cent for its USD loan. The company has also witnessed 4.07 per cent CAGR growth in interest expense over the last five fiscal years. Its debt to equity ratio is 1.95 as of FY15, which is quite high.
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Recent Developments
The company acquired a minorities’ stake in Jubilant Cadista to help it in consolidating the US’ generics business. It took a strategic decision to make a foray into the attractive Indian pharmaceutical market through its newly set up India branded pharmaceuticals’ business with the launch of a cardiovascular and diabetic division. JLL secured Abbreviated New Drug Application (ANDA) final approval from the US Food and Drug Administration (USFDA) for Zolmitriptan orally disintegrating tablets of 2.5 mg and 5 mg. The tablets will be used for acute treatment of migraine headaches in adults. JLL also gained ANDA approval from USFDA for Levofloxacin tablets of 250 mg and 500 mg, the generic version of Levaquin tablets (of Ortho-McNeil), used for the treatment of adults with infections such as pneumonia, bacterial sinusitis, chronic bronchitis, skin and skin structure infections, chronic bacterial prostatitis, urinary tract infections and inhalational anthrax. The total market size for Levofloxacin tablets as per IMS is USD 28 million per annum.
Future Plans
As on June 30, 2015, Jubilant Life Sciences had a total of 815 filings for formulations of which 389 have been approved in various regions globally. This includes 72 ANDAs filed in the US, along with 46 dossier filings in Europe. JLL’s subsidiary, Jubilant DraxImage, has signed a contract with Cyclopharm (CYC), providing an exclusive license to market and distribute Technegas in the United States. It will pay CYC 17.5 per cent royalty on sale in addition to an agreed margin above the cost of goods sold. Furthermore, JLL is going to strengthen its position globally by applying several business strategies. The company has a unique and attractive niche market product portfolio. It also has wide global pharmaceutical and agrochemical relationships. The company has in-house innovative technology and inorganic initiatives that have helped it build a strong presence across the pharmaceuticals’ value chain. The company’s dependence on third party supplies has been considerably reduced. It also wants to strengthen its balance-sheet by enhancing capacity utilisation.
Conclusion
JLL has restructured its debt and aligned its business segments by forming a wholly owned subsidiary called Jubilant Pharmaceuticals, Singapore. The company’s subsidiary, Jubilant HollisterStier, has cleared the hurdle of its pharmaceutical sterile manufacturing facility in Spokane, Washington, USA. The USFDA has upgraded the status of the plant to Voluntary Action Indicated (VAI) from Official Action Indicated (OAI). Earlier in 2013, the company had received a warning letter about this plant from the USFDA over current good manufacturing practices (cGMP) violations. JLL has also revised Niacinamide pricing through an increment of 10 per cent from June 16, 2015 for non-contract customers and wherever existing contracts permit. Considering the clearance of hurdles like CMO inspection, Niacinamide, and debt restructuring, most of the negative factors burdening the company have now been taken care of so that it is on track to deliver growth in the future. Hence we recommend only high-risk investors to take exposure in this stock considering its increasing debt burden.