A dose of exports

PENNY WISE

With its manufacturing centres and R&D facility in place, Indoco Remedies is well positioned to tap into the CRAMS opportunity.

Domestic formulations player, Indoco Remedies which has a sizeable presence in the dental and ophthalmic segments, is diversifying its revenue streams and bridging the gap in its product portfolio to give a push to its sales.

While its exports to the US market are expected to commence in the last quarter this fiscal, the company hopes that new product launches in categories experiencing high growth rates and its entry into the API segment will help it reach the Rs 1,000-crore sales target by 2010 from the Rs 300-odd crore expected this fiscal.

The exports impetus
A late entrant into the pharma outsourcing game, Indoco expects foreign markets to contribute nearly half of its revenues in the next four years. The share of exports, which have been growing in the overall revenues for the last six years, contributed only 16 per cent to the company's Rs 241 crore turnover in FY06.

While the new patent regime was the first trigger, higher margins and market size are responsible for making its overseas push an essential part of its growth strategy.

Exports, which are growing at 70 per cent, in the regulated markets (currently Europe) will help the company diversify its revenue streams, believes Suresh Kare, the company's chairman and managing director.

Having missed the first bus, Indoco is trying to make good the delay by acquiring companies and putting up requisite facilities and tie-ups in place.

LaNovaChem acquisition
The Rs 19-crore acquisition which brought with it a new active pharmaceutical ingredient (API) facility in Patalganga, Maharashtra not only helps Indoco, a formulations player, reduce its dependence on API manufacturers but also becomes a base for its exports. The company is planning to get the plant approved by the FDA during 2007.

With existing sales of APIs and intermediates in 15 non-regulated countries and an established API brand image catering to the biggest players in these countries, the buy, which makes the company a fully integrated player, could prove to be one of the major contributors to its revenues.

The company's director, business development Aditi Kare believes that the acquisition has helped jumpstart the company's foray into APIs and reduced time lines by 18 months.

Eyeing the big one
While Indoco chose the easier route of growth by catering to the UK and German markets initially, its foray into the world's largest pharmaceutical market has just got under way.

The company has a five-year agreement with Nexus Ophthalmic for three products and has filed ANDAs (Abbreviated New Drug Application, an approval process to market a generic drug) for two of them.

"The company's move to focus on the niche ophthalmic and dermatalogical segments for the US markets is largely due to the higher entry barriers," says Suresh Kare.

Indoco's second Goa facility which manufactures sterile eyedrops is among the only three in the country (the others are Cipla and FDC) to have US FDA approval. Being smaller in size and requiring a dedicated facility, these segments also have fewer players (four-five) unlike other highly competitive segments.

For the calendar year 2007 and 2008, the generics market for drugs that are expected to go off-patent in the dermatogical and ophthalmic segments is in the region of $500 million.

While the US foray has been a recent exercise, the company has been exploring contract research and manufacturing (CRAMS) activities in UK since 2003 and Germany in the last fiscal with a combined commercial launch of 17 products.

In addition to these, the company is also diversifying into other East European countries such as Slovenia, Romania and Bulgaria and non-regulated markets in Africa and South East Asia.

Non-regulated markets will grow at a slower pace, thus pulling down the overall export growth rates to 40 per cent. Growth in 2007 according to Suresh Kare will come from the US business, R&D projects involving API synthesis, process improvement and dossier development.

The domestic branded effort
To increase its focus on its ophthalmic range of products in the domestic segment, Indoco is planning to launch its sixth marketing division---Warren Excel. Products for this segment were earlier marketed by its Warren division.

To ensure new revenue streams the five divisions (Indoco, Spade, Warren, Surge and Radius) introduced 23 products this fiscal catering predominantly to the lifestyle and antibiotics segments.

These products which address a Rs 377 crore market contributed 25 per cent to the growth in domestic sales. With top ten brands including Febrex Plus, Cyclopam, Vepan, Sensodent K, and ATM accounting for 60 per cent of domestic business and products marketed through medical representatives, Suresh Kare wants to focus on building brands by strengthening and expanding the field force.

With a market share of just under one per cent the company is ranked 32nd in the domestic formulations segment but 24th in terms of prescriptions thanks to its sales network.

Valuation
Indoco wants to improve its margins which have been static in the last two years by increasing volumes and cutting costs.

Thanks to the expenditure on a new R&D centre at Navi Mumbai (Rs 22 crore), formulation project at Baddi (Rs 34 crore) and the LaNovaChem acquisition (Rs 19 crore)--all in the current fiscal, it has not able to make much headway on this count. 
 

LOOKING FOR GROWTH
Period	YE Sept 2006	Sept 2005	% change
Net Sales	261.26	204.37	27.83
Operating Profit	37.77	42.79	-11.73
OPM (%)	14.46	20.94	-
Net profit	23.53	26.09	-9.81
NPM (%)	9.01	12.77	-
EPS	19.94	22.11	-

However, tax breaks at its Baddi plant will help boost its bottom line. While Indoco does not have a direct peer, companies in the CRAMS space (which is its focus area now) have been market favourites for some time now and this is reflected in their valuations.

While Indoco trades at PE multiple of 16, Divi's and Nicholas Piramal are valued at 55 and 41 times their trailing earnings. If Indoco can scale up its marketing effort by entering into tie-ups in regulated markets and increase its share in the fast growing segments (antibiotics/lifestyle), it will prove to be an attractive buy at an earnings multiple of 9 on an estimated FY07 EPS of 37.