As generic pharma players lag, investors log into Crams companies

Acceleration in outsourcing trend is expected to help Divi's Labs, Jubilant Life and Syngene post strong revenue growth

Larger generic players are struggling to improve their revenue growth amid multiple headwinds, but one segment that has bucked the trend within the pharma space is contract research and manufacturing services (Crams). 
 

While sustaining base business revenues has become tough for generic players given lumpy revenues and high dependence on the US market which has structural issues, revenue visibility and pipeline of Crams players remain robust. An analyst at a domestic brokerage says: “The Street is betting on Crams players given better prospects, stable cash flows and good margins.” This is reflected in their stock prices with the S&P BSE Healthcare Index down almost 16 per cent since the start of September while Crams companies such as Divi’s Laboratories are trading at their 52-week highs.

With international pharma majors looking to curtail their research and development expenditure and reduce cost of manufacturing, the outsourcing trend is expected to accelerate. This should help boost the top line of Divi’s, Jubilant Life Sciences and Syngene International, the research services arm of Biocon. 

 

Some of the gains are reflected in the September quarter (Q2) numbers. Divi’s reported strong volumes and pricing while a weak rupee helped. Though there is a delay in its greenfield project, given growth opportunities and higher demand, the company had increased capital expenditure on two brownfield projects and is de-bottlenecking existing facilities. Analysts expect volume momentum to continue as benefits from pricing due to better product mix will sustain. Axis Securities has a positive view given Divi’s R&D capabilities, cost efficiencies and speed of delivery. This will help it monetise the strong demand environment, coupled with pricing and currency tailwinds.

For Jubilant Life Sciences, growth is expected to be driven by the firm outlook in its pharma segment and growing contract manufacturing order book. The pharma (formulations with radioactive substances used in diagnosis or therapy) prospects had significantly improved after the Triad Pharmacy acquisition. The pharma business, which accounts for over half of revenue, grew 55 per cent year-on-year in Q2, with a strong improvement in margins.

Analysts expect this momentum to continue, led by an increase in the number of Ruby-fill installations (a product used in imaging), improved penetration through Triad’s distribution network spread across 1,700 customers and better demand for existing products. The recently enhanced capacity in contract manufacturing and solid dosage formulation businesses will help drive growth. Jubilant is expected to expand its market share led by superior execution in allergy business and reduced competition in active pharmaceutical ingredient (API) business. Analysts at Motilal Oswal Securities expect the company’s profits to grow 23 per cent annually during FY18-20.

Syngene International, the research services arm of Biocon, had seen a good 11 per cent growth in revenues during Q2. This coupled with Biocon’s biosimilar launches drove its Q2 performance. Syngene, which has seen revenues grow 21 per cent annually over FY13-18, has kicked off FY19 earnings on a mixed note, say analysts. While revenue growth remains healthy, margins have been slightly weak. Analysts at ICICI Securities expect operating leverage to pan out gradually which, in turn, is likely to hold the operating profit margins in the 31-33 per cent band over the medium term. Its recent client additions such as Amgen, Zoetis, Herbalife, GlaxoSmithKline and multiple-year extension of BMS and Baxter contracts add to the strong revenue visibility. Syngene remains well poised to capture opportunities in the global contract research space on account of strategic outsourcing by global innovators, adds ICICI Securities.