Clinically fit

PENNY WISE

The only listed player in the niche area of contract research (CR) in India, topline growth expectations of around 80 per cent during FY05, a client list including six Fortune 500 companies and three of the world's top generic drug development firms, and what's more, a growth in stock price of 290 per cent over the last 12 months.

Sounds impressive? That, in a nutshell, is the story of Hyderabad-based Vimta Labs. Analysts have taken a liking to the scrip in the recent past. "The rise in the stock price is a recognition of the company's performance," says Bharat Shah, president of Mumbai-based securities firm, Emkay Shares & Stock Brokers.

With MNC pharma companies expected to flock to India to avail themselves of lower costs for CR here, Vimta is positioning itself to fulfil its aim of becoming one among the top 10 global players in CR by 2010.

Winning streak
Established in 1984 by Dr S P Vasireddi and V Harriman, Vimta moved into testing of drugs and pharmaceutical products in 1988. The company's business can be classified into four divisions - clinical reference, analytical and environment assessment labs, and CR.

Vimta's financials make for impressive reading. For FY04, it reported a net profit of Rs 8.50 crore, against Rs 2.06 crore in FY03, and a 81.17 per cent rise in net income to Rs 35.11 crore. The company managed to keep up the momentum in the June quarter of FY05, too.

While net income grew 88.93 per cent to Rs 12.81 crore, net profit soared 183.70 per cent to Rs 3.83 crore. Apart from being a dominant player in CR, which is a $10.70-billion industry globally, the company conducts analytical testing in niche segments such as food and drug effectiveness and water quality monitoring.

CR is the key
Vimta's success has been built on its CR capabilities. The company established its CR facility in 1994. It conducts bio-equivalence/bio-availability (BA/BE) studies for global generic majors and Indian pharma companies and has the expertise for phase I, II, III and IV clinical trials. CR is a Rs 430-crore market in India and is estimated to be growing at 30 per cent per annum.

According to analysts, the spurt in CR activity in the country has been mainly because of the fact that global pharma majors are outsourcing research to third parties in an effort to cut costs and stay competitive.

According to a recent report by Merrill Lynch, bio-equivalence studies in India are estimated to be 50-60 per cent cheaper than in developed markets. "Given its technical capabilities, India is turning out to be a natural destination for pharma outsourcing," it says.

According to the report, the estimated global spend on clinical trials is $9 billion of which Indian firms could potentially cater to $5 billion. Analysts believe that Vimta's early entry into the clinical research space gives it a first-mover advantage over its peers.

The company is among the first contract research firms in India having a client with USFDA (US Food and Drug Administration) approval for an ANDA (abbreviated new drug application) filing based on its studies.

Like the CR market, the clinical labs market, which contributes to 16 per cent of the company's revenues, is also on a high growth path. According to Merrill Lynch, India's Rs 2,000-crore clinical labs market has seen organised players grow at 30 per cent per annum.

Increasing usage of pathological labs by doctors for faster and superior diagnosis and the surging presence of insurance players are expected to keep up the growth rate.

Vimta also has the advantage in the analytical labs market, which has seen a growth of 50 per cent per annum. Apart from being one of India's oldest players in the field, Vimta's integrated business model with a presence in CR and clinical reference gives it an edge over peers.

The environment assessment lab is also one of the older units of Vimta. According to Merrill Lynch, the growing global trend towards adhering to environmental norms should keep this market expanding.

Vimta has the experience of conducting more than 150 impact assessment studies in the fields of petroleum, power, mining, cement, metallurgy, chemical, infrastructure and offshore installations. Its customer base in these segments includes the government, public sector companies and domestic market leaders apart from MNCs from Europe, USA and Japan.

Positives outweigh negatives
Apart from small-time regional players, Vimta has no major competitors. "The company has no competitors in the listed category and no domestic firm has a business model similar to that of Vimta's," notes Shah. The entry barrier is also high in the sector as it is a knowledge industry and it takes time to build reputation and credibility.

However, Vimta's story is not without risks, say analysts. Any adverse news-flow on its human trials during CR could result in a backlash, they caution. There is also the risk of key clients getting into CR themselves, instead of outsourcing it to players like Vimta.

Since the industry is highly dependent on human capital, high attrition may upset the apple-cart. Vimta currently has a staff strength of around 450. The industry is also troubled by fast obsolescence of testing equipment, to counter which companies have to make continuous investments. Vimta is providing for a 15 per cent increase in depreciation each year to overcome this problem.

According to Shah, the company has earmarked Rs 60 crore for its expansion plan. "That may be on the higher side," he says, though he notes that the company will be able to manage that kind of investment, considering its strong cash flows. He also feels that the investment could turn out to be a huge positive for the company if it is implemented without any cost or time overruns.

The company is confident of 80 per cent growth in revenues in the coming years. Given the nascent stage of the business and increasing client additions, analysts are optimistic about the company meeting this target.

"Around 80 per cent growth is achievable, especially considering that two of the company's facilities are going on stream by October," notes Shah. At Rs 458 levels, Vimta is trading at 19x FY04 earnings. Shah notes that valuations are likely to improve in future as the company is expected to improve its performance.