Jubilant Lifesciences – Key triggers in place to drive earnings growth
Jubilant Life Sciences (JLS), one of the three flagship companies of Jubilant Bhartia Group, is an integrated pharmaceuticals and life sciences company. It is engaged in the manufacture of radiopharmaceuticals, allergy products, advance intermediates, nutritional products and life science chemicals. The company also provides services in contract manufacturing and drug discovery solutions. JLS’ operations are spread across the world, including India, the US, Canada, Europe and other countries.
JLS business can be segmented in to pharmaceuticals and life science ingredients (LSI). The pharmaceuticals segment contributes 52% to the overall sales and LSI segment contributes 45%. The remaining 3% is from drug discovery. The business which has seen tough times during FY15 and FY16 has seen turnaround during last financial year. Led by its efforts to drive revenue growth and profitability over the last three years, company’s key business segments are at inflection point.
Within the pharmaceuticals business, specialty pharma is expected to lead growth over the medium term. All the three sub-segments in specialty pharma are expected to have better traction due to Commercial launch of NDA (RUBY-FILL) and acquisition of a distribution chain to increase penetration in radiopharma, Health order book and ramp-up of operations in CMO of sterile injectables, Increased field force to enhance reach in allergy products. Also, the other segment within pharmaceuticals – generics – is expected to show revival in growth, led by Brownfield expansion and considerable capex lined up for future growth in API, new product launches and increased traction in existing products, which should drive growth in solid dosage formulation.
JLS delivered highest-ever EBITDA margin in the pharma segment in FY17 due to the increased share of the high-margin specialty business compared to generics. The EBITDA margin is expected to expand further due to Focus on reducing cost associated with manufacturing in CMO business, Robust growth in high-margin radiopharma business, Increased traction in allergy products due to improved reach, Improved volumes in API segment and further economies of scale, led by debottlenecking.
In the life science ingredients (LSI) segment, specialty intermediates and nutritional products (SINP) form 52% of sales, while life science chemicals account for the remaining 48%. The key products in this space are fine ingredients, crop science chemicals, nutritional products, ethyl acetate and acetic anhydride. Fine ingredients, crop science chemicals and nutritional products are clubbed as SNIP, while ethyl acetate and acetic anhydride are clubbed as life science chemicals. New product launches and increased traction in existing products to improve SNIP performance.
JLS has delivered better EBITDA margin in FY16 and FY17 v/s FY15, largely on account of its focus on relatively high-margin products, cost-optimization initiatives and improved process efficiencies. EBITDA margin shrunk in FY15, largely due to unabsorbed cost in Symtet products in the crop science segment. In addition, the anti-dumping duty imposed by China in advanced intermediates led to volumes and margins contraction. However, JLS has reduced exposure to China for pyriudine based products and increased its business from other markets. Also, JLS has taken price hikes in nutritional products, which would aid margins improvement. Furthermore, new product launches would result in higher capacity utilization and better cost efficiency, leading to better EBITDA margin in the crop science segment.
With better growth and a superior product mix coupled with cost efficiency measures the overall EBITDA margin is expected to improve from 22.4% in FY17 to 25% by FY20. Overall R&D spend (including charged to P&L and capitalized) as % of pharma sales has been increasing gradually. R&D spent increased to INR2.6b in FY17, accounting for 7.9% of pharma sales, which was largely toward radiopharmaceuticals and development of products for the US market. This is expected to increase further over the next two years.
Over the past two years, JLS has reduced its net debt by INR8.7b, which has not only reduced financial leverage but also lowered interest burden. Also, there has been a reduction in interest rate from 7.6% in FY16 to 6.8% in FY17 on a blended basis. As a result, overall interest outgo reduced from INR3.8b in FY16 to INR2.6b in FY17 on adjusted basis. Better revenue growth, coupled with improving margin, would result in improved operating cash flow, which would also enable further debt reduction. This would also improve overall profitability with lowering of interest outgo. Management has guided for debt reduction of INR6bn over next 2 years.
JLS has successfully cleared US FDA inspections at its various facilities in the past three years. Notably, it resolved warning letters at Spokane and Montreal within 12-15 months. While peers are faced with numerous regulatory headwinds, we believe JLS has minimal regulatory risks over the medium term.