Marksans Pharma Ltd- Analysis

Marksans Pharma Ltd- Analysis

September 5, 20207:47 am
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In the current blog, I will be talking about ‘Marksans Pharma Ltd’ , a small cap pharma company which along with the entire pharma sector has been doing quite well.  In the blog “Marksans Pharma Ltd- Analysis”  I will cover: History of the promoter, about the company, acquisitions, plants & financial analysis. Also, I have tried to do the best possible as there is no information available outside the company’s annual reports.

Marksans Pharma Ltd- Analysis

Background of the Company: Marksans Pharma Ltd

Marksans Pharma Ltd is headed by Mr Mark Saldanha.

Mark Saldanha is the son of Gracias Saldanha, the founder of Glenmark Pharmaceuticals and the brother of Glenn Saldanha, the current CEO of Glenmark Pharma. You might have guessed the name of the company Glenmark is the first name of both the sons of Gracias Saldanha. Gracias Saldanha founded Glenmark in 1977 and has taken it to such a scale. Both the brothers have been a part of the journey of Glenmark Pharma till 2003 when Mark Saldanha separated from the company by heading a spun-off wholly owned subsidiary of the company “Glenmark Laboratories Ltd” and later got merged with a listed entity TASC pharma changing the name of this entity to “Marksans Pharma Ltd” in 2005.

During the earlier phase, Marksans Pharma funded its growth & acquisition by raising capital through FCCB(Foreign Currency Convertible Bond). But slow integration of the acquired companies and adverse currency movement led to losses (loss of 223 cr in 2011 and loss of 179 cr in 2012) and eventually the company had to be referred to BIFR in 2011. The company came out of BIFR in 2013 with reduced liabilities & an improving business outlook. Since then the company has been on continuous growth track except the year 2017 where the entire pharma industry suffered. 

Mark Saldanha holds 48.25% stake in the company since the QIP of 2015.

In terms of R&D, the company spends just 1-2% of revenue every year & has 2 R&D center with 50+ experienced scientists

Terminologies

Rx Drugs: These are the medicines that require doctor’s prescription to buy it from pharmacy. Also called as prescription drugs.

OTC Drugs: Over the Counter medicines. You can directly go to the pharmacy and buy it such as Vicks, Eno, cough syrup, anti-allergics etc . Doctor’s prescription is not required.

Difference between soft gel capsules, hard gel capsules & tablet: Link

Marksans Pharma Ltd- Analysis

About the Company: Marksans Pharma Ltd

Headquartered in Mumbai, Marksans Pharma Ltd is engaged in the research, manufacturing and marketing of generic pharmaceuticals(formulations) and focused on the regulated market and have grown majorly via acquiring international companies. A larger percentage of revenue now comes from the acquired subsidiaries.  The co. derives more than 95% of its revenue from the developed market. Their product includes – soft gelatin capsules & tablets in niche segments. 

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The management of the company has repeatedly emphasized about the niche & expertise required to manufacture soft gel capsules/soft gelatine capsules. According to the company’s annual report the price erosion in the soft gelatin capsule segment is only 50-60% against 80-95%  in the tablets and capsules segment, following patent expiry. The company does not provide information on what percentage of revenue comes from Soft gel capsules. 

In terms of product portfolio about 31% of company’s revenue comes from Pain management vertical followed by 18% from Anti-diabetic, 13% from cough & cold, and then by Gastrointestinal, CNS, CVS etc as of FY20. When it comes to product segment split, it is equal of 50:50 in OTC & Rx varying 5%+/- here and there.

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Earlier the company used to do contract manufacturing for Pharma MNC but there has not been any mention of the same in the last 2 annual reports. Seems like they have exited this business.

The management keep setting growth target for themselves and is growth hungry but not at the cost of profitability.

Marksans Pharma Ltd- Business Model
Marksans Pharma Ltd- Analysis​

List of Acquisitions

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Acquired companies:

  1. Bell, Sons & Co. (UK)- Acquired in 2007 and has OTC Portfolio in Cough & Cold drugs(150+). Bell is a well-known brand in the UK with a strong distribution network.
  2. Relonchem(UK)- Acquired in 2008.  Relonchem has high end Rx Portfolio(100+). Marksans have turned around the operation by shifting the focus from manufacturing for 3rd parties to directly manufacturing and distributing.
  3. Time Cap Labs(US) – Acquired the company in 2015 for $28Mn. With Time Cap labs the company is trying to set up its front end presence i.e. selling the products in their own brand name which improves margins as well as applying for US govt contracts given that it requires drugs to be manufactured in the US. The company has distribution channel across all major retailers such as  Wal-Mart, Walgreen, CVS and Cardinal Health. Diluted equity via QIP to raise the capital for the acquisition. Large soft gel capsule market in US is under-penetrated & hence higher margins. Launched Ibuprofen soft gelatin capsule in FY15 which has been the key growth driver in the US market.
  4. Nova Pharmaceuticals(Australia)– Acquired in 2005. Engages with retailers & pharmacies in marketing private label OTC and generic products.
Marksans Pharma Ltd- Analysis
Company structure

As you can see in the image on the top, the company has 3 subsidiaries, 3 step-down subsidiary and one subsidiary of the step-down subsidiary, in all 7 companies under it.

Marksans Pharma Ltd- Analysis​​​

Expertise in Soft Gel Capsules

Marksans Pharma Ltd is mainly focused on manufacturing soft gelatin capsules which is a niche segment.  Company focuses on soft gelatin capsules because of manufacturing complexities, small market size & limited competition in OTC & Rx drugs.

Marksans Pharma Ltd- Analysis
Benefits of Soft Gel Capsules

Let me explain to you why the company insist on Soft gel capsules being a specialized product. Let us first understand the below terms.

Bio availability: Fraction of the medicine/drug/dosage that reaches the system circulation/absorbed by the body. It is a measure of how easily a substance is absorbed by the body. You might have guessed it right, that higher the bioavailability the better. It varies between 0 and 1. Administering the drug intravenously(injecting via nerves) has the bioavailabilty of 1 but when taken orally the bioavailability is almost always less than 1. This is because when the drug is taken orally it passes through a number of internal body organs where the chemicals present in the gastrointestinal track first breaks & then dissolves it and then it is sent to small intestine. The food present in the gastrointestinal track also interferes the drug ingredients affecting the overall impact of the drug.

Let us also understand the importance of Sustained release capsules.

Sustained release tablet/capsules: These tablets achieve prolonged therapeutic effects by continuously releasing the medication over an extended period of time after administration of a single dose. They are used to maintain constant drug level in the body, minimize side effects and then eliminate multiple dosage.

Soft gel capsules can increase the bioavailability of poorly absorbed or soluble nutrients. Softgels can deliver incredibly accurate dosages or sustained release, making low and ultra-low amounts easier to achieve than other oral dosage forms, such as tablets.

You can read more about Soft gelatin capsules here

One of the largest manufacturer of Soft gel capsules in the world is India’s Strides Pharma Science Ltd

Marksans Pharma Ltd- Analysis​​

Plants

1. Goa: They have the manufacturing capacity of 2.4 billion Softgel and Hard Gelatin capsules per annum, 6 billion Tablets per annum(oral solid tablets). This manufacturing facility is approved by USFDA, UKMHRA, Australia TGA.

2. Southport, the United Kingdom (non sterile liquids/ointments/ powder products): Manufacturing capacity includes 2 billion Bottles per annum, 1 billion Tubes per annum, 1 billion Sachets per annum. Facility is approved by UK MHRA Accreditation.

3. Farmingdale, New York, United States (solid oral dosages)manufactures soft gels, tablets and capsules. The facility can manufacture 6 billion Tablets and Hard Capsules per annum and has US FDA accreditation.

Marksans Pharma Ltd- Analysis​​​

Geography wise revenue distribution

Marksans Pharma Ltd- Analysis
Geography wise revenue distribution​

As you can see the majority of sales comes from the developed geographies. And if one geography goes slow in one particular year, the other makes up for it.

In terms of growth, except the year 2017 , the company has growth every year since 2012. 

2017 was a very difficult period for the entire pharma industry which heightened scrutiny and delayed approvals.

Marksans Pharma Ltd- Financial Analysis​​​

Marksans Pharma Ltd- Analysis
Marksans Pharma Ltd-Financial Analysis

Since the company largely manufactures in India and export via its subsidiaries, it would be more prudent to look at the consolidated numbers. 

Learning from its troubled past with debt, the company has continuously reduced its debt and is now Net debt negative i.e. its cash of ₹94cr exceeds its small short term debt of ₹19cr as of 31st March 2020. Even the acquisition of US subsidiary Time Cap Labs was through dilution of equity raised via QIP in 2015. Looking at the size of the company and the absence of lot many players imply the total market size would be much smaller than that of traditional pharma businesses but good enough for smaller companies such as Marksans Pharma to expand.

The profitability decline between 2016 and 2017 was mainly on account of adverse pharma industry factors in both UK & US, their key markets. The year 2021 has started on a very positive note with the company already making 41.8% of last year’s profit in just one quarter. Now with such good result comes caution. One needs to closely track the performance of the industry.

The company also has improved upon its return ratios.

Marksans Pharma Ltd- Analysis​​​​

THE REVENUE OF PHARMA COMPANIES GROW MAINLY BY FILING FOR DRUGS IN VARIOUS GEOGRAPHIES AND ONCE GETTING THE APPROVAL THEIR REVENUE INCREASES BY PLACING THEM IN THEIR ALREADY SET UP DISTRIBUTION CHANNEL.

IN THE UK MARKET THE COMPANY HAS BEEN FILING AND GETTING APPROVALS BUT THE US MARKET THE APPROVALS HAVE BEEN STAGNANT . ALSO THE COMPANY DOES NOT SHARE THE DETAILS ON THE APPROVAL OF ANY DRUG THAT IN A WAY MAKES DIFFICULT TO UNDERSTAND THE FUTURE PROSPECTS.

UK market has been key growth driver for both FY20 & Q1FY21 growing by 23.5% & 43% respectively. It seems the growth has been coming by the way of increasing market share and increasing the distribution in the US where the company has grown by 6% & 29% in FY20 & Q1FY21.

If the current sectoral tailwind continues the company is expected to continue performing well.

One can take a position in the company till time pharma theme is working and closely track the performance of the industry. In terms of valuation, the current price of ₹46 is quite reasonable.

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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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