Panacea Biotec – Avoid

Panacea Biotec has announced that it has commissioned a new oncology production unit at Baddi, Himachal Pradesh. This new unit has an annual capacity of around 1.2 million vials, and has already received approvals from regulatory authorities like USFDA, UK-MHRA etc. The total cost of setting up this plant was Rs 55 crore. The new capacity will cater to the growing demand of the anti-cancer products in the country.

Through this new capacity, the company expects to generate sales of about Rs 12-15 crore in FY13 (1% of FY11 revenues). Panacea will sell the cancer products from this facility in the domestic market in the first year, i.e. FY13, and will start exporting them later. According to the filing made by the company with the BSE, this plant will enjoy excise duty and sales tax exemption.

Currently, the domestic cancer drug market is strong, with a CAGR of 21%. The domestic market is expected to reach Rs 3309 crore by 2014. Besides, the USA is facing shortage of some cancer drugs, and this situation will help the company to increase its exports.

On the surface of it, it seems that Panacea may benefit from these opportunities. However, we, at DSIJ, have some concerns about the company, due to which we do not think that it will achieve its target in the immediate future.

Oncology products formed about 4.8% of its total sales in FY11. The Onco products segment reported a YoY growth of 48% to touch Rs 14.3 crore. In the first nine months’ period of this fiscal, the company reported a 24% decline in its topline, mainly due to the delisting of one of its vaccines by the World Health Organization (WHO). Besides, Panacea has also witnessed a decline in the sale of polio vaccines due to reduced immunisations in the country.

The company reported a loss of Rs 88 crore as compared to a profit of Rs 92 crore in the year ago period. The half yearly result indicates that the total loans stood at Rs 811 crore, while its debt-to-equity ratio stands at 1.31x. Its interest cover ratio has come down drastically from 4.37x to 0.69x, as per the half yearly statements.

Looking at these financial parameters as well as the business lost due to the delisting of the vaccine by WHO, we believe that the addition of the new capacity would not bring windfall gains. In fact, in the current situation, it seems that the gains would not be enough to cover the lost revenue.

In the last year, the scrip lost more than half of its value, while in this year, the scrip has gone further down by 10%. Though at a PE of 3.82x it looks cheap on the valuations front, this is merely due to the investors’ bearish stance. We remain in sync with that and advise investors to avoid the counter.