Buy Claris Life Sciences

Claris Life Sciences (CLS) yesterday surged by 20 per cent over the news that the USFDA has cleared the warning letter issued to CLS in 2010. Even today the impact is quite significant as the shares of the company are up by over 5 per cent. In the last two trading sessions the market cap of the company has increased by 25 per cent while on a YTD basis the scrip has yielded 102 per cent returns, indicating that investors are very bullish on the scrip.

Claris Life has seen very interesting bulk deals in this year. In the last six days, Barclays Capital Mauritius Limited has purchased a total of 11 lakh shares in the company which is 1.8 per cent stake. Besides this, in July this year a U.S.-based private equity fund called Signet Healthcare Partners bought 2.2 per cent stake in the company. Earlier, celebrity investor Shivanand Shankar Mankekar bought 1.07 per cent of the shares of CLS while Morgan Stanley Asia has also picked up 0.78 per cent stake in the company. As per its June 2012 shareholding pattern, 22.22 per cent of the shares were held by the top six investors despite which the promoter group holds 67 per cent stake in the company, which we believe is still large.

CLS has five manufacturing facilities in India. It has a unique business model where it has all products directed towards therapies in the specialty segment. This gives a unique edge to its business as the specialty segment is on a high growth phase. Besides, due to a rise in population and increasing income levels, there is also a rise in the healthcare expenses as well as the number of therapies. The company derives over 53 per cent of its sales through export. The U.S. is also a key market for it where it mainly sells sterile drugs which have a very high growth there. After the company received USFDA approval in 2007 there was a surge in its revenues but after the import alert and warning letter in 2010 the revenues have remained flat.

Now with the approval in sight, we expect the company to start increasing its USFDA approvals as well as new launches that will drive its revenues. It has a total pipeline of 128 products of which 48 have been monetized. Totally it has 1,228 product-approved registrations of which 1,021 are in the regulated markets and 207 are in the emerging markets. Besides, there are 357 products under approval.

The pipeline of the non-commercialized (approved) products is USD 3.4 billion (over Rs 18,000 crore) which is fairly large. Drugs of over USD 8 billion will go off patent in the next three years in the sterile (injectable) space which will help Claris to post incremental revenues in future. Therefore, clearance of the warning letter is very positive on the stock. The injectable market is a high entry barrier market which is regulated by the regulatory bodies over the world and also requires use of multiple technologies.

On the financial front its topline has grown at a CAGR of 18 per cent in the last five years while its EBITDA has grown by 34 per cent. The net profit has shown even better growth at a five-year CAGR of 35 per cent. Its EBITDA and net profit margins have doubled in the last five years, indicating high profitability. The debt to equity ratio of 0.4x indicates low leverage and comfortable debt levels.

Its EV/EBITDA at 6.8x is quite comfortable. Looking at the high profit margin business and extremely high number of product registrations, we advice to enter the counter which will give fantastic returns over the next three years.