Caplin Point Laboratories: Getting the growth formula right

The stock of Caplin Point Laboratories (Caplin Point), a mid-sized pharmaceutical company, has gained over 160 per cent since the March lows.

After the rally, at ₹505.1, the stock trades at 17.5 times its trailing twelve-month (TTM) earnings, below its three-year average TTM P/E of 19 times.

Also, the stock trades at a discount to many pharma companies many of whom are significantly larger. This could be a function of the company’s regional revenue concentration — 86 per cent of revenues come from Latin America. That said, the current stock valuation of Caplin Point does offer comfort. This is particularly so once we consider the company’s 20 per cent plus operating profit margins, impressive revenue growth and strong balance sheet over many years.

The company expanding presence in Latin Americaand its foray into the US generic injectables market other than as a contract manufacturer for multinational pharma companies, will be the key drivers to watch out for. It also plans to enter other regulated markets such as Canada and Australia.

Apart from that, Caplin Point’s entry into API (active pharmaceutical ingredients) manufacturing, to enable backward integration is another positive. Its API project near Chennai, dedicated for production for the US market, is expected to be completed by Q4 FY22.

Investors with a high risk appetite and a long-term horizon can consider investing in the stock of Caplin Point, a ₹3,820-crore market cap company.

About the company

Starting out as a manufacturer of ointments, creams and other external applications in 1990, today, Caplin Point has a portfolio of 400-plus pharmaceutical products across 36 therapeutic segments. It manufactures 40 per cent of its products at its facilities and outsources the other 60 per cent from its partner companies in China (40 per cent) and India (20 per cent).

The company’s WHO-GMP approved facility in Puducherry manufactures formulations in the form of tablets, capsules, liquid orals, to name a few. The US FDA and EU GMP approved facility at Gummidipoondi in Tamil Nadu specialises in injectables and ophthalmic drops.

All the products are exported, and nothing is sold in India. The company derives 86 per cent of its revenue from Latin America, which has always been its focus market. The US contributes another 8 per cent and the French-speaking African countries, the remaining 6 per cent.

Key growth drivers

Over the last decade, Caplin Point has expanded its presence in Latin America from two to 10 countries, including Chile, Dominican Republic, El Salvador, Ecuador and Venezuela. The company is making inroads into larger countries such as Colombia, Chile and Brazil and is also expanding its high-margin branded generics portfolio. After completing the acquisition of its channel partners, Caplin Point has gained direct access to pharmacies, with a resultant increase in margins. With pharmacies remaining open during Covid times, the company’s sales remained unaffected.

In the highly competitive US generics market, the company’s strategy has been to cater to the injectables and ophthalmics segments. How the company successfully navigates the regulated US market, where it has been a relatively new entrant, will determine its future growth.

While continuing to engage in contract manufacturing, Caplin Point has also been collaborating with its US pharma partners (for marketing and distribution) and filing ANDAs or abbreviated new drug applications with the USFDA, on its own and through its partners. Own filings ensure a higher profit share for the company. As on date, the company has nine approved ANDAs (generic drug applications), of which seven have been launched.

While the US generics market has seen price erosion, the injectables space (particularly for complex products) offers scope for profitable growth. According to IQVIA, a global healthcare data analytics firm, the US generic injectables market is expected to grow at 16 per cent CAGR (2020-25).

Strong financials

Caplin Point has grown its revenue around 29 per cent CAGR and operating profit (EBIT) 32 per cent CAGR between FY16 and FY20. Revenue and operating profit growth for H1-2020, was 21 per cent and 14 per cent year-on-year, respectively.

The company’s profit margins too have been impressive (almost 20 per cent plus) in the five years until FY20. For H1-2020, Caplin Point reported operating profit and net profit margins of close to 28 per cent and 23 per cent respectively. It has had almost no debt on its books for at least last five years.

Do note, while the company’s net profit grew 38.3 per cent CAGR between FY16 and FY20, net cash from operations has not kept pace with it. A change in the company’s sales model - providing a credit period of ninety days to customers, resulted in receivables (as a percentage of sales) rising to 23 per cent plus from FY18. The company’s cash flow from operations, however, improved for H1-2020.