Panacea Biotec: Vaccine for risk

Panacea Biotec is the largest vaccine producer in the country. With a view to taking advantage of the lucrative market for off-patent drugs, Panacea Biotec is looking to manufacture generics to expand its domestic formulation business and has plans to venture into the US market. This will enable it to exploit several hundreds of drugs which would be off-patent in the next several years as the exclusivity patent protection period expires.

Rajesh Jain, joint managing director at Panacea Biotec has gone on record that Panacea Biotec would be introducing several generic drugs in India soon. Panacea Biotec is looking into hypertension, type 2 diabetes and gastrointestinal diseases as the potential opportunity areas.

Panacea Biotec‘s vaccine business has been lagging behind the formulation business over the last few quarters. It is expected that Panacea Biotec will offer products aggressively from the formulation segment.

In the first two quarters of FY 2009-2010 there was muted growth in Panacea Biotec but sales picked up in the third quarter in the vaccine business. Panacea Biotec expects to grow 20% in the current fiscal from last year’s sales of about Rs 800 crore.

Panacea Biotec is currently working on the Japanese encephalitis and Dengue vaccine which may be launched next fiscal. Most of its vaccines and formulations are currently in the licensing stage and some are expected to be launched by July-August 2010.

Panacea Biotec is also looking to start operations in the US from next fiscal to expand its exports. Panacea Biotec is reported to have tied up with a US firm for the distribution agreement.

It is expected that by 2010-11 second half Panacea Biotec will launch its products in the US, which will lay the foundation and then 2011-12 would give the momentum.

Panacea Biotec is expecting 30% growth for its Rs 45 crore export segment and expects its operating margins to improve from 16% to 20% as it expands its business to US and domestic formulations.

Panacea Biotec has about Rs 120 crore of cash reserves and it is not looking for acquisitions but expects in licensing and out licensing opportunities deals in the vaccines and medicines for infectious diseases and organ rejection.

Panacea Biotech has been in news recently for receiving supply commitments for its vaccine business. Panacea Biotech has been witnessing growth in revenues and improvement in operating margins since the past two quarters (on a trailing four-quarter basis). Panacea Biotech has posted strong growth (QoQ and YoY) for the quarter ended December ‘09.

The vaccine business contributes over 70% of Panacea Biotech‘s total revenues. Panacea Biotech’s formulations business is also witnessing a steady improvement in revenues and earnings. Orders for future supply of vaccines hint at a promising growth for Panacea Biotech in the foreseeable future.

Panacea Biotech has procured an order worth over Rs 1,000 crore from UNICEF for supply of pentavalent vaccine over the three years from 2010 to 2012. This order, while enhancing Panacea Biotech’s revenues and earnings, will help in reducing Panacea Biotech’s dependence on the oral polio vaccine, which constitutes more than half of Panacea Biotech’s total revenues. Panacea Biotech recently signed an advance market commitment agreement with the government of India for providing vaccine against the swine flu virus. Panacea Biotech has a capacity to manufacture 40-45 million doses.

In January 2010, Daivi Ventures increased its stake in Panacea Biotech from 5% to 6.3% capital. Panacea Biotech has secured the approval of its members for an offer to buy back 55.9 lakh shares, constituting 8.4% of its paid-up capital at a price not exceeding Rs 229.

Given the improvement in Panacea Biotech’s performance and expectation of better performance in the future, Panacea Biotech’s stock seems to be a good investment.

Panacea Biotech‘s annual sales are Rs 800 crore and it is currently valued at a market cap of over Rs 1,200 crore. The stock is currently trading at 14x FY10E EPS of Rs12 and 8.7x FY11E EPS of Rs.19. This is quite reasonable given the growth prospects.