Nectar Lifesciences, earlier named as Surya Medicare, promoted by Sanjiv Goyal, was incorporated on Jun. 1995, with financial collaboration with the Punjab State Industrial Development (PSIDC). The company is engaged in producing oral and sterile bulk drugs in the antibiotic segment.

It manufactures sterile SSP and cephalosporin. It has more than 300 customers, including Ranbaxy, Cipla, Alembic and Alkem. 25% of its revenues come from international markets (China, Korea, S. E. Asia, Italy, Africa and South America. The company has a manufacturing plant (installed capacity, 950 MT) at Derabassi which produces oral and sterile forms of SSPs and cephalosporin. During the period 2005-2009, it grew rapidly and consistently, with sales averaging 28% and earnings 17%.

Key Highlights:

US-based private equity firm - New Silk Route Partners (NSR) - has picked up 30% stake in Nectar Lifesciences for Rs 250 crore at Rs 35 per share. The deal was structured through
a combination of global depository receipts (GDRs) and fresh shares.

Glaxo SmithKline entered a strategic alliance with Nectar Lifesciences for cefuroxime axetil. Currently, it sources majority of its cefuroxime requirements from Nectar as the company has doubled the capacity to 300 metric tonne in the current fiscal. The company expects an upside in the revenue to the tune of Rs 130-150 crore from this product from FY10 onwards.

Nectar tied-up with Ranbaxy-Daichii for making penems, another antibiotic molecule. This contract led to a capacity expansion of nearly three times i.e. from 18 metric tonnes to 50 metric tonnes. They also inked an alliance with a large Malaysian multinational company to supply formulations from its cephalosporins facility in Baddi to Far East Asia

Future Outlook

At the current price of Rs 39, the stock is available at 9.28x of its FY10E earnings and 8.31x of its FY11E earnings. We recommend BUY with a target price of Rs 48-52, given that the company’s future shows potential.

During the quarter ended 31st Dec, 2010, the top-line of the company witnessed a growth of 93 %( y-o-y) to Rs 2597.8 mn as against Rs 1343.1 mn during the corresponding period last year, the improved sales number of the company is driven by increased sales figure recorded by all segments of the company.

The operating profit of the company during the quarter grew by 104% to Rs 558.2mn as against Rs 274mn during the same period last year. This is primarily due to a decline in raw material cost as a % of sales by 180bps to 79% as against 80.8% during the same period last year. Operating profit margins of the company recorded an of 182bps. During the quarter ended 31st Dec, 2009, the PAT increased
to Rs 321.5mn as against Rs 56.5mn during the corresponding quarter last year.

The Bottom line of the company has shown a tremendous performance, it rose by a whopping 469% to Rs 321.5mn as against Rs 56.5mn (on y-o-y basis) during the same quarter last year. The improved performance of the company is largely on account of higher Top- Line numbers, stable Interest cost, coupled with zero tax liability as the company enjoyed MAT credit benefit.

Neclife's team, with its excellent R & D and project skills, completely de-bottlenecked all its operations to reach global capacity and thus took leadership position in key molecules like Cefixime Trihydrate, Cefuroxime Axetil and Cefpodoxime Proxetil in orals and Ceftriaxone Sodium and Cefotaxim Sodium among sterile APIs. The Company is also taking various steps to enter into the regulated market without diluting its share in the semi-regulated market.

ANALYSIS & REPORT

Why to invest in shares of Nectar-Life Science Limited?

US Health bill: - Big boost to Indian Pharma Industry

The US Health care bill, is a big boost to Indian Pharma Industry, Indian drug makers could see runaway growth for next 7-8 years. The US government has passed the bill to reduce the health care costs and to extend the insurance coverage to nearly 35-40 mn more Americans. The US health care bill will promote use of low cost generic drugs. This will open huge opportunity for Indian companies with large number of US FDA approved manufacturing facilities outside US. Indian pharma companies – most of them being exporters of generic drugs and intermediates to the US. Currently Generics drugs form only 19-20% of the US market, which is expected to make up nearly 46-48% by 2013. To serve the US market the demand for APIs is expected to scale up from the generic drugs manufacturers.

Growth Drivers: - Indian Pharmaceuticals:

Indian Pharmaceutical Industry is poised for huge growth opportunity on all platforms across the entire segments of the industry. India with its skilled and cost effective talent pool is a preferred offshore location. In addition to this India has the maximum number of US FDA approved manufacturing plant outside US.

Patents worth more than US $200 bn are expected to expire during the next 3-4 years, which is a major opportunity for domestic generic and bulk drugs manufactures.

Japanese market offers new growth avenue for Indian generic players, Japan is the third most important market after US & Europe. With health care reforms and focus of Japanese Government to reduce health care budget, the growth prospects for low cost Indian manufacturers are high.

Global pharma outsourcing market is expected to be $73 billion by 2011 up from $43 billion in 2007.India can potentially capture 10 percent of the Global outsourcing market by 2010. This provides a huge growth opportunity for companies engaged in contract manufacturing and R&D.

The current spending on healthcare (public and private) is estimated to increase to 10% of GDP by 2016, Semi-urban and rural markets are emerging as new growth drivers in the domestic market. With high per capita income and increased access to modern medicine, this segment is expected to continue its strong growth momentum.

SECTOR - Cephalosporins

Cephalosporins are grouped into multiple generations, with higher generation cephalosporins (third to fifth) being more effective. The production process being highly specialized and more complex than earlier generations of cephalosporins, higher generation cephalosporins command higher prices.

Cephalosporins are a range of antibiotics used to treat infections, which together with combinations, account for a $21 billion global market, which is growing by about 9%.

The Indian cephalosporin API market is valued at about $450 million. Third- and fourth-generation cephalosporins account for about $250 million of this market and growing at a very healthy rate of 25%.

COMPANY:

• Nectar Lifesciences Ltd. (NecLife) is one of the few qualitative manufactures in India having facilities to develop, manufacture & market Oral and Sterile Cephalosporins, Semi Synthetic Penicillins and other Active Pharmaceutical Ingredients (APIs).

• It is amongst the few life saving APIs manufacturing companies, possessing facilities to produce sterile APIs through both Lyophilization and Crystallization processes.

• It has ultra modern manufacturing facilities supported by a very strong technology group. It is a preferred supplier to reputed qualitative formulators in India and abroad.

• It has state of art manufacturing facilities for API’s built as per USFDA /EDQM guidelines and facilities certified by WHO GMP.

• The company has a recognized two star ‘EXPORT HOUSE’ status. Its products are exported to over 45 countries across 5 continents.
• It also ventured into Phyto-chemicals with launch of “NECTAR MENTHOL” offering Menthol and derived products and also into manufacturing of Hard Gelatin Capsules.

FUNDAMENTALS:

• Nectar Lifesciences Ltd. is betting on third-generation cephalosporins which are used to treat bacterial infections that don’t respond to penicillin or first and second-generation cephalosporins. Company is among the world’s largest producers of several third- and fourth-generation cephalosporins. Its top five products account for 51% of the cephalosporin market. It claims 35-40 per cent of the third- and fourth-generation cephalosporin portion of the Indian market.

• They have started manufacturing empty hard gelatinous capsules (EHGC) at its Baddi plant in Himachal Pradesh. It also came into manufacturing finished formulations on contract for other companies with the motive to de-risk the business (the segment accounted for about 5 per cent of sales in 2009). The company also has a captive power plant with the capacity of
6MW which benefits them to reduce the power cost.

• Nectar is a key player in the global market as it has developed global scale in some key products. For instance, it is the largest producer of cefixime trihydrate (a third-generation cephalosporin) and boasts of a market share of 48% where Aurobindo Pharma has a 16% market share. It is also the second-largest producer of cefuroxime axetil (a second-generation cephalosporin) and the third-largest producer of cefpodoxime proxetil in the world.

• It has the advantage of a very low cost base for manufacturing as it is operating at a large scale. Thus, it benefits while tying up with global majors for the supply of bulk drugs. Its price realization on APIs and formulations in semi-regulated markets is 20-30% higher than its existing geographies and 50-70% higher in regulated markets.

• The company is well positioned to serve the global market as it has upgraded its old plant, at an investment of Rs 25 crore at Derabassi, Punjab to meet the norms of US FDA.

• Company is looking forward to volume driven large markets to chunk higher revenues. They have 8 abbreviated new drug applications (ANDAs) for US formulations and 7 EU submissions planned for 2011-12.

• Further, planning with 10 ANDAs, 10 COS (certificate of suitability – an approval from the European directorate for quality medicines) dossiers every year in these markets. They also got product approvals in Russia and the CIS (Commonwealth of Independent States) region.

FUTURE EXPANSION PLANS:

The company wants to have a broader range of tie-ups (also with Indian MNCs) to service their regulated markets and the rest of world for formulations.

It is also including non-ceph products in their portfolio like foraying into the space of cardio-vascular problems, HIV, diabetes and cancer. To cater this they are setting up a new Rs 1,000 crore manufacturing facility which will be spread over 220 acres in Punjab. The project will be financed through a combination of debt and equity. The facility will have two units - one for oncology and the other for CVS (cardio-vascular systems), HIV and diabetes drugs.

As a strategic move the company has increased its focus on US markets for its high-value, high-margin pharma-grade menthol crystal, which is a high margin product for the company. This will boost the operating margins for NecLife.