SMS Pharmaceuticals - Next Big inbuprofen player?

Undiscovered Small Cap Series- 6

In this blog we will do analysis of a smallcap pharma company called SMS Pharma. So without any further a due , lets get started:-

History

SMS Group was established in 1989 started as a single-unit product facility. In 2007 SMS was listed on stock market. Fast forward to 2017 this year was marked as demerger of SMS Group into SMS Pharma and SMS Lifesciences. And in 2020 it commercialised, Remdesivir & Favipiravir which are using treatment of Covid-19.

Business

The company is one of the leading manufacturers of anti-retroviral APIs and intermediates which are used in many therapeutic segments. Now you must be wondering hey Jay, I don’t know what is API, what is this retroviral ? What is just happening.

Lets first discuss how a medicine is made . This is how the whole value chain looks like:-

So for making of a medicine first thing we use is Key Starting Material then we add Intermediate to it , after that we add API(ie. Active Pharmaceutical Ingredient) and on top of that we add formulations and then what we see is the end product i.e Medicine or Drug.

So now that you know the whole value chain you must have understood that SMS Pharma makes APIs and Intermediates . Lets understand what Anti Retroviral(ARV) means, ARV means viral diseases such as HIV which last till the person lives on earth, And SMS Pharma makes APIs for medicines related to ARV diseases , In making of a ARV Medicine API constitutes of 75% of the total cost, benefiting SMS.

Products

SMS makes many APIs and Intermediates which are used in many therapeutic diseases. Therapeutic diseases means the diseases which have a cure or are in a process of creating a cure. So the therapeutic diseases in which SMS Pharma operates are Anti-Ulcer, Anti-Fungal, Anti-Migraine, Anti-Viral, Anti-Retroviral etc.

All their API Products are :-

In the Anti Migraine , they have 2 APIs named Sumatriptan & Succinate which have 100% market share in some countries such as spain. They also aim to diversify into many more therapeutic diseases when they go off patent.

Ibuprofen

They have recently launched Ibuprofen which is a API. This ibuprofen is used for reducing pain, and for minor aches and pains. They have started sales of ibuprofen in India and Rest of the world. 80% of their revenue comes from export and that is bound to increase as the management expects that they will get approval to sell ibuprofen in USA and Europe in FY21-22, which will flourish their Revenue .Even the customers are very eager and looking forward to work with SMS on Ibuprofen given the uncertainty they faced for past 2 years from existing sources.

Growth Prospects

Indian pharmaceuticals are expected to grow threefold over the next decade. India’s domestic pharmaceutical market is estimated at US$ 42 billion in 2021 and likely to reach US$ 65 billion by 2024 and further expand to reach ~US$ 120-130 billion by 20306. In 2019, the revenue of the global Ibuprofen API market was $573 million. It is estimated to grow by $645 million with a CAGR of 2–3 percent by 2023.

Key Numbers

Financials

Financials of the company saw a dip in 2020 but are now on a upward trajectory again. Where their revenue is at 563 Crores, Net profit at 63 Cr, EBITDA Margin at 22% , PAT Margin at 10% and EPS at 7.2 in rupee.

Thesis

Main these pointers for the company are :-

• Expect to get Approval to sell Ibuprofen in US and Europe in FY21-22, while domestic sales have started.

• 100% market share in Sumatriptan & Succinate

• Customer Demand from SMS to deliver Ibuprofen due to uncertainty from last 2 yrs

• Aim to enter more therapeutic segments when they go off patent

• Cost Optimization due to more R&D. If they reduce their costs then they will become the lowest cost producer

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