The article was originally written on 26th June 2024 and was later brought to this platform.

What do they do?

Gujarat Themis is one of the few pharma companies that has mastered fermentation manufacturing process for two intermediates: Rifa S and Rifa O.

Rifa S is used as an input for Rifampicin and Rifapentine (used primarily to treat TB), while Rifa O is used for Rifaximin (used to treat gut issues like Traveler’s Diarrhea).

Are they good at what they do?

On all accounts it seems like they are the best. Let me give you the reasons I have come to accept this despite being an industry outsider:

1. Lupin is one of their chief customers for Rifa S. Although they manufacture this intermediate themselves, they continue to buy from Gujarat Themis. In fact, when Themis was in dire straits a few years back, Lupin even handed them an interest free loan to ensure their survival. In return they capped Themis’ profit for certain duration. Sometime in FY2020 this changed but the relationship survived.
2. The company is operating at an EBITDA of 50% and an ROE of 34%. This demonstrates their pricing power and ability to charge a premium.
3. I managed to connect with a few industry experts that have supported this claim and also suggested that Themis can compete with any Chinese manufacturer in quality and price.

Can this space become too crowded?

GOI has provided PLIs for Rifampicin and one player has even taken the government up on that offer (Macleods). Industry rumors suggest other players might be integrating vertically as well. Hence, over supply is indeed a possibility.

However, industry experts and management commentary seem to indicate that setting up a fermentation process is incredibly difficult. There are too many variables to control – all the way from the strain of bacteria you have acquired to the kind of water you release into the environment. It is also difficult to point out which input is creating what changes.

This claim is supported by the fact that even though Lupin has set up their own manufacturing of Rifa S, they continue to buy from Themis, probably due to their inability to match the quality / yield of Gujarat Themis.

Do they have the space to grow?

Here is where my thesis becomes vague. I have been unable to assess the size the market and the growth rate for Rifa S and Rifa O. According to a couple of secondary sources – Rifampicin has a global market size of $125 million and Rifaximin is about $1.5 billion. However, their growth rates are unclear.

Hence, instead of giving you a clear number – let me summarize some of the factors creating tailwinds:

1. Introduction of Rifapentine: WHO has updated their recommended treatment for TB from Rifampicin to Rifapentine. While the duration of the course and doses have reduced, the amount of Rifa S for the treatment has supposedly increased (~1.5x). This will expand the market for Rifa S by at least that much ($100 mil is according to our best estimate).
2. Rifaximin going off patent: Rifaximin is expected to go off patent over the next 5 years at different points in different countries. With the introduction of generics, it is expected that the volumes of this drug will rise (as prices will fall). It is difficult to assess by how much. Management has given no guidance besides signaling optimism. We do know that the patented drug being sold by Salix did a revenue of 1.7B USD in 2022.
3. Market share gain from China: With a push for Make in India and general awareness about China’s dumping practices, there is a belief and hope that Indian players will gain market share from China. Themis being the most efficient should gain most from this transition.

Please note again the glaring lack of credible numbers. We are also not aware how many more players will enter this space with these tailwinds being present. Thus, whether or not they will have room to grow and just how much – my assessment is incomplete.

What I can tell you is this:

• Management is already in the process of doubling its Rifa S / Rifa O manufacturing capacity from the current 16 ton / month.
• They have also signalled optimism of further capex to be announced soon which will be as much as current (INR 200 Cr) if not more.
• If their customers are vertically integrating backwards, they have also began vertically integrating forward. Majority of their current capex is to build an API block where they plan to manufacture Rifapentine to start with and R&D facilities to expand their bouquet of products.

What’s the bottom line?

At 3.5k Cr the current market cap, arguably, has already captured all announced capex plans (200 cr). If we assume that 3 years from now:

• 7 ton / month of API block will be used completely to manufacture Rifapentine (because we don’t know yet what else it might be)
• A realization of USD 440 will be achieved for said Rifapentine (current import price is USD 450-500; I have assumed 400 compounded by 5% for 2 years)
• The Rifa S / O manufacturing capacity doubles and operates at 100% utilization
• Some Rifa S will be consumed for captive usage in the ratio 1.5x of Rifapentine manufactured
• The profitability and realization of Rifa S and O remain stable (5% CAGR)

This gives me a PAT of 206 Cr and a PE on current market cap of ~17. Thus unless we can underwrite future growth potential post FY27 and current capex, its difficult to see how this stock will appreciate any further.

I find myself retaining this stock despite its sharp increase in price and despite my inability to confidently size the opportunity for the following reasons:

1. Themis seems to have a clear right to win in the production of Rifa S and Rifa O.
2. This right to win should enable them to win the downstream market (Rifapentine API) as they enter this space – further increasing their topline and EBITDA margins.
3. While the tailwinds for Rifa S imply only a 50% rise in market size, Rifa O could result in a significant opportunity as the introduction of generics could potentially lead to a multifold volume increase of the drug. Industry experts suggest that Rifaximin could be the drug of choice once the prices drop.
4. I find myself trusting the management and believe they are capable of entering further adjacencies to increase their TAM as time progresses.

Help

If someone can help me size the market for Rifa S and O and understand the impact of the upcoming tailwinds, that would immensely helpful.

Disclaimer – This is not investment advice. Merely a thesis of my own research.