The Hindu Business Line : Matrix Labs: Hold

INVESTORS can retain their holdings in the Matrix Labs stock. The scrip had a spectacular run on the bourses this calendar year, registering an almost six-fold jump compared to its price of Rs 200 in January.

Given the reduced dependence on the flagship product Citalopram, and with no exclusive launch planned (which Citalopram enjoyed in European markets), there appear no triggers to sustain the scorching pace the stock has set over the past few months. But it could continue to appreciate, though at a more sedate pace.

The stock trades at a multiple of 11 times its likely annualised earnings per share.

Financials

Sales for the quarter-ended September 2003, at Rs 136.4 crore, were up 136 per cent on a quarter-on-quarter basis. The figures, however, are not strictly comparable as those for the latest quarter include those of Vorin Laboratories and Medicorp Technologies, which were amalgamated with Matrix.

Raw material costs, as a percentage of sales, rose sharply in the just-concluded quarter (58 per cent against 37 per cent, quarter-on-quarter). This played a pivotal role in compressing the operating profit margin (OPM) from levels of 45 per cent to 31 per cent.

In spite of higher provisioning for tax (Rs 7.5 core compared to Rs 0.95 crore in the corresponding previous quarter), the net profit, at Rs 32 crore, was higher by 33 per cent.

Citalopram — a money spinner

Matrix's fortunes have, to a great extent, been determined by the success it had in its supplies of Citalopram, an anti-depressant, to the European market. The company developed a non-infringing process for the active pharmaceutical ingredient, and by virtue of the status of a sole supplier, hit pay dirt. The API contributed about 50 per cent to the company's topline for FY2003.

To de-risk its business model by reducing its dependence on a single product, Matrix has chosen to broadbase its offerings.

As a result, Citalopram chipped in with a contribution of under 30 per cent of for the half-year ended September 2003. This has not been without its consequences, though. Compared to the last fiscal when the OPM across all four quarters stood at 45 per cent, it has declined to 32 per cent for the two quarters of this fiscal.

The possibility of a drop in per-tonne realisations for the API; the likelihood of other competitors stepping in and disrupting Matrix's market dominance for the product, and a strong rupee could attenuate upside possibilities from Citalopram.

Product pipeline

Apart from Citalopram, Matrix has also secured US Food and Drug Administration approval for Fluconazole, the API in Pfizer's blockbuster anti-fungal Diflucan, after it goes off patent in January.

However, with Matrix not having supply exclusivity on this API, realisations would not be as lucrative as in the case of Citalopram.

Another significant development is Matrix signing a pact with the Clinton Foundation for supply of anti-retrovirals to treat AIDS patients in sub-Saharan Africa and the Caribbean. As a member of the quartet with which the agreement for supply of these drugs has been signed (Ranbaxy, Cipla and the South Africa-based Aspen Pharmacare are the other three), Matrix is looking at a significant upside to its revenues over a five-year term, which is the duration of the agreement.

However, as the rationale behind this agreement is to make available these drugs at an affordable price, returns from these supplies are unlikely to have a salutary impact on profitability.

Stock outlook

Matrix has been at the forefront of the bull run in mid-cap pharma stocks over the past few months.

The current market price impounds the success that Matrix encountered with Citalopram; going forward, an upward re-rating from this level would call for greater visibility on launches in the developed markets. Holding on to the stock appears to be prudent under the circumstances.

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