IPO

Wednesday, June 14, 2017 Click here for Rating Reckoner
Eris Lifesciences
Capitalising on lifestyle disorders
CM RATING45/100
Incorporated in 2007 and promoted by Amit Bakshi, Gujarat based Eris Lifesciences) undertakes research and development (R&D) and manufactures and sells branded pharmaceutical products in select therapeutic areas within the chronic and acute categories of the Indian pharmaceutical market (IPM). The categories include cardiovascular, anti-diabetics, vitamins, gastroenterology and anti-infectives. The focus is on developing products in the chronic and acute categories that are linked to lifestyle-related disorders.

The chronic category of the IPM contributed 65.6% of the revenues of the fastest growing company in the chronic segment and the second fastest growing in IPM and ranked 20th among the 377 domestic and multinational companies in the chronic category of the IPM by revenues in the fiscal ended March 2017 (FY 2017).

Products in the chronic category cater primarily to therapeutic areas such as cardiovascular, anti-diabetics and neurology, chronic respiratory and chronic pain (analgesics). The acute category consists of vitamins, gastroenterology, anti-infectives, gynaecology, cute respiratory, acute pain (analgesics), hepatoprotectives, hormones, hematology, dermatology, anti-obesity products and products for injury healing.

The product portfolio, comprising 80 mother brand groups end March 2017, has primarily focused on therapeutic areas that require the intervention of specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists.

Besides owning and operating a manufacturing facility in Guwahati, Assam, certain products are outsourced from 20 third-party producers. The products manufactured at the Assam facility contributed 59.30% of the revenues in FY 2017.

Between FY 2013 and FY 2017, there has been an increase in the number of doctors prescribing the products from 37,842 (constituting 13.8% of the doctors in metro cities and class 1 towns in India) to 50,282 (constituting 15.7% of the doctors in metro cities and class 1 towns in India), with a prescription share of 1.3% in FY 2017.

In addition to organic growth, exploration continues for asset and brand acquisitions and joint ventures. A 75% stake was purchased in Kinedex healthcare, catering to mobility related disorders and with an annual turnover of around Rs 83 crore in December 2016. As many as 40 brands were bought from Amay Pharma for Rs 38 crore in July 2016. Apricapharma, with Rs 19-crore revenues from the cardiovascular and anti-diabetics segments, was acquired in the same month. A tie-up was entered into on 1 May 2017 for exclusive right to market in India certain formulations in the acute pain-analgesics therapeutic area, manufactured by Pharmanza under license from the Council of Scientific and Industrial Research-Central Drug Research Institute.

The Offer and the Objects

The offer comprises offer for sale of 2.89 crore shares. At the lower price band of Rs 600 per share, the issue size works out to Rs 1732.50 crore. At the higher price band of Rs 603, the issue size works out to Rs 1741.16 crore. The minimum bid lot is 24 equity shares and in multiples of 24 equity shares. The issue, to be made through the book-building process, will open on 16 June and will close on 20 June, with anchor investor bidding date of 15 June 2017.

The offer for sale of 2.89 crore shares is by the selling shareholders comprising the promoters and promoters group Amit Bakshi, Himanshu Shah, Inderjeet Negi, Kaushal Shah, Rajendrakumar Patel, Bhikabhai Shah and Hetal Shah and private equity (PE) investor ChrysCapital. The PE transaction of ChrysCapital in Auguset 2011 was a secondary sale by the promoters. ChrysCapital, exiting through the offer for sale, held 16.25% stake prior to the offer at Rs 87 per share. A discount of RS 60 per share is being offered to eligible employees.

The objects of the issue are to get the benefits of listing the equity shares on the BSE and the NSE, to enhance visibility and brand image and provide liquidity to the existing shareholders.

Strengths

Among the fastest growing in certain high growth therapeutic areas, with a portfolio of complementary products, revenues recorded a CAGR of 21.7% between FY 2013 and FY2017, outperforming overall IPM CAGR of 11.8%. The first growing in the chronic category of the IPM and among the top 25 companies by revenues registered CAGR of 28.9, between FY 2013 and FY 2017.

The portfolio consisted of 63 brands in the cardiovascular therapeutic area and 26 brands in the anti-diabetics therapeutic area end March 2017. The top 10 brands contributed 75% of the revenues. As much as 73% of the brands are in the high-growth segment as against 31% of the IPM. The product portfolio is tilted towards chronic side, with a high prescription share of specialists and super specialists (96% compared with 62% for IMP market).

The focus is on branded prescription-based pharmaceutical products catering to lifestyle- related disorders. Products have been identified, developed and marketed in the acute category, connected to lifestyle disorders, and are required to be prescribed over an extended period or are complementary to the existing chronic portfolio of being prescribed by doctors.

The focus is on metro cities and class 1 towns in India as these have higher incidence of lifestyle disorders and concentration of specialists and super specialists. Sales in metro cities and class 1 towns together accounted for 76.8% of the revenues in FY 2017.

Ranked second based on CAGR growth of the top 35 companies over the last five fiscals. Ranked second in the IPM based on CAGR of 21.7%, first in the chronic category due to CAGR of 28.9% and third in the cardiovascular therapeutics as well as anti-diabetics therapeutics segments, with CAGR of 25.8% and 34.5%, respectively. 

The aim is to utilize the R&D efforts to target select products that are currently under patent protection and to launch branded prescription generics of these products on the expiry of the patents in India, particularly in therapeutic areas in which there is significant presence. Patents of six products in the cardiovascular and anti-diabetics therapeutic areas, currently under patent in India, are expected to expire by FY 2024. Their combined market size was around Rs 2262 crore in FY 2017.

Exports are nil and is immune from regulatory issues plaguing the IPM and also oblivious to forex volatility.

Tax breaks will continue till FY 2024.

Weaknesses

Only one manufacturing facility, located in Assam. Any disruption here might adversely affect the business.

Change in norms by the Union government to prod doctors to prescribe generic drugs or cheaper but equally effective alternative brands can affect prospects.

Increase in coverage of the Drugs Price Control Order can bring more drugs under price control and hamper profitability.

Letters have been received from the Medical Council of India and certain state medical councils after anonymous complaints alleging providing of benefits to several doctors. If the allegations, found true, can adversely affect reputation and business prospects.

There is no presence in the export market, much bigger than the domestic market and highly profitable. There is a limit to how much a player can grow in the domestic market over a longer period.

Valuation

Consolidated net sales were up 21% to Rs 724.98 crore and the operating profit margins increased from 28.7% to 37.1%, resulting in a 57% improvement to Rs 268.63 crore in operating profit in FY 2017. Despite being debt-free, the interest outgo was around Rs 24 lakh. With 467% surge in other income to Rs 19.12 crore and 17% rise in depreciation to Rs 23.74 crore, consolidated profit before tax (PBT) was up 71% to Rs 23.74 crore. After providing total tax of Rs 21.87 crore, consolidated profit after tax jumped 81% to Rs 242.08 crore. Notably, the OPM of 37.1% is abnormally high and seems unsustainable.

The equity share capital stands at Rs 13.75 crore. The face value per share is Re 1 each. EPS for FY 2017 works out to Rs 17.6. At a higher price band of Rs 603, the scrip is offered at P/E multiple of around 34.3 times FY 2017 earnings, in line with P/E multiples of listed associates of MNC majors, whose business models in India are similar.

Eris Lifesciences : Issue highlights
Offer for sale (in no of shares in crore)2.89
- On lower price band1732.50
- On upper price band1741.16
Price band (Rs)600-603
Post issue share capital (Rs crore) 13.75
Post-issue Promoter shareholding (%)55.9%
Issue open date16-06-2017
Issue closed date20-04-2017
ListingBSE, NSE
Rating45/100

 

Eris Lifesciences: Consolidated Financials
1303(12)1403(12)1503(12)1603(12)1703(12)
Net Sales393.06508.82545.56597.02724.98
OPM (%)21.9%19.4%22.3%28.7%37.1%
OP85.8998.92121.45171.55268.63
Other in. 1.454.423.493.3719.12
PBDIT87.34103.34124.94174.92287.75
Interest0.710.250.020.120.24
PBDT86.63103.09124.92174.80287.51
Dep.3.494.7715.5120.3623.74
PBT 83.1498.32109.41154.44263.77
EO loss0.000.000.000.000.00
PBT after EO83.1498.32109.41154.44263.77
Tax (including Deferred Tax)24.7027.7920.1619.5921.87
PAT58.4470.5389.25134.85241.90
MI and share of associates0.240.120.031.29-0.18
Total PAT58.2070.4189.22133.56242.08
EPS*4.25.16.59.717.6
*EPS is on post issue equity capital of Rs 13.75 crore of face value of Rs 1 each
EO: Extra Ordinary items. Figures in crore
Source: Capitaline Databases

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