Long term investors may subscribe for Eris Lifescience IPO - SMC

SMC | May 11, 2015, midnight


About the company


Incorporated in 2007, Eris Lifescience Ltd is Ahmedabad, Gujrat based pharmaceutical company engaged in research, development, manufacturing and selling of select therapeutic areas within the chronic and acute categories of the Indian Pharmaceutical Market (IPM). The product portfolio of the company comprised of 80 mother brand groups as of March 31, 2017. The product portfolio is primarily focused on therapeutic areas which require the intervention of specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists. Sales in metro cities and class 1 towns, together accounted for 76.8% of its revenues in Fiscal 2017. Eris Lifescience own and operate a manufacturing facility in Guwahati, Assam. It also out-sources the manufacturing of certain of its products to 20 manufacturers. Eris strong sales team comprised of 1,310 marketing representatives.


Strength


Focus on branded prescription based pharmaceutical products catering to lifestyle related disorders: The company focus has been on developing, manufacturing and marketing products, which are linked to lifestyle related disorders, which are chronic in nature, and to a target population, which primarily consults specialists and superspecialists. The company has developed, manufacture and commercialize branded prescription based pharmaceuticals products in select chronic and acute therapeutic areas, such as: cardiovascular; anti-diabetics; vitamins; gastroenterology; anti-infectives; and gynaecology. In Fiscal 2017, the company has generated 65.6% of its revenues from the chronic category of the IPM (Source: IMS TSA MAT, March 2017). The chronic category accounted for 34.3% of the IPM in Fiscal 2017 compared to 31.4% of the IPM in Fiscal 2013, representing growth at a CAGR of 14.3% (Source: IMS TSA MAT, March 2017). The Company has identified, developed and is marketing products in the acute category which are connected to lifestyle disorders, and are required to be prescribed over an extended period, or are complementary to its existing chronic portfolio in terms of doctors prescribing its products.


One of the fastest growing companies in certain high growth therapeutic areas with a portfolio of complementary products: The Company has witnessed growth in revenues, at a CAGR of 21.7%, between Fiscals 2013 and 2017 has outperformed overall IPM growth, at a CAGR of 11.8%, during the same period. In the chronic category of the IPM, the company has grown faster, among the top 25 companies in terms of revenues, with revenue growth at CAGR of 28.9%, between Fiscals 2013 and 2017. The company has ranked 20th out of the 377 domestic and multinational companies in the chronic category of the IPM, in terms of revenues, for Fiscal 2017, compared to 26th in Fiscal 2013, and its market share by revenue in the chronic category increased from 0.9% in Fiscal 2013 to 1.4% in Fiscal 2017. (Source: IMS TSA MAT, March 2017). In the chronic category, products in the cardiovascular and anti-diabetics therapeutic areas accounted for 61.6% of its revenues in Fiscal 2017. (Source: IMS TSA MAT, March 2017) In the cardiovascular therapeutic area of the IPM, the company ranked 18th in terms of revenues in Fiscal 2017, and third in terms of revenue growth among the top 25 companies between Fiscals 2013 and 2017 (Source: IMS TSA MAT, March 2017). Further, effective July 1, 2016, the company has acquired trademarks in relation to 40 brands, from Amay Pharma in order to further grow its product portfolio in the cardiovascular and anti-diabetics therapeutic areas. In the acute category, products in the vitamins and gastroenterology therapeutic areas accounted for 23.0% of its revenues in Fiscal 2017 (Source: IMS TSA MAT, March 2017).


Focus on metro cities and class 1 towns in India which have higher incidence of lifestyle disorders and concentration of specialists and super specialists:The product portfolio of the company primarily focuses on therapeutic areas which have a higher incidence in metro cities and class 1 towns, and which rely on prescriptions by specialists and super specialists, who are concentrated in these regions. According to the Report of the Working Group on Disease Burden for the 12thFive Year Plan, there is a greater prevalence of lifestyle related disorders in urban and semi urban areas compared to rural areas. The company focuses on sale of its products in metro cities and class 1 towns, with 76.8% of its revenues coming from these areas for Fiscal 2017.


Multi-faceted product selection and engagement model leading to growth in prescription Strong sales, marketing and distribution capabilities: The multi-faceted product selection of the company and engagement model comprises of identifying and addressing diagnostic gaps, therapeutic gaps and patient compliance gaps.


Diagnostics gap:The Company believes that a combination of diagnostics with commercialization and marketing enhances the quality of diagnosis and prognosis. The company has undertaken certain initiatives to support doctors, which it believes has helped increase the prescription rates of its products.


Therapeutic gap: The Company seeks to identify and address therapeutic gaps in the IPM, where it believes that the clinical benefits of certain products and therapies are not tapped up to their potential. Patient compliance gap: Patient compliance forms an important part of its marketing initiatives. Its initiatives include technology driven delivery systems.


The company believes its product selection and doctor-patient engagement model has helped the company to achieve significant growth in its product prescriptions, as demonstrated by the prescription rankings of its top 10 mother brand groups between Fiscals 2013 and 2017.


Risk Factor


Rely on certain third party manufacturers for manufacturing some of its products:The company relies on certain third party manufacturers for manufacturing some of its products. In the event the manufacturing facilities of its third party manufacturers cease to be available to the company at terms acceptable to it, or it experiences problems with, or interruptions at such facilities, its business, results of operations and financial condition may be adversely affected.


Shortfall in the supply of its raw materials or an increase in its raw material costs:Raw materials, including packaging materials, are subject to supply disruptions and price volatility caused by various factors such as commodity market fluctuations, the quality and availability of raw materials, currency fluctuations, consumer demand, changes in government policies and regulatory sanctions. Any shortfall in the supply of its raw materials or an increase in its raw material costs, or other input costs, may adversely affect the pricing and supply of its products and have an adverse effect on its business, results of operations and financial condition.


Quality control problems at its manufacturing facility: Manufacturers of pharmaceutical products in India are subject to significant regulatory scrutiny. Any quality control problems at its manufacturing facility or those of its third party manufacturers may damage its reputation and expose the company to litigation or other liabilities, which could adversely affect its results of operations and financial condition.


Significant portion of its revenue from the sale of products in certain therapeutic areas: The company generates a significant portion of its revenue from operations from the sale of products in certain therapeutic areas, such as cardiovascular, anti-diabetics, vitamins and gastro-intestinal. Sale of products in cardiovascular, anti-diabetics, vitamins and gastro-intestinal therapeutic areas contributed 32.7%, 28.9%,13.7% and9.3%, respectively, towards its revenues in the IPM, for Fiscal 2017(Source: IMS TSA MAT, March 2017). Further, the company is dependent on its top 10 mother brand groups, by revenue, which together generated 72.5% of its revenues in the IPM for Fiscal 2017. if any of its top mother brand groups or products in its key therapeutic areas do not perform as expected will affect the business of the company.


Valuation:


At upper price band of Rs.603 EPS and P/E of FY2017 are Rs. 17.61and 34.25 multiple respectively and at a lower price band of Rs. 600, P/E multiple is 34.08; at upper price band of Rs.603 , book value and P/B of FY2017 are Rs.39.27 and 15.36 multiple respectively and at a lower price band of Rs. 600 P/B multiple is 15.28. No change in pre and post issue EPS and Book Value as the company is not making fresh issue of capital.


Outlook


The company is an Ahmadabad based pharmaceutical company with its own manufacturing facility in Guwahati, Assam for its 20 products. It develops, manufactures and commercialises branded pharmaceutical products in select therapeutic areas within the chronic .The fundamentals of the company look sound but with the comparison to its peers it is looking pricy and long term investors may subscribe the issue.


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