ERIS LIFESCIENCES LTD.

Report By Apeksha Shetty

Eris Lifesciences Ltd, a decade old company, has a USP of developing products linked to chronic and lifestyle related disorders.

The company ranked 32nd among the top players in IPM (Indian Pharmaceutical Market) with market share of 0.7% and a CAGR of 21.7% between FY 13-17. Let’s have a detailed analysis of the first pharmaceutical company which has filed for an IPO in 2017.

Offer Details

Issue Size: Rs. 1,741.16 Cr (Offer for Sale of 28,875,000 shares which consists of total 21% of the shareholding)

  • 25% of total capital base by Botticelli
  • 75% of total capital base by other shareholders
  • 150,000 shares (out of the 28,875,000 shares) reserved for employees of the company

Opening Issue Date:  June 16, 2017

Closing Issue Date: June 20, 2017

Issue Price Range: Rs. 600 to Rs. 603

Lot Size: 24 equity shares

Face Value: Re.1 per share

Merchant Bankers: Axis Capital, Citigroup Global Markets, Credit Suisse

Eris Lifesciences is offering discount of Rs. 60 per share to eligible employees.

 The Global Pharmaceuticals Industry

The global pharmaceuticals market is estimated to grow at a CAGR of 5.6% between calendar years 2015 and 2020. IMS (IMS Health Information and Consulting Services India Private Limited) has identified 21 ‘Pharmerging’ markets, including China, India, Brazil and Russia, based on macroeconomic metrics and pharmaceuticals market forecasts. India is one of the largest contributors to the global pharmaceuticals market growth and is ranked third among the ‘Pharmerging’ markets in terms of pharmaceuticals sales.

According to IMS, pharmaceutical sales in ‘Pharmerging’ markets are expected to grow at a CAGR of approximately 7.6% between calendar years 2015 and 2020, which is higher than major developed countries and rest of the world, which are forecasted to grow at a CAGR of approximately 5.5% and 2.6%, respectively, between the same periods. ‘Pharmerging’ markets are expected to increase their share in the global pharmaceuticals market sales growth from 25.1% in calendar year 2016 to 30.5% in calendar year 2020.

The Indian Pharmaceuticals Markets

India is one of the largest pharmaceuticals markets in the world. Between FY13-17, the IPM revenues grew at a CAGR of 11.8% to reach Rs.1,143.26 bn , driven by favorable demographic and macro-economic trends, the rising prevalence of chronic diseases, increasing insurance spending and the under penetration of medical infrastructure and talent. In addition to a large domestic formulations market, India has also emerged as a hub for exporting finished formulations, APIs and excipients to several countries globally. The table below illustrates the growth in India’s pharmaceutical exports between FY12-16:

The IPM can be classified into acute and chronic categories. The acute category of the IPM comprises of therapies intended for diseases of short duration and recent onset, including anti-infectives, gastro intestinal medication, vitamins and gynecology. The chronic category includes therapies intended for non-communicable diseases that are prolonged in duration. Some examples of chronic diseases include heart disease, diabetes, cancer and arthritis.

The IPM is the 13th largest market globally in terms of value and third largest market globally in terms of volume.

Key Characteristics of the IPM

  • Large out of pocket spend and low per capita heath expenditure:

In 2014 India ranked 64th globally out of 218 countries, in terms of out of pocket expenditure, as a percentage of private expenditure on health. In 2014, per capita expenditure on health in India was US$ 75, as against US$ 420 in China, US$ 99 in Indonesia, and US$ 127 in Sri Lanka.

  • Branded generics:

Branded generics (off-patent drugs with a trade name) dominate the IPM, contributing to approx. 98% of retail sales in FY17. In FY17, the IPM had 34,895 brands across all therapeutic areas and the top 300 brands accounted for 30.3% of the sales in the IPM. The top 100 brands accounted for 30.8% of the overall sales in the chronic category and for 20.7% of the overall sales in the acute category for FY17.

  • Prescriptions led:

A large portion of the IPM is prescription led, with the prescriber base comprising Registered Medical Practitioners. Hospitals and OTC account for a smaller portion of the IPM. A growth in the number of Registered Medical Practitioners combined with other drivers including a rise in the patient population, increasing affordability, and improving medical infrastructure and diagnostics has led to a growth in the number of prescriptions.

  • Rising prevalence of chronic diseases:

Rising demand for drugs that treat chronic illness, driven by a growing incidence of lifestyle disorders has led to an increase in the share of the chronic category in the IPM from 31.4% in FY13 to 34.3% in FY17.

  • Metro cities and class 1 towns:

According to IMS, metro cities and class 1 towns in India accounted for 66.0% of the IPM revenues in FY17. The contribution of metro cities and class 1 towns to revenues for FY17 from the chronic category of the

IPM were higher, at 72.0%, as compared to acute category, at 62.9%. Further, the chronic category has grown at a faster pace in metro cities and class 1 towns at 13.1% and 18.2%, respectively between FY13-17 while growth in the acute category in metro cities and class 1 towns has been 10.0% and 11.3%, respectively, for the same period.

  • Domestic companies dominate market share:

Domestic companies accounted for a majority of the revenues in the IPM, with a share of 78.4% of revenues, for FY17, compared to 75.6%, for FY13. Multi-national corporations had a lower share of the IPM, partly due to branded generics dominating the IPM accounting for approximately 98% of retail sales in FY17

  • Fragmented supplier base:

The IPM is characterized by fragmentation in the supplier base, which consisted of 514 companies, in FY17. However, the top 10 companies and the top 25 companies accounted for 42.9% and 70.5% of the IPM, respectively for FY17.

 

The growth drivers for IPM are favourable demographics and macro-economic developments, rising prevalence of chronic diseases and availability of specialist doctors.

 Company Overview

The company develops, manufactures and commercializes branded pharmaceutical products in select therapeutic areas within the chronic and acute categories of the IPM, such as: cardiovascular; anti-diabetics; vitamins; gastroenterology; and anti-infectives.

The focus has been on developing products in the chronic and acute category which are linked to lifestyle related disorders. The chronic category of the IPM contributed 65.6% of total revenues in FY17.

The company generated 34.4% of the revenues from the acute category of the IPM in FY17. The revenues from the acute category grew at a CAGR of 12.0% between FY13-17.

The company is ranked 20th out of 377 domestic and multinational companies present in the chronic category of the IPM, in terms of revenues for FY17.

The company was fastest growing, in the chronic category, among the top 25 companies in terms of revenues, with revenue growth at CAGR of 28.9%, between FY13-17

The product portfolio 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 our revenues in FY17, as a majority of specialists and super specialists are based in these metro cities and class 1 towns.

Between FY13-17, there has been an increase in the number of doctors prescribing our products from 37,842 (constituting 13.8% of doctors in metro cities and class 1 towns in India) to 50,282 (constituting 15.7% of doctors in metro cities and class 1 towns in India) with a prescription share of 1.3% for FY17.

Average Prescription Per Doctor Per Month

(Based on MAT Mar 31, 2017)

Products in the chronic category of the IPM cater primarily to the following therapeutic areas

The company has grown the product portfolio in the acute category of the IPM, catering primarily to the following therapeutic areas:

High growth chronic franchise focused on lifestyle disorders

The company earns approximately 66% of the revenue from Chronic and approximately 94% of chronic revenues from cardiology and diabetes.

Cardiovascular Anti-Diabetics Others
Market Growth (FY 13-17) 11.60% 19.10% 14.10%
Eris Growth (FY 13-17) 25.80% 34.50% 20.50%

 

Others include Neurology, Chronic Respiratory, Chronic Pain
Eris Market Share (FY13-17) 2.00% 2.40%
Focus Segment Hypertension, Lipid lowering Oral Anti-Diabetics
No. of brands (March 31, 2017) 63 26
Flagship Mother Brand Eritel, Olmin, LN Bloc Glimisave

 

Objects of the Issue

The objectives of issue are mentioned below:

  • The sale of up to 28,875,000 Equity Shares by the Selling Shareholders.
  • Further, the Company expects that listing of the Equity Shares will enhance the visibility and brand image and provide liquidity to the shareholders. Listing will also provide a public market for the Equity Shares in India.

Note: The Company will not receive any proceeds from the Offer and all the proceeds will go to the Selling Shareholders.

Strengths

  • Focus on branded prescription based pharmaceutical products catering to lifestyle related disorders;
  • One of the fastest growing companies in certain high growth therapeutic areas with a portfolio of complementary products;
  • Portfolio of high volume and leading brands;
  • Focus on Metro Cities and Class 1 towns in India which have higher incidence of lifestyle disorders and concentration of specialists and super specialists;
  • Multi-faceted product selection and engagement model leading to growth in prescription for our products; and
  • Strong sales, marketing and distribution capabilities.

Strategies

  • Consolidate the position in therapeutic areas in which we have significant presence
  • Target and enhance the presence in large and high-growth therapeutic areas
  • Explore in-licensing and co-development opportunities to leverage the sales, marketing and distribution and manufacturing infrastructure
  • Target future patent expiries in India
  • Enhance the product line and expand the capabilities through strategic acquisitions

Risk Factors

  • There are outstanding proceedings involving the Company, and certain of the Subsidiaries, Promoters and Directors and any adverse outcome in any of these proceedings may have an adverse effect on the business, results of operations and financial condition.

 

Nature of Litigation Number of Cases Amount (Rs. In Million)
Civil Proceeding 9 105.6
Criminal Proceeding 8 1.58
Action initiated by statutory/regulatory authority 11 129.03
Taxation Proceeding 12 8.67

                 It involves litigation against company, directors, subsidiaries and company

  • The efforts of company at integrating acquired businesses may not yield timely or effective results, which may affect the financial condition and results of operations.

 

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

 

  • Significant portion of revenue from the sale of products in certain therapeutic areas and our top mother brand groups account for a significant portion of the total revenue. The business, results of operations and financial condition may be adversely affected if any of the top mother brand groups or products in the key therapeutic areas do not perform as expected.

 

  • The company generates a significant portion of the 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% and 9.3%, respectively, towards the revenues in the IPM, for FY17.

 

  • Further, the company is dependent on our top 10 mother brand groups, by revenue, which together generated 72.5% of the revenues in the IPM for FY17. Further, it derived 76.8% of revenues in the IPM in FY17, from sale of our products in metro cities and class 1 towns in India. Any decrease in demand for the products in metro cities and class 1 towns in India, whether due to a shift in demand, change in pathology incidences or patterns or due to a shift in doctor prescription behavior, which is not offset by an increase in demand for the products in other regions in India, may result in a decrease in our revenues.

 

  • The company relies on the marketing representatives and distributors for the sale and distribution of the products. A decrease in the number of the marketing representatives or termination of the sales arrangements may adversely affect our business, results of operations and financial condition.

Financial Analysis

  1. One of the fastest growing companies in chronic segment
  • Revenues grew at a CAGR of 14% over FY13-17. However, growth in the chronic category was higher at 29% over FY13-17.
  • According to IMS, metro cities and class 1 towns in India accounted for 66% of the IPM market in FY17. The contribution of these geographies in the chronic category was at 72%. Further, the chronic category has grown at a faster pace in metro cities and class 1 towns at 13.1% and 18.2%, respectively, over FY13-17.
  • The company own and operate a manufacturing facility in Guwahati, Assam which ensures tax relief till 2024. It also outsource  the  manufacturing  of  certain of its products,  and  currently  use  20  third party  manufacturers.

2.Significant margin expansion and strong return ratios

  • Its operating margin has improved from 22% to 37% during this period, aided by improvement in sales productivity.
  • The profits of the company are increasing every year but they have shot up significantly in 2017.
  • The company has entered into 2 acquisition deals in December 2016 and July 2016 and these deals have added to the revenue of the company which contributes of Rs.830mn (for FY17) from Kinedex Healthcare and Rs.193mn (for FY17) from Amay/Aprica Pharma.

Debt/Equity Ratio

Year FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Equity 1060.85 1765.04 2656.66 2992.44 5399.24
Debt 5.63 0 5 0 4.94
Debt/Equity Ratio 0.53% 0.00% 0.19% 0.00% 0.09%

Excellent growth in top brands

Source: Company Presentation

Peer Comparison

   Total Revenue

(Rs. In Million)

Face Value P/E EPS RONW(%) Net Asset Value
Eris India 7,441 1 34.45* 17.6 44.48 39.27
GSK Pharma 30,728 10 61.51 39.8 16.78 236.93
Abbott India 29,963 10 31.41 130.19 19.95 652.7
Sanofi India 24,394 10 31.65 129.13 17.11 753.62
Pfizer India 21,431 10 23.48 73.61 13.92 528.74

*P/E is calculated by taking upper price band

 

Considering the valuation aspects, the issue is not overpriced. P/E of the company is in line with other peers. RONW is the highest among the peers mentioned above. Although EPS is the lowest among the peers, but since the last 5 years the EPS is improving every year. The NAV is significantly lower and the company can improve further on the NAV front. The Total revenue of company is less than other peers; this can be mainly because the company has focused on Chronic and Lifestyle Disorders.

Authors Note

As already discussed, the company has deals into products linked to lifestyle related disorders. So, the prescription share for Eris of the Specialist and Super specialist doctors is 96.1% and 3.9% of general physician. (As on March 2017)

Secondly for the chronic segment of company, 76.8% of the total revenue comes from Metro cities and class 1 towns. Specialists & super-specialists are concentrated in metro cities & class I towns. The CAGR over FY13 to FY17 is 13.1% for metro cities and 18.2 for class I towns for IPM.

The company follows a strategic marketing approach with a prominent sales team and well supported technology which ultimately results in improving the productivity.

Eris is the second fastest growing company in IPM and first fastest growing company in Chronic with 50,282 prescriber base. It has 4 brands in top 300 brands in Chronic. The company has completed 3 acquisitions and has 110% of Return on Equity.

Current capacity utilisation around 55% in FY17 indicates that with increase in the utilisation, operating leverage will increase making margin profile attractive in near term. However, the impact of existing as well as new acquisition will have to be monitored closely

The company has been delivering superior return ratios of 49% ROCE and 45% ROE which is very unlikely being in the pharma sector. The company is continuously formulating different strategies to expand plus to increase the top line. Therefore we feel that there are chances of listing gains plus it’s a good bet for long term investment.