Subscribe to Claris Lifesciences IPO - Ventura Securities

Claris Lifesciences Ltd. (CLL) is one of the largest domestic sterile injectable pharmaceutical companies with presence in 76 countries globally. The company has 128 off patent generic products across multiple therapeutic segments which are predominately used for critical care. Its key products such as Propofol (14.4% of revenue, Rs 2500 Cr global market size) and iron sucrose (Rs 1700 Cr global market size) and hydroxyl ethyl starch has huge demand potential. As of September 30, 2010, CLL had obtained over 1,100 registrations worldwide and approximately 324 applications were pending approval. A majority of these products are supplied to institutional clients (government and private hospitals, aid agencies, and nursing homes).

With attractive valuation, sustainable business model and good traction in revenues, we recommend to SUBSCRIBE the issue for listing as well as long term gains.

Key Investment Highlights

Injectables business on a high growth path

As compared to oral products, injectable products are difficult to manufacture. For the same reason, injectable products have low price erosion and thus offer better profitability margins. Primarily on account of a large number of innovator drugs going off patent, global generic injectables market is expected to grow at a CAGR of 11% to reach $33 bn by 2014, up from $20 bn (as of 2009). With very few companies (4 MNCs viz: Baxter, Fresenius, Hospira, B. Braun) in the fray, CLL (with its low cost business model and large portfolio of diversified product range across multiple therapies), is well placed to benefit from this.

Manufacturing competence and strong product portfolio across multiple drug delivery systems provides sustainable revenue streams

With technologies purchased from international suppliers, CLL is among few manufacturers worldwide to have its manufacturing facilities approved by multiple regulator authorities for parental in glass bottles, emulsion and PVC bag manufacturing. The company has one of the largest injectables portfolios in India across multiple drug delivery systems. Besides this, the company is among 3 companies worldwide to manufacture API used for formulation of Propofol (regulating anesthesia levels) and Iron Sucrose (Used for renal failure surgery) products provide a huge opportunity.

Pfizer deal to strengthen presence in regulated markets

CLL has entered into a marketing alliance with Pfizer, wherein Pfizer will commercialize CLL's 15 injectables products that are off patent and have lost exclusivity in US, Canada, Australia, New Zealand and Europe. The drugs included in the deal cover a range of therapeutic areas including antiinfectives, antibiotics and other critical care products. Leveraging on the well established presence of Pfizer in regulated marketed, the company plans to expand its reach and business in regulated markets.

Capacity expansion and investment in R&D facility to drive future growth

Out of Rs 300 crore issue proceeds company intends to spend a sum of Rs ~200 crore towards capacity expansion and investment in R&D facility. With this proposed expansion, the company can leverage its low cost manufacturing capacity to take advantage of the global shortage of Propofol, Iron Sucrose, PVC and Non PVC bags. We expect revenue to get a boost once these facilities are commercialized.

Macro features, strong distribution network and increased filings to enhance presense in emerging as well as regulated markets

The company has obtained 1100 approvals for its injectables products globally and approvals of 324 more registration is pending. Going forward changes in healthcare standards, insurance penetration and government spending on healthcare along with increased product portfolio, registration base and enhanced distribution network holds key for driving growth in emerging markets.

Key Concerns

USFDA warning letter may hamper demand and reputation of company Recently the company was issued a warning letter by USFDA for violating the CGMP regulation on certain products. As a result the company is unable to sell those products until import alert is withdrawn. Any undue delay in resolving the issue with USFDA may have adverse impact on the revenue growth and profitability.

Business subjected to regulatory approvals

The process of acquiring regulatory approvals for products are costly and a time consuming affair. Failure to obtain approvals on time may have negative impact on future growth prospects of the company.

Valuation & Recommendation

At a upper price band of Rs. 293 the stock is trading at a pre issue P/E of 11.3x and post issue P/E of 13.6x. Accordingly the company is trading at a pre issue P/BV of 2.9x and post issue P/BV of 3.5x. With attractive valuation, a sustainable business model and traction in revenues, we recommend to SUBSCRIBE the issue for listing as well as long term gains.

Source : Equity Bulls

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