IPO Review: Claris Lifesciences

Generic injectables player, Claris Lifesciences, plans to raise Rs 300crore, for expanding its capacities and paying a part of its debt. The company, which gets over half of its revenues (Rs 759 crore) from exports, has a presence in 76 countries with over 1,100 product registrations and a product portfolio of 128 drugs. The company is eyeing the global generics market for injectables, which is pegged at $20 billion, and is expected to reach $33 billion by 2014-a growth of 10 per cent annually. The growth is expected to be driven by a number of products going-off patent and limited price erosion due to little competition.

Injectable advantage

The management believes its presence in the injectables category is an advantage as over four-fifths of the molecules in this category have less than five competitors. This is because manufacturing injectables is capital intensive, is subject to stricter regulations and involves a complex formulation process. This means that injectables do not face the sharp price erosion, as is the case with oral (tablets, capsules) drugs, when products go off patent, thus allowing for better margins.

In addition, the companys expansion into developing countries as well as portfolio of products spanning eight therapeutic segments with higher entry barriers has helped it to improve its Ebitda margins from 23 per cent in CY2007 to 29 per cent in CY2009. The company improved this further to 31 per cent for the five month period ended May.

Given the product portfolio, it is likely to maintain margins at the current levels, analysts believe. An example of lower competition is its product Propofol, which is made by two other competitors. The company expects to improve its addressable market size for this product, which fetches 14 per cent of revenues, from Rs 500 crore to Rs 2,500 crore, by expanding its presence in more countries.

Risks

Given that the US is the largest geography, accounting for about half of the global injectables market, the warning letter from the US FDA earlier this month for not meeting specifications related to good manufacturing practices at its Ahmedabad plans and the product recalls is a major risk. While the company gets about 13 per cent of revenues from the US, the recalled products revenue constitute about 3.6 per cent of the turnover. The warning letter and the import alert means that the company cannot export any drug to the US from its Ahmedabad facility.

The company has submitted a corrective action plan and expects the approvals soon, but given the recent cases of other pharma companies and the time to resolve these differences, it will take a while before the issue is resolved. Though it is a setback, the company believes that with 80 per cent of the revenues coming from emerging markets, a large chunk of revenues will continue to flow unhindered.

As a matter of information, investors need to keep in mind that one of the erstwhile promoters of the company, Sushil Kumar Handa, the former chairman and managing director of Core Healthcare, had been included in the list of wilful defaulters (his name was cleared in August) by the Credit Information Bureau (CIBIL) due to failure to repay loans. However, currently he has no association with Claris.

Investment rationale

While the company does not have a direct competitor for its range of products, globally it has competition in the form of Baxter, Fresenius, Hospira and B Braun. At the price band of Rs 278-Rs 293, its stock would trade at a reasonable 13 times its annualised CY10 fully diluted earnings. Other mid cap companies such as Cadila Healthcare and Torrent Pharmaceuticals are quoting at premium valuations of 23.7 times and 15 times FY11 earnings. While the presence of Carlyle group as an investor provides some comfort, investors with some appetite for risk may subscribe to the offer.