Supriya Lifescience coming with an IPO to raise upto Rs 723.77 crore

Supriya Lifescience

• Supriya Lifescience is coming out with a 100% book building; initial public offering (IPO) of 2,64,15,093 shares in a price band Rs 265-274 per equity share.
• Not more than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on December 16, 2021 and will close on December 20, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 2 and is priced 132.50 times of its face value on the lower side and 137 times on the higher side.
• Book running lead managers to the issue are ICICI Securities and Axis Capital.
• Compliance Officer for the issue is Shweta Shivdhari Singh.

Profile of the company

The company was incorporated as ‘Supriya Lifescience Limited’ pursuant to a certificate of incorporation dated March 26, 2008 issued by the Registrar of Companies, Maharashtra at Mumbai (RoC), upon the conversion of ‘M/s Supriya Chemicals’, a partnership firm, into a public limited company, in accordance with the provisions of Part IX of the Companies Act, 1956. The company commenced operations pursuant to a certificate for commencement of business dated April 1, 2008 issued by RoC.

The company is one of the key Indian manufacturers and suppliers of active pharmaceuticals ingredients (APIs), with a focus on research and development. The company has niche product offerings of various APIs focused on diverse therapeutic segments such as antihistamine, analgesic, anaesthetic, vitamin, anti-asthmatic and antiallergic. It has consistently been the largest exporter of Chlorpheniramine Maleate and Ketamine Hydrochloride from India, contributing to 45-50% and 60-65%, respectively, of the API exports from India, between Fiscal 2017 and 2021. It was among the largest exporters of Salbutamol Sulphate in India contributing to 31% of the API exports from India in FY 2021 in volume terms.

The company’s pharmaceutical business is organized into domestic and export sales, according to the geographies in which it operates. It has grown its API business in several countries across Europe, Latin America, Asia (excluding India), North America and India. The company’s customers include global pharma companies such as Syntec Do Brasil LTDA, American International Chemical Inc and AT Planejamento E Desenbolvimento De Negocios Ltda, with whom it has business relationship for over nine years, and Suan Farma Inc, Acme Generics LLP, Akum Drugs Ltd and Mankind Pharma Ltd with whom it has business relationship for over four years. Its products are registered with various international regulatory authorities such as USFDA, EDQM, NMPA (previously known as SFDA), KFDA, PMDA, TGA and Taiwan FDA.

Proceed is being used for:

• Funding capital expenditure requirements of the company.
• Repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company.
• General corporate purposes.

Industry Overview

Indian pharmaceutical industry has shown impressive growth over the last few years and has become one of the sunrise sectors of the Indian economy. It is third largest in the world in terms of volume, behind China and Italy and 14th largest in terms of value. The industry supplies over 50 percent of global demand for various vaccines, 40 percent of generic demand in the US and 25 percent of all medicine in UK. India enjoys an important position in the global pharmaceuticals industry. The cost of manufacturing in India is approximately 33 percent lower than that of the US, making it a suitable marketplace for investors to invest more in the country.

The government’s concerted push towards the pharma sector through initiatives such as Make in India, Ayushman Bharat Scheme, National Digital Health Mission etc, has cemented India as a leading global capital market. The total size of pharma and related industry including medical devices in the country was at $51 billion in 2019-20, of which 75 percent is contributed by pharmaceutical products alone. Besides, coronavirus disease (covid-19) pandemic has presented both an opportunity and a challenge for India to emerge as the ‘pharmacy of the world. The commitment of provision of Covid-19 vaccine to other countries has made India the epicentre for its manufacturing. According to total sales audit data from world's largest pharmaceutical market research firm IMS Health, the Indian Pharma Market (IPM) grew 59 percent y-o-y in April, 2021 vs 16 per cent y-o-y in March, 2021 due to the low base effect in April, 2020 and sharp surge in Covid-19-related sales.

Indian pharmaceutical industry is likely to maintain its growth trajectory in near future, as the fresh wave of Covid-19 in the country has pushed up sales of medicines and resulted in exponential growth for the industry. The industry has proved to be a dependable supplier of quality drugs in a time of global need on account of the COVID-19 pandemic, and is expected to reach a size of $130 billion by 2030. The pharma is well poised and is looking forward to attract FDI and exploit the many opportunities that COVID-19 has created. Pharma sector will become AtmaNirbhar, not only in sense of meeting domestic requirements but also for fulfilling global demand of low cost - high quality medicines and medical devices. The schemes for development of bulk drug & medical device parks are expected to attract cumulative investment of about Rs 77900 crore and can generate about 2,55,000 employments. The government has taken active steps by releasing the PLI 1.0 and 2.0 schemes to take forward the AtmaNirbhar agenda for the pharmaceutical industry. These initiatives will be important to build on the strength of the pharmaceutical industry.

Pros and strengths

Significant scale with leadership position across key & niche products: The company’s core strength lies in identifying generic molecules (off-patent) in its existing therapeutic segments which fits in to its existing chemistry and production infrastructure and its ability to develop the product and scale-up production. In order to achieve the same, its marketing and research and development teams work in tandem to estimate potential market (in terms of volume) and cost of development, raw materials and production. With its focus on products which are high on value and low on competition, it is well positioned to derive relatively higher returns from its investments.

Backward integrated business model: The company’s backward integration of API ensures steady supply of intermediates. As on October 31, 2021, 12 of its existing products were backward integrated, which contributed 67.14% and 60.17% of the total revenue for Fiscal year 2021 and for the six month period ended September 30, 2021, thereby resulting in increased margins and lesser dependence on suppliers for key starting material. With the ability to meet intermediates and processes requirements in-house, its integration model of business helps it to have sustainable business. It further protects it from relying on external sources for its raw materials, thereby reducing risk of unfavourable terms of supply such as high pricing and long timeline for delivery. Backward integration has enabled it to ensure a steady supply of intermediates at an equitable cost, avoiding any market fluctuations and to ensure quality and security of availability of essential raw materials. Its ability to produce key starting material is one of its key strengths, resulting in cost competitiveness.

Global presence across various countries: The global pharmaceutical market can broadly be divided into regulated markets, semi-regulated and non-regulated markets. From April 1, 2020 until October 31 2021, its products were exported to 86 countries including (i) regulated markets such as USA, China, Japan, Germany, Spain, Indonesia, South Korea and Switzerland; and (ii) semi-regulated and non-regulated markets such as Brazil, Mexico, Chile, Taiwan, Malaysia; Bangladesh, South Africa, Kenya, Jordan and Egypt, through its own marketing and distribution network as well as by entering into distribution arrangements with pharmaceutical distributors in these markets. For the Fiscals 2019, 2020, 2021 and for the six month period ended September 30, 2021, its export sales accounted for 70.96% 71.85%,77.47% and 73.57%, respectively of its revenue from operations.

Advanced manufacturing and R&D capabilities: The company’s modern manufacturing facility located in Parshuram Lote, Maharashtra is spread across 23,806 sq.mt and has reactor capacity of 547 KL/ day. It has four manufacturing blocks which are segregated therapeutic segment wise. The fourth block commenced operation on May 30, 2021. The manufacturing facility includes well delineated areas for R&D, quality control (chemical microbiology), quality assurance, dedicated areas for engineering maintenance, warehouse, materials and finished goods stores. It also has an effluent treatment plant and an express feeder from the sub-station for power. It also operates seven cleanrooms. It also initiated the construction of a new warehouse and administration block (which will house a new quality control and assurance laboratory) to accommodate the rapidly expanding business and its needs. In addition, the company has acquired a plot of land, admeasuring 12,551 sq.mt, near the present manufacturing facility, wherein the Company intends to expand its manufacturing infrastructure.

Risks and concerns 

Significant portion of revenue comes from limited product: The company generates a significant portion of its revenue from operations from the sale of a limited number of products. The company’s revenue from the sale of these products may decline as a result of increased competition, regulatory action, pricing pressures or fluctuations in the demand for or supply of such products. Similarly, in the event of any breakthroughs in the development or invention of alternative products for these categories, it may be exposed to the risk of its products becoming obsolete or being substituted by such alternatives. If the company is unable to continue to sell its top products in the market or maintain historic levels of business from these products or fail to successfully introduce new products in other categories to compensate for any losses in these categories, its business, results of operations and financial condition may be adversely affected.

Highly dependent on third-party suppliers and transporters: The raw materials essential to its manufacturing business are purchased primarily from suppliers in India, China, Europe and USA. Raw materials are subject to supply disruptions and price volatility caused by various factors, including commodity market fluctuations, the quality and availability of supply, currency fluctuations, consumer demand and changes in government programs. Supply interruptions or delays may lead to delays in production and higher raw material costs. In the event of any disruption to its supply of the raw materials necessary for the production of its products at commercially acceptable prices, it may be forced to reduce, suspend or cease production or sale of certain of its products, and its sales volumes for the relevant product could be adversely affected.

Significant portion of revenue comes from few customers: The company is dependent on a limited number of customers for a significant portion of its revenues. From April 1, 2021 to September 30, 2021, top three customers constitute 30.98% of total revenue, while top ten customers constitute for 47.13% of total revenue. In fiscal 2021, top three customers constitute 21.59% of total revenue, while top ten customers constitute for 40.10% of total revenue. Further, the company currently do not have long term contractual arrangements with its customers and conduct business with them on the basis of purchase orders that are placed from time to time. Further, some of its customers currently manufacture or may start manufacturing their own APIs and may discontinue purchasing APIs from it. There is no assurance that the company will be able to maintain historic levels of business from its significant customers, or that it will be able to significantly reduce customer concentration in the future.

Stiff competition: The pharmaceutical industry is a highly competitive market with several major pharmaceutical companies present, and therefore it is challenging to improve market share and profitability. The company’s business, prospects, results of operations and financial condition could be adversely affected if its competitors gain significant market share at its expense, particularly in areas in which it is focused such as Asia and Europe. Many of its competitors may have greater financial, manufacturing, R&D, marketing and other resources, more experience in obtaining regulatory approvals, greater geographic reach, broader product ranges or a stronger sales force. Further, some of its competitors, may be consolidating and integrating, and the strength of combined companies could affect its competitive position in all of its business areas. Additionally, if one of its competitors or their customers acquire any of its customers or suppliers, it may lose business from the customer or lose a supplier of a critical raw material or component, which may adversely affect its business, results of operations, cash flows and financial condition.

Outlook

Supriya Lifescience is engaged in the manufacturing of Active pharmaceutical ingredients (APIs). As of March 31, 2021, the company produces 38 APIs focused on diverse therapeutic segments such as antihistamine, analgesic, anaesthetic, vitamin, anti-asthmatic and anti-allergic. The company has been the largest exporter of Chlorpheniramine Maleate and Ketamine Hydrochloride from India between Fiscal 2017 and 2021. The company is also one of the largest exporters of Salbutamol Sulphate from India in FY 2021 in terms of volume. On the concern side, the company derives a significant portion of revenue from a few customers and the loss of one or more such customers, the deterioration of their financial condition or prospects, or a reduction in their demand for its products could adversely affect its business, results of operations and financial condition.

The issue has been offered in a price band of Rs 265-274 per equity share. The aggregate size of the offer is around Rs 700 crore to Rs 723.77 crore based on lower and upper price band respectively. On the performance front, the company’s revenue from operations increased by 23.66% to Rs 385.37 crore in Fiscal 2021 from Rs 311.64 crore in Fiscal 2020. This was primarily due to an increase in revenue from sale of products. Increased revenue arose primarily from an increase in export sales, particularly to the Europe, Latin America and Rest of Asia. Meanwhile, the company’s restated profit for the year increased by 68.70% to Rs 123.83 crore in Fiscal 2021 from Rs 73.40 crore in Fiscal 2020. The company presently operates from its manufacturing facility located in Parshuram Lote, Maharashtra, spread across 23,806 sq.mts, having reactor capacity of 547 KL/ day. It intends to enhance its production capacity and capabilities through additional capital expenditure in its existing manufacturing facilities. It has also initiated the construction of a new warehouse and administration block (which will house a new quality control and assurance laboratory) to accommodate the rapidly expanding business and its needs. Moreover, the company intend to continue to drive its R&D initiatives towards the development of innovative APIs. It also intends to improve its R&D capabilities, with a focus on capturing more high-value first-to-market opportunities in key international markets, as well as leveraging its broad product basket to enhance its market position globally.