Quest Laboratories coming with IPO to raise Rs 43.16 crore

Quest Laboratories 

• Quest Laboratories is coming out with initial public offering (IPO) of 44,49,600 shares of Rs 10 each in a price band Rs 93-97 per equity share.  
• The issue will open for subscription on May 15, 2024 and will close on May 17, 2024.
• The shares will be listed on NSE Emerge Platform.
• The face value of the share is Rs 10 and is priced 9.30 times of its face value on the lower side and 9.70 times on the higher side.
• Book running lead manager to the issue is Shreni Shares.
• Compliance Officer for the issue is Jayesh Jain.

Profile of the company

Quest Laboratories is engaged in the business of manufacturing of pharmaceutical formulations across a broad spectrum, including antibiotics, antimalarials, antispasmodics, anti-inflammatories, antiemetics, respiratory medications, diabetes treatments, antidepressants, and more. These formulations fall under the trademark ‘Quest Laboratories’. The company produces a variety of products, comprising ethical drugs, generic drugs, and over-the-counter drugs (OTC). These products are available in various forms such as tablets, liquid orals, oral dry powders, oral powders (ORS), ointments, and external liquids. This comprehensive approach allows the Company to address a wide range of medical needs and preferences among patients. 

The Company holds World Health Orgabnization (WHO) Schedule M GMP, and GLP certifications, adhering to the stringent guidelines set by the World Health Organization. Its commitment to quality is further demonstrated by its ISO 9001:2015 certification and ISO/IEC 17025:2017 accreditation. With manufacturing under one roof, the company maintains stringent quality control standards throughout the entire manufacturing process. By doing so, it ensures that its products meet the relevant quality standards before they reach the market. 

The company also possesses Good Laboratory Practice (GLP) certificate issued by Food & Drug Administration, Bhopal, Madhya Pradesh, indicating its commitment to maintaining high standards of quality and compliance in laboratory operations, particularly within the pharmaceutical sector. Its in-house laboratory is equipped with various equipment such as HPLC (High-Performance Liquid Chromatography), GC (Gas Chromatography), FTIR (Fourier Transform Infrared Spectroscopy), UV (Ultraviolet-Visible Spectroscopy), Dissolution apparatus, and other advanced instruments. This comprehensive suite of tools enables it to conduct a wide array of tests and analyses efficiently and accurately. 

Proceed is being used for:

• Funding of capital expenditure towards purchase of plant and machineries for expansion at the existing manufacturing facility. 
• Funding working capital requirements of the company. 
• General corporate purposes.

Industry overview

India is the largest provider of generic drugs globally and is known for its affordable vaccines and generic medications. The Indian Pharmaceutical industry is currently ranked third in pharmaceutical production by volume after evolving over time into a thriving industry growing at a CAGR of 9.43% since the past nine years. Generic drugs, over-the-counter medications, bulk drugs, vaccines, contract research & manufacturing, biosimilars, and biologics are some of the major segments of the Indian pharma industry. India has the most number of pharmaceutical manufacturing facilities that are in compliance with the US Food and Drug Administration (USFDA) and has 500 API producers that make for around 8% of the worldwide API market.

Market size of India pharmaceuticals industry is expected to reach $65 billion by 2024, and around $130 billion by 2030. According to the government data, the Indian pharmaceutical industry is worth around $50 billion with over $25 billion of the value coming from exports. About 20% of the global exports in generic drugs are met by India. India is among the top 12 destinations for biotechnology worldwide and 3rd largest destination for biotechnology in Asia Pacific. In 2022, India’s Biotechnology industry crossed $80.12 billion, growing 14% from the previous year. During FY18 to FY23, the Indian pharmaceutical industry logged a compound annual growth rate (CAGR) of 6-8%, primarily driven by an 8% increase in exports and a 6% rise in the domestic market. The Indian pharmaceutical industry has seen a massive expansion over the last few years and is expected to reach about 13% of the size of the global pharma market while enhancing its quality, affordability, and innovation.

The pharmaceutical industry in India is a significant part of the nation's foreign trade and offers lucrative potential for investors. Millions of people around the world receive affordable and inexpensive generic medications from India, which also runs a sizable number of plants that adhere to Good Manufacturing Practices (GMP) standards set by the WHO and the USFDA. Among nations that produce pharmaceuticals, India has long held the top spot. Medicine spending in India is projected to grow 9-12% over the next five years, leading India to become one of the top 10 countries in terms of medicine spending.

Pros and strengths

Multi-product capability: It has approvals to manufacture more than 600 formulations. It routinely manufactures 250 to 300 types of formulations based on market demand and limited formulation lines. However, it has versatile manufacturing facility by which it can produce multiple products using a combination of processes. The flexible manufacturing infrastructure helps the company changes its product mix in response to changes in market demand. It has complete infrastructure of formulation development, pilot plant and validation studies and are able to develop efficient and cost-effective specialized processes at short notice.

Product portfolio: A diverse and well-balanced product portfolio is another key competitive advantage for the Company. The Company offers a comprehensive range of products, including generic drugs, branded pharmaceuticals, over-the-counter (OTC) products, and specialized medications. This diverse portfolio allows the company to cater to various market segments and respond effectively to changing market demands.

Supply chain efficiency: The Company maintains an efficient and well-managed supply chain. This efficiency results in reduced lead times, minimized inventory costs, and improved overall responsiveness to market changes. Such streamlined supply chain operations provide a significant competitive advantage in the pharmaceutical industry, where timeliness and efficiency are crucial factors. By leveraging these competitive advantages, the company continues to thrive in competitive pharmaceutical market, delivering high-quality products, satisfying customer needs, and driving its long-term success. In the pharmaceutical industry, where precision, timeliness, and compliance are critical, an optimized supply chain can indeed provide a substantial competitive advantage.

Risks and concerns

Highly depend on major raw materials: The business is significantly affected by the availability, cost and quality of the raw materials and components which it needs to develop its products. Its principal raw materials include APIs, emulsifying wax, dextrose anhydrase, flavors, pharmaceuticalgrade sugar, colorants, aqueous coating materials, and packaging materials etc. It usually does not enter into long-term supply contracts with any of its raw material suppliers. It is dependent on external suppliers for certain of the materials /components. The prices and supply of these and other raw materials and components depend on factors beyond its control, including general economic conditions, competition, production levels, transportation costs and duties. If, for any reason, its suppliers of raw materials and components should curtail or discontinue their delivery of such materials to it in the quantities it needs or at prices that are competitive or expected by the company, its ability to meet the requirements of its customers could be impaired and its earnings and business could suffer.

Dependent on top 10 customers: Its revenue from operations for the Period ended December 31, 2023 and for the financial year ended March 31, 2023, 2022 and 2021, its top 10 customers contributed around 97.15%, 95.13%, 86.29% and 55.65% respectively. Given the nature of its business, there can be no assurance that it would be able to attract new customers or reduce its dependence on any of its top customers. It expects that it will continues to be reliant on its major customers for the foreseeable future. Accordingly, any failure to retain these customers or to remain suppliers to these customers and/or negotiate and execute contracts on terms that are commercially viable, with these select customers, could adversely affect its business, financial condition and results of operations. In addition, any defaults or delays in payments by a major customer or the insolvency or financial distress by a major customer may have an adverse effect on business, financial condition and results of operations.

Dependent on third-party transportation providers: Its success depends on the supply and transport of the various raw materials required for its manufacturing facility and of its finished products from its manufacturing facility which are subject to various uncertainties and risks. The company does not completely depend on its own transportation facility and are majorly dependent on third-party transportation providers for the delivery of its products. While transportation restrictions, if any, could have an adverse effect on supplies and deliveries to and from its customers and suppliers. In addition, raw materials and finished products may be lost or damaged in transit for various reasons including occurrence of accidents or natural disasters. There may also be a delay in delivery of raw materials and products which may also affect its business and results of operations negatively.

Outlook

Quest Laboratories is engaged in the business of manufacturing of pharmaceutical formulations across a broad spectrum, including antibiotics, antimalarials, antispasmodics, anti-inflammatories, antiemetics, respiratory medications, diabetes treatments, antidepressants, and more. The company produces a variety of products, comprising ethical drugs, generic drugs, and OTC. These products are available in various forms such as tablets, liquid orals, oral dry powders, ORS, ointments, and external liquids. This comprehensive approach allows the Company to address a wide range of medical needs and preferences among patients. On the concern side, its products face intense competition from products commercialized or under development by competitors in all of its product portfolios. It competes with local companies, multi-national corporations and companies from the rest of world. If its competitors gain significant market share at its expense, its business, results of operations and financial condition could be adversely affected.

The company is coming out with an IPO of 44,49,600 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 93-97 per equity share. The aggregate size of the offer is around Rs 41.38 crore to Rs 43.16 crore based on lower and upper price band respectively. On performance front, revenue from operations increased by 3.63% from Rs 5,948.39 lakh in Fiscal 2022 to Rs 6,164.06 lakh in Fiscal 2023. This increase was primarily due to the rise in sales of products during the year, notably driven by increased orders from government departments in Madhya Pradesh.  The company’s profit after tax for the year increase by 22.50% from Rs 410.5 lakh in financial year 2021-22 to Rs 502.85 lakh in financial year 2022-23. Meanwhile, the company aims to expand and diversify its product portfolio by increasing its product base and introducing new range of product lines. It plans to continue expanding its manufacturing capabilities in order to capture future growth trends. It intends to explore opportunities to expand its operations by developing new products and services within its existing lines of business. Its plan involves increasing production capacity by installing new plant and machineries at its existing manufacturing facility.