Parabolic Drugs IPO Analysis

Seeks parabolic pricing for entering in to CRAMS business

Focused on manufacturing APIs for domestic and international markets

Incorporated in 1996, Parabolic Drugs (PDL) was promoted by Pranav Gupta and Vineet Gupta. The company is into manufacturing APIs (active pharma ingredients) and API intermediates of Semi Synthetic Penicillin's (SSPs) and Cephalosporins for both domestic and international markets, including regulated markets. Currently, PDL has a portfolio of 44 APIs and 7 API intermediates, which are marketed over 45 countries. The company has two manufacturing facilities at Derabassi, Punjab, and Panchkula, Harayana, and two R & D facilities at Derabassi, Punjab, and Barwala, Harayana.



The R & D center at Derabassi will be used to develop new molecules and improve existing process. From this center, the company has filed 10 applications for process patents, of which nine patent process applications are with the Indian patent office and one patent process application with PCT, Switzerland. PDL has filed 17 Drug Master Files (DMFs) with various regulatory authorities of regulated markets. This includes 7 DMFs field with the US FDA, 1 DMF with the Bureau of Pharmaceutical Sciences, Canada, and 9 DMFs with European Directorate for the Quality of Medicines & Healthcare (EDQM). Till date, it received approval for two DMFs from EDQM and one DMF from US FDA.

As a growth strategy, the company is planning to venture into the CRAMS business, develop APIs in non-antibiotic segments, and improve revenues from regulated markets for existing products. The recently completed R & D center at Barwala will used to provide CRAMS services to innovator companies. PDL is currently manufacturing only antibiotics such as SSP (semi-synthetic penicillin) and Cephalosporins in both oral and sterile forms. But, now, it is planning to develop APIs in non-antibiotic segments. In this process, it is developing a product pipeline of over 20 products in non-antibiotic segments including lifestyle therapies.

Revenue Mix

Business wise: Revenues from APIs and APIs intermediates is around 82%:18%.

Geographical Mix: Revenues from domestic market are around 73% and remaining from exports.

Capex plan

To meet the increasing demand of existing products, it is building two manufacturing facilities (one for oral Cephalosporins and one for Sterile Cephalosporin) in its Derabassi plant. It is also planning to set up an US FDA compliant API manufacturing facility at Chachrauli, Derabassi. This facility will be used to manufacture non-antibiotics APIs as well as contract manufacturing for innovator companies. Besides all these facilities, the company through its subsidiary Parabolic Research Labs is setting up a new manufacturing facility including a custom synthesis with two kilo laboratories and 10 laboratories, an in-house documentation center, and intellectual property rights and regulatory affairs set-ups.

Public Issue

To fund all these expansion plans and to retire part of debt, the company is coming out with IPO of Rs 200 crore. The public offer includes fresh issue and offer for sale. The selling shareholders are mainly BTS India Private Equity Fund and Alden Global (Mauritius). Of Rs 200 crore, the company will get around Rs 182.78-184.81 crore and BTS and Alden will receive remaining Rs 15.19-17.22 crore. Pre-issue, BTS hold approximately 70 lakh shares or an 18.79% stake in the company. The cost per share is Rs 54.37. BTS is set to sell 15.34 lakh shares, which will bring down its stake in the company post-issue to 8.83%. Alden holds 14.76 lakh shares or a 3.96% stake pre-issue. The cost per share is Rs 37.20. It is also set to sell 4.92 lakh shares in IPO, thereby bringing down its stake to 1.59%, post issue.

Strengths

* The R & D facility at Barwala and the manufacturing facility at Panchkula were set up according to US FDA standards.
* The customers' base has improved from 244 end March 2007 to 487 end December 2009. Sales from top customer decreased to 15.25% in the nine months ended December 2009 compared to 39.33% in the year ended March 2007.
* The company manufactures niche penicillin APIs like Bacampicillin, Sultamycillin, and Pivampicillin.

Weaknesses

* PDL paid a high interest cost of Rs 29.57 crore for the nine months ended December 2009 and Rs 28.34 crore for the year ended March 2009. In fact, the interest cost paid by the company is higher than its profit in corresponding periods. The debt as on 31 December 2009 was Rs 367.68 crore (both secured loan of Rs 303.18 crore and unsecured of Rs 64.50 crore). PDL is planning to repay Rs 38.84 crore from funds raised through the IPO. Still, the company will be left with debt of Rs 328.84 crore. The secured loan was raised at floating interest rates.
* The company is planning to enter into the CRAMS business with innovator companies. For this purpose, it is setting up a manufacturing facility at Chachrauli. The facility is expected to commence only by 2012. As MNCs are concentrated in regulated markets, the facility needs to get corresponding regulatory approvals. The average time to get regulatory approval for plant from US FDA or UK MHRA is 18-24 months.
* PDL is a net importer as most raw materials are imported from China. The change in forex movement will have impact on the company's margins.
* Cash flows from operations including working capital were negative in the last five years and also for the nine months ended December 2009.

Valuation

Total income from operations increased by 45% to Rs 394.92 crore, operating profit margin contracted by 210 bps to 15.5% and net profit fell by 29% to Rs 21.09 crore for the year ended March 2009. In the first nine months of FY 2010, sales were at Rs 346.22 crore, and operating margin 18.3% and net profit Rs 21.41 crore. The margin and profit for the nine months ended December 2009 was higher than full year performance of FY 2009.

At an issue price of Rs 75-85, the EPS for year ended March 2009 is Rs 3.4-4.8 and PE works out to be 22.1-17.7 times. The EPS for annualised nine months ended December 2009 on lower price band is Rs 4.6 with P/E at 16.3 times and at the upper price band EPS is Rs 4.9 and P/E 17.3 Comparable but relatively larger player Nectar Lifesciences trades at 8.8 times its FY 2010 earnings.