Claris Lifesciences IPO Analysis

The Ahmedabad-based Claris Lifesciences, promoted by Arjun S. Handa and Sarjan Financial Private Limited, is one of the largest Indian sterile injectables pharmaceutical companies with presence in 76 countries worldwide. It offers 128 products across multiple markets and therapeutic areas. All of its products are off-patent products, which range across various therapeutic segments, including anesthesia, critical care, anti-infectives, renal care, infusion therapy, enteral nutrition, parental nutrition and oncology. It offers injectables in various delivery systems, such as glass and plastic bottles, vials, ampoules, pre-filled syringes and non-PVC and PVC bags. Its customer base primarily includes government and private hospitals, aid agencies and nursing homes.



Its manufacturing facilities are located in Ahmedabad (Gujarat), which are approved by foreign regulatory authorities including the USFDA (US Food and Drug Administrator), MHRA (Medicine and Healthcare products Regulatory Agency) UK, TGA (Therapeutic Goods Administration) Australia, NAM (National Agency for Medicines) Finland, GCCFDCA (Gulf cooperation council Food and Drug Control Administration), and INVIMA (Columbia). One of its facilities, Clarion V is currently under construction; expected to be operational by the third quarter of FY'11.

It has adopted three different distribution models for the supply of its products across international markets. A) In certain countries it registers, then imports and store products as well as market them to customers through entities owned and controlled by it. B) In some other countries, it partners with local distributors who import and distribute its products, and under its supervision carries on marketing activities. C) To the rest of the countries it operates with distributors and marketing partners who are responsible for marketing its products.

As of September 30, 2010, an aggregate of 25 ANDAs (Abbreviated New Drug Application) were granted for 16 products.

For the five months ended May 2010, revenue from international business amounted Rs 198.96 crore, which accounts for 61% of total sales. For the year ended December 2009, revenue from international business (54% of total sales) decreased by 1% to Rs 406.818 crore, where as revenues from India decreased by 10% to Rs 336.71 crore.

As of September 30 2010, it had a sales division of approximately 422 people covering various territories across India and it employed sales force of about 107 people for international markets. It also had a network of approximately 43 clearing and forwarding agents, 40 distributors, 16 consignee agents and 1120 stockists in the country.

It plans to set up new plant comprising a small volume parenterals line, a PVC bag line, a non-PVC bag line and a fat emulsion line at a total cost of Rs 131.9 crore (to be commissioned by September 2012). It also plans to setup Clarion IV – manufacturing line for propofol and other fat emulsion products at its existing plant with Rs 26.47 crore (to be commissioned by June 2012). In addition, it plans to setup facility for research and development for Rs 38.41 crore at its manufacturing facilities and prepayment of identified term loan of Rs 45.91 crore.

To fund all these expansion plans and to retire part of debt, the company is coming out with IPO of Rs 300 crore through 100% book building process.

Strengths:

* It has one of the largest injectables portfolios among the Indian pharmaceutical companies with 98 products formulated from portfolio of approximately 57 molecules.
* It has manufacturing facilities for large volume parenterals in glass bottles, emulsions and bag manufacturing facilities, which are approved by multiple regulatory authorities in regulated markets.
* It has established sales, marketing and distribution across 76 countries, with workforce that is well experienced and spanned across all business verticals in the generic injectables industry.
* Its core competency is its unique R&D capabilities such as developing complex and difficult to develop products propofol, iron sucrose, hydroxyl ethyl starch and glutamine IV.
* As of September 30.2010, it had filed 280 applications for product registrations in regulated markets, including 36 applications in the United States, out which it had obtained 145 product registrations including 25 in the United States.
* In March 2009, it entered into business agreement with Pfizer group of companies to market its product portfolio by Pfizer to strengthen its presence in regulated markets.

Weaknesses:

* The US FDA inspected manufacturing facilities in Ahmedabad on November 1st, 2010 and issued a warning letter on the back of violations of CGMP regulations for finished pharmaceuticals.
* The company and its partners received number of complaints in relation to its products ciplofloxacin, metronidazole and ondansetron, which were recalled by them from united sates, Denamrk, Finaland, Canada, Australia and Newzland. The cost of recall for the five months ended May 2010 is Rs 7.45 crore in aggregate (includes cost of product replacement and write-offs of affected inventory). Product recalls not only entail losses, but also affect the credibility of the company in the market.
* The registration of the company and its products were suspended by the Drug and Food Control, Kuwait, from June 8, 2010 to August 22, 2010.
* The margins of its major product propofol (14.8% of gross sales for year ended December 2009) may decline in future on the back of increased competition.
* One of the erstwhile promoters and relative of Arjun Handa, Sushil Kumar Handa, had promoted Core Healthcare (which was engaged in similar line of business) and had to be wound up due to loan defaults.

Valuation:

For the year ended December 2009, consolidated sales decreased by 1% to Rs 743.53 crore primarily due to decrease in sales from domestic markets on the back of decrease in sales of traded products such as IV fluids and cephalosporin. PBT was flat around Rs 143.72 crore. However, due to fall in provision for tax, adjusted PAT was up 16% to Rs 124.89 crore.

At an issue price of Rs 278-293, the consolidated EPS for year ended December 2009 is Rs 20.2-20.3 and PE works out to be 13.8 -14.4 times, respectively. The five months ended May 2010 annualised consolidated EPS works out to Rs 22.4-22.6 and P/E 12.4-12.9. Strides Acrolab, which is another player in injectables, but with revenues also coming from non-injectables, trades at 16 times its TTM consolidated earnings. Another player Venus Remedies trades at 5 times its TTM EPS. Overall Pharmaceutical – Formulations – Indian companies trade around 9 times TTM EPS.

via CM