Parabolic Drugs IPO Analysis, Updates, Company Profile, Risk and Concern Outlook

| June 14, 2010 | 3 Comments

Parabolic Drugs IPO:

Parabolic Drugs Limited is coming up with a 100% book building; initial public offering (IPO) of 20,25,702 shares to raise about Rs 200 crore. The equity shares of Rs 10 each are being offered in a price band of Rs 75-85 per equity share.

At least 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs). Further, up to 15% would be available for non-institutional bidders and remaining 35% for the retail investors.

The issue will open on June 14, 2010 and will close on June 17, 2010. The shares will be listed on BSE and NSE.

The face value of each share is Rs 10 and is priced 7.5 times of its face value on the lower side and 8.5 times on the higher side. Minimum order quantity for bidding has been fixed at 80 shares and thereafter in multiples of 80 shares.

Book running lead managers to the issue are Avendus Capital and ICICI Securities.

Company secretary and compliance officer for the issue is Anil Kumar.

Profile of the Parabolic Drugs Limited:

Parabolic Drugs was incorporated on February 22, 1996 under the Indian Companies Act, 1956, with the Registrar of Companies, Punjab, Himachal Pradesh and Chandigarh. The company is promoted by Pranav Gupta, Vineet Gupta, PNG Trading Private Limited (PNG) and Parabolic Infrastructure Private Limited (PIPL). At present, the company owns and operates two manufacturing facilities at Derabassi, Punjab, and Panchkula, Haryana. It commenced commercial operations in February 1998 by setting up a unit at Sundhran, Derabassi, to manufacture SSPs. The facility at Sundhran, Derabassi, is WHO-GMP and ISO-14001 certified. Parabolic Drugs started its second facility at Panchkula in fiscal year 2005. Currently, the Panchkula facility has two units manufacturing SSPs and API intermediates such as 6-APA. It is also in the process of setting up a custom synthesis and research and development (R&D) centre at Barwala, Haryana, for development and scale-up of new APIs and APIs intermediates in all therapeutic segments, including non-antibiotic products. This facility is expected to commence operations in the last quarter of fiscal year 2010, to focus on providing contract research services to innovator companies. In addition, the company is in the process of setting up another manufacturing facility at Chachrauli, Derabassi, to manufacture the non-antibiotic range of APIs, which is expected to commence commercial operations in the third quarter of fiscal year 2011.

The company’s product portfolio presently comprises 42 APIs and seven API intermediates which are marketed and exported domestically in the market. It supplies its products to approximately 45 countries, including regulated markets. It has filed 15 dossiers with the relevant regulatory authorities to increase its penetration in the regulated markets. The company has an established R&D setup which comprises chemical and analytical research laboratories at its facility at Sundhran, Derabassi. Its R&D department has led the company to successfully launch additional sterile and oral products over the years. During fiscal year 2010, products such as Ceftazidime, Cefotiam, Ceftizoxime and Cephalothin were launched to further widen its product range.

It has made eight applications for the process patents, of which seven patent applications have been filed with the Indian Patent Office, and one international process patent for manufacturing Cefuroxime Axetil filed under the PCT. PDL has obtained the USFDA approval for supplying 6-APA into US markets. PDL has also been granted Certificates of Suitability by European Directorate for the Quality of Medicines (EDQM) for two of its products. As on February 25, 2010, PDL had filed 17 Drug Master Files (DMF) applications in EU, the US and other markets.

Parabolic Drugs Limited IPO grading:

Credit Analysis and Research (CARE) and Brickwork Ratings India (Brickwork) have assigned ‘CARE IPO Grade 2’ and ‘BWR IPO Grade 3’, respectively to the issue, indicating below average and average fundamentals, respectively.

Proceed is being used for:

Multi-purpose block-III at Derabassi;

Sterile cephalosporin plant at Derabassi;

Establishment of Chachrauli plant;

Investment in its subsidiary;

Repayment/prepayment of identified loan facilities; and

General corporate purposes

Industry overview:

India is the world’s largest democracy by population size and one of the fastest growing economies in the world. Strong GDP growth and significant cost advantages have resulted in the Indian pharmaceutical industry growing significantly by 19.8% from around $6.9 billion in 2002-03 to around $17.0 billion in 2007-08.

The Indian pharmaceutical industry can be classified based on products manufactured as ‘bulk actives’ and ‘formulations’. Based on the markets catered, these can be further classified into domestic exports. Further, exports can be made to regulated or developed markets like the US, Europe, Japan, etc and semi-regulated/nonregulated or emerging markets like Asia, Africa and Latin America.

Indian pharmaceutical exports have grown at a CAGR of 27.0% in the last six years to reach $8.6 billion in 2007-08. The Indian pharmaceutical industry is the beneficiary of several policy initiatives by the Government of India.

According to the ministry of commerce, Report of the Task Force, December 2008, currently, the Indian pharmaceutical industry is one of the world’s largest and most developed, ranking fourth in volume terms and 13th in value terms. In the API segment, India ranks third in the world producing about 500 different APIs. India has emerged as the country with the largest number of USFDA approved plants outside the US. According to the Department of Industrial Policy & Promotion, the drugs and pharmaceuticals sector has attracted foreign direct investment (FDI) worth $121.8 million during the period April-October, 2009. The cumulative FDI inflows in this sector from April 2000 to October 2009 have been $1.58 billion.

The Indian pharmaceutical industry is expected to grow at a CAGR of 14.2% to around $50 billion in 2015-16. Exports are expected to grow at a CAGR of 16.2% while the domestic market is expected to grow by 12.5%. The key growth drivers for the Indian pharmaceutical Industry are the large number of products going off-patent in developed markets, pressure to contain rising healthcare costs, intensifying competition and a shift to the networked pharmaceutical operating model. India, with its low cost manufacturing facilities, abundant talent pool and significant presence in the generics market is an attractive destination for global contract research and manufacturing services (CRAMS).

Parabolic Drugs Limited IPO’s Pros and strengths:

Established R&D facility – Parabolic Drugs is a research driven company with its R&D efforts focused on developing non-infringing processes and achieving process improvements and production cost efficiencies. The company is having an established R&D facility which comprises chemical and analytical research laboratories at Sundhran, Derabassi, and a team of 85 scientists including 16 Ph.Ds, as at April 15, 2010. The company has also set up an additional R&D centre at Barwala in fiscal 2010. Its R&D department has successfully launched various sterile and oral SSPs and Cephalosporins in the past.

Diversified and improving customer base – Including some of the leading generic companies in the world, the company as at March 31, 2009, was catering to 487 customers worldwide compared to 244 in fiscal 2007. Its sales to top five customers, which amounted to 57.59% of total sales by value in fiscal 2007 reduced to 34.84% in fiscal 2009. The company constantly strives to increase customer base and reduce dependence on any particular customer. They supply products domestically as well as to approximately 45 countries, including regulated markets. Some of the countries to which it supplies its products include Turkey, Jordan, Syria, Iran, Korea, Italy, the Netherlands and the US.

Wide product range in the antibiotics segment – The company manufactures a wide range of products in the antibiotics segment encompassing oral as well as sterile forms of SSPs and Cephalosporins. In addition, the company also manufactures a range of API intermediates which are in turn used to manufacture APIs. Its current product portfolio comprises 44 APIs and seven API intermediates which are marketed domestically and exported. The company is continuously focusing on developing new products within their existing segments, including niche products developed with specific applications such as niche Penicillin APIs such as Bacampicillin, Sultamycillin, and Pivampicillin at its Panchkula facility.

Advanced facilities to serve regulated markets and manufacture multiple products – The manufacturing facilities of the company are designed to manufacture a variety of APIs and API intermediates using a combination of processes. Its facility at Sundhran, Derabassi is WHO-GMP and ISO-14001 certified. Most of its facilities are in compliance with rules and regulations of USFDA. Such facilities allow the company to market products in regulated markets on registration and approval of the products with the relevant authorities. Its proposed facility at Chachrauli, Derabassi is also being set up in compliance with USFDA standards. Their flexible manufacturing infrastructure enables them to expand product range and change product mix in response to changes in customer demand and to serve customer requirements ranging from laboratory scale research to commercial production.

Parabolic Drugs Limited’s IPO Risks and concerns:

Revenue dependence on few therapeutic categories – The company’s revenue is derived from sale of products in limited therapeutic areas which include Semi Synthetic Penicillin (“SSP”) and Cephalosporin range of antibiotics in oral and sterile form. The revenue derived from the sale of products in the antibiotic category was Rs 37,452.39 lakh for the nine-month period ended December 31, 2009, which was 100% of the gross sales of the company up to December 31, 2009, as per its audited restated consolidated financial statements. If the company is unable to appropriately identify and respond to competitive pressures in this segment or successfully introduce new products, it will adversely affect future results of operations.

Competitive business environment – The company operates in a competitive business environment, both globally and domestically. Competition from existing players and new entrants and consequent pricing pressures may adversely affect the business, financial condition and results of operations. Further, the Active Pharmaceutical Ingredient (API) product segment, which is the core area of functioning of the company and is intensely competitive and company’s inability to properly handle the competition will affect the finances.

Overdependence for imports of raw materials, particularly from China – A significant portion of raw materials consumed by the company are imported, particularly from China. For the financial year ended March 31, 2009, the value of raw material imported by the company was Rs 22,762.22 lakh or 61.65% of the total raw materials consumed. Further, the percentage of raw materials imported from China to the total raw materials consumed for the fiscal 2009 was 22.62%. Also, raw material costs are dependent on global commodity prices, which are subject to fluctuations. In the event the prices of such ingredients were to rise substantially or if imports from China were to be restricted in any manner or market concerns regarding the quality of such raw materials, it will be difficult to find alternative suppliers for raw materials, on terms acceptable to the company, and business, results of operations and financial condition could be adversely affected.

Expansion plans subject to time and money constraints – The proposed expansion in operations of the company requires significant capital expenditures. Further, the company may make substantial investments in the future for establishing new manufacturing facilities and upgrading its existing manufacturing facilities so that they comply with the standards set by the USFDA and other regulatory authorities. Delays in the construction and equipping or expansion of any of its facilities could result in loss or delayed receipt of earnings, increase in financing and construction costs, and the company’s failure to meet profit and earnings budgets may require them to reschedule or reconsider its planned capacity expansions and accordingly would have an adverse effect on its financial condition and results of operations.

Parabolic Drugs Limited IPO’s Outlook:

Parabolic Drugs, incorporated on February 22, 1996, is engaged in the manufacturing, including contract manufacturing, of APIs and API intermediates for the domestic market as well as for exports to international markets, including regulated markets. It owns and operates two manufacturing facilities at Derabassi, Punjab, and Panchkula, Haryana. The company is having a wide range of product portfolio comprising 42 APIs and seven API intermediates which are marketed and exported domestically in the market. The company is focused on entering regulated markets where margins are substantially higher than non-regulated markets. The company has been repeatedly increasing its customer base and holds an established R&D facility.

On the concern side, the company faces stiff competition from domestic as well as foreign players, in the regulated and unregulated markets as well. Further, a significant portion of raw materials consumed are imported, particularly from China that poses geographical vulnerability. The company’s revenue is derived from sale of products in limited therapeutic areas. The company is planning to enter into CRAMS segment, the operating margins of the segment are high but it will have to face a stiff competition from established companies like Divi’s lab, Zydus Cadilla, Aptuit Laurus, ChemBiotech, Shasun Chemicals, etc. in the segment.

The scrips are being offered in a price band of Rs 75-85. The P/E works out to be 16.3x on the lower side of the price band and 17.3x on the higher side of its annualised FY10 earnings. The average return on capital employed (ROCE) for the last five years is at 10.3%, while average return on net worth (RONW) for same period is at 30.7% this is higher than industry averages of 8.79% & 13.8% respectively. It reported a total income of Rs 350.15 crore with a net profit of Rs 23 crore for the nine months ended December 2009. But if we compare it with a relatively larger player Nectar Lifesciences that trades at 8.8 times, its FY10 earnings then the issue sounds pricy. Though the Indian pharmaceutical industry is growing significantly but is highly regulated, including in relation to quality standards and pricing of drugs and intermediates. Keeping in view all these factors our recommendation will be against the issue.

Popularity: 14% [?]

Tags: , , , , , , , , , , ,

Category: IPO

«
»