Concord Biotech

R&D-driven Biopharma Company

Oncology and Anti-infectives to drive growth in the near term

Concord Biotech is an India-based R&D-driven biopharma company. The company is ranked among the leading global developers and manufacturers of select fermentation-based APIs across immunosuppressants and oncology in terms of market share, based on volume in 2022.

Company manufacture (a) bio-pharmaceutical APIs through fermentation and semi-synthetic processes, across the therapeutic areas of immunosuppressants, oncology and anti-infectives; and (b) formulations, which are used in the therapeutic areas of immunosuppressants, nephrology drugs and anti-infective drugs for critical care.

In FY23, APIs contributed 89.23% to total revenue and Formulations 10.77%.

Company supply its products to over 200 customers in over 70 countries including regulated markets, such as the United States, Europe and Japan, and India. In FY23, India contributed 50.65% to total sales, USA 17.26% and Rest of the world 32.09%.

Company also offers contract research and manufacturing services, where it collaborate with third-party pharmaceutical companies to develop APIs and formulations. Going forward, company plans to grow its CDMO business.

As of March 31, 2023, company had three manufacturing facilities in the state of Gujarat, India, comprising API manufacturing facilities in Dholka and Limbasi and a formulation manufacturing facility in Valthera, which were commercialized in 2000, 2021 and 2016, respectively. As of March 31, 2023, company had a total installed fermentation capacity of 1,250 m3.

Company had a market share of over 20% by volume in 2022 across identified fermentation-based API products, including mupirocin, sirolimus, tacrolimus, mycophenolate sodium and cyclosporine.

As of March 31, 2023, company had 23 API products including six fermentation-based immunosuppressant APIs, including tacrolimus, mycophenolate mofetil, mycophenolate sodium, cyclosporine, sirolimus and pimecrolimus. Company intends to continue to grow its immunosuppressant API portfolio, which will remain one of the key contributors to its API business.

To capitalize on the benefits of backward integration that its presence in APIs provides, Company entered into the formulations segment in 2016. In India, company market a portfolio of 27 brands across immunosuppressants, nephrology drugs and anti-infective drugs for critical care. Company has presence across 20 states and five union territories in India.

Company aims to capture opportunities within the fermentation segment across APIs, formulations and other adjacencies, by combining its R&D and production capabilities. To continue its growth momentum, company is also expanding in oncology and anti-infectives (in addition to the existing immunology drug portfolio).

Going forward, company intends to Increase its wallet share from existing API customers, serve additional customers and expand its API portfolio and geographic reach.

Company has 77 approved products for formulations. Company filed 128 Drug Master Files (DMFs) across several countries for its APIs, including 20, 65 and four, respectively, in the United States, Europe and Japan, as of June 30, 2023. In addition, it obtained four ANDA approvals for six products from the USFDA for formulations, as on 27 July 2023.

For the Financial Years 2021, 2022 and 2023, its ten largest customers generated revenues of Rs 272.52 crore, Rs 310.19 crore and Rs 377.81 crore, respectively, representing 44.17%, 43.51% and 44.28%, respectively, of total revenue.

Offer and its objects

The IPO will be complete offer for sale of 2,09,25,652 equity shares by existing shareholder Helix Investment Holdings.

Price band for the IPO is Rs 705 to Rs 741 per equity share of face value Re 1 each.

Company will not directly receive any proceeds from the Offer, and all the Offer Proceeds will be received by the Selling Shareholder Helix Investment Holdings.

Promoters of the Company are Sudhir Vaid and Ankur Vaid. Promoters and promoter group holds an aggregate of 22,558,375 equity Shares, aggregating to 44.08% of the pre-Offer issued and paid-up Equity Share capital. The post IPO shareholding is expected to remain same.

The issue, through the book-building process, will open on 4 August 2023 and will close on 8 August 2023.

Strengths

Company is one of the leading global developers and manufacturers of select fermentation-based APIs across immunosuppressants and oncology in terms of market share, based on volume in 2022. As an established fermentation-based immunosuppressant API manufacturer, company is well positioned to benefit from the growth potential in the immunosuppressant drug market.

Company has high profit margin because of its niche and complex product portfolio. Its OPM was 53.09%, 38.33% and 40.24%, respectively, for the Financial Years 2021, 2022 and 2023.

Company has invested significantly in capacity expansion in recent years. Company is among the few companies globally that have successfully scaled up fermentation-based API manufacturing capabilities. With increased capacities, company is well poised to scale up its API production to serve more customers.

Company has total of 41 manufacturing blocks and 387 reactors in the Dholka and Limbasi facilities, which allows it the flexibility in plant configuration to cater to customer demands.

Company has ability to expand its installed capacity at the existing manufacturing facilities, which may help reduce the need for significant capital expenditure on capacity expansion.

Company has strong R&D capabilities, which help improve its fermentation technology. It has dedicated R&D units for both APIs and formulations. For the Financial Years 2021, 2022 and 2023, its expenditure on R&D activities amounted to Rs 19.29 crore, Rs 25.84 crore and Rs 29.58 crore, respectively.

Company has a Diversified global customer base with long-standing relationships with key customers. As of March 31, 2023, company had over 200 customers in over 70 countries for both API and formulation products. For the Financial Years 2021, 2022 and 2023, long-term supply agreements with customers, constituted 14.06%, 12.45% and 12.56% of its total revenue, respectively.

Company is managed by, experienced Promoters and management team. Mr. Sudhir Vaid, one of the Promoters has played a crucial role in building technology capabilities, scaling up manufacturing facilities and developing R&D division. Mr. Ankur Vaid, the other promoter has contributed to its market strategy.

Weaknesses

Company is highly dependent on imports of raw materials from China. Any disruptions to or restrictions on supply of raw materials from China may adversely affect business. In FY23, Cost of materials imported from china represented 32.01% of Total cost of materials imported.

Company operate in a highly regulated industry. Any inability to comply with laws and regulations may lead to penalties and sanctions, which could impact business operations.

Company is subject to risks arising from exchange rate fluctuations. Significant portion of its business is in several other currencies, primarily in US dollars. For the Financial Years 2021, 2022 and 2023, exports represented 59.05%, 52.67% and 49.35%, of its total revenue respectively.

Company face pricing pressure from customers, which may affect its ability to maintain or increase product prices, thus affecting profit margins.

Company’s business requires significant working capital, for financing the purchase of raw materials and the development and manufacturing of products before payment is received from customers. Insufficient cash flows could affect business.

Company generate significant proportion of its revenue from sales of immunosuppressant APIs. Decline in sales of immunosuppressant APIs and formulations may affect business.

Pharmaceutical industry in which company operate is highly competitive. Any failure to compete in therapeutic areas in which it is focused, can impact business.

Valuation

For FY23, consolidated sales were up by 19.67% to Rs 853.17 crore compared to FY22. OPM increased by 191 bps to 40.24%, which led to 25.62% increase in operating profit to Rs 343.29 crore. Other income increased 50.79% to Rs 35.31 crore, while interest cost fell 17.74% to Rs 4.51 crore and depreciation increased 7.96% to Rs 54.03 crore. PBT increased 35.57% to Rs 322.01 crore. Tax expenses for FY23 was of Rs 81.93 crore compared to tax expense of Rs 62.59 crore in FY22. Net profit rose 37.25% to Rs 240.08 crore.

FY23 EPS on post-issue equity works out to Rs 22.95. At the upper price band of Rs 741, P/E works out to 32.28.

As of 2 August 2023, its listed peers such as Biocon trades at TTM P/E of 47.82, Lupin trades at TTM P/E of 105.25 and Aurobindo Pharma trades at TTM P/E of 24.81. For FY23, Concord Biotech OPM and ROE stood at 40.24% and 18.61% respectively, compared to 22.48% and 2.58% for Biocon, 10.80% and 3.45% for Lupin, and 14.96% and 7.18% for Aurobindo Pharma respectively.