Innova Captab

Branded generic pharmaceutical manufacturer

New facility in Jammu to expand product offerings in the CDMO and branded generic businesses

Incorporated in the year 2005, Innova Captab is an integrated pharmaceutical company in India, with a presence across the pharmaceuticals value chain including research and development, manufacturing, drug distribution and marketing and exports. The company has three businesses: CDMO (contract development and manufacturing organization)services and products, domestic branded generics, and international branded generics.

CDMO services and products include commercial large-scale manufacturing of generic products. The company’s comprehensive CDMO formulation capabilities allow it to offer its customers multiple dosage forms, including oral solids, oral liquids, dry syrups and injectables, as well as more complex delivery forms such as modified and sustained release forms and tablets in capsules. The CDMO product portfolio spans across both acute and chronic therapeutic areas. Domestic branded generics business consists of development, manufacture, and distribution of generic formulation products, which are marketed and distributed in India. The CDMO business caters to the Indian pharmaceutical companies, while the domestic branded generic products businesses cater to the end-user market through a strong network of distributors, stockists and retail pharmacies, and international business caters to pharmaceutical companies and international distributors. The international branded generic product business focused on exports to emerging and semi-regulated international markets and is expanding its international branded generics business to regulated markets like the United Kingdom, and Canada.

The company had 182 and 133 CDMO customers in fiscal 2023 and in the three months ended June 30, 2023, respectively. In fiscal 2023 and in the three months ended June 30, 2023, it manufactured a diverse generics product portfolio of over 600 products and marketed them under its own brands in the Indian market through a developed network of approximately 5,000 distributors and stockists and over 150,000 retail pharmacies. In addition, during fiscal 2023 and the three months ended June 30, 2023, it exported branded generic products to 20 and 16 countries, respectively.

Branded generics are generic copies of the original drug with a new brand name and are sold through various marketing and sales channels. Branded generic products are generic medicines or drugs for which the patents have expired and are typically used as a substitute for more expensive branded generic medicines to offer affordable medicines to patients by the retailers and pharmacies. In fiscal 2023 and in the three months ended June 30, 2023, it exported branded generic products to 20 and 16 countries, respectively. As on October 31, 2023, it has 200 active product registrations and 20 registrations, subject to renewal, with international authorities and 218 fresh registration applications in process with international authorities.

The company has a dedicated R&D laboratory and pilot equipment located at its manufacturing facility in Baddi, Himachal Pradesh. Its R&D laboratory is recognized by DSIR (Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India) for in-house R&D work. In addition, it is looking to establish a new R&D center in Panchkula, Haryana, as well as a new facility in Jammu. As on October 31, 2023, it has employed a team of 29 scientists and engineers at its R&D laboratory.

The company has acquired Sharon pursuant to CIRP (Corporate Insolvency Resolution Process) under the IBC (Insolvency and Bankruptcy Code, 2016). In accordance with the terms of the resolution plan approved by the NCLT, it infused Rs 195.4 crore into Sharon on June 26, 2023. Sharon is now a wholly owned subsidiary of UML (Univentis Medicare Limited) as of June 30, 2023. Sharon manufactures intermediates and active pharmaceutical ingredients (APIs) as well as finished dosages. It also offers contract manufacturing services for pharmaceutical products. Sharon caters to both domestic as well as international markets including Canada, the United Kingdom, Europe, Australia and Central and South America. Sharon has manufacturing plants located in Dehradun, Uttarakhand and Taloja, Maharashtra. As of October 31, 2023, Sharon had 567 employees. Innova Captab had nil revenue from Sharon on a restated consolidated basis in fiscal 2021, fiscal 2022 and fiscal 2023 and for the three months ended June 30, 2023. Revenue from Sharon on a pro forma consolidated basis was Rs 192.216 crore in fiscal 2023.

The company has two manufacturing facilities atBaddi, Himachal Pradesh. Its facilities produce tablets, capsules, dry syrups, dry injections, ointments, and oral liquids. The total installed capacity of the company and the Innova Partnership, on a combined basis (not including Sharon) in fiscal 2023 was 8,191.59 million tablets and 2,472.48 million capsules.The aggregate manufacturing capacity utilization of the company and the Innova Partnership, on a combined basis (not including Sharon), for tablets was 40.68% and for capsules was 55.49%in fiscal 2023. Its facilities are ISO 9001:2015 (quality management system) certified and has GMP (Good manufacturing practices for medicines intended for the European Union market)certifications from the Health and Family Welfare Department, Himachal Pradesh, in conformity with the format recommended by the WHO and Ethiopia.

The company is planning to construct a new 240,916 sq. ft facility in Jammu, which will include tablets, capsules, dry syrups, and injections. The estimated total project cost for this new manufacturing facility at Jammu is Rs 355.17 crore. It has also acquired the necessary land to build this new facility. It anticipates benefitting from the New Central Sector Scheme for Industrial Development of Jammu & Kashmir through this upcoming manufacturing facility in Jammu. Under this scheme, the GoI offers companies registered under the scheme a capital investment incentive, a capital interest incentive, goods and service tax incentive and a working capital interest incentive.

The company purchase APIs and other materials such as excipients and impurities from third party suppliers domestically. It sources most of its API and other materials from a small core of suppliers with reputations for quality products. It does not have any long-term contracts with third-party suppliers. Prices are negotiated for each purchase order, and generally have more than one supplier for each raw material. In addition, under certain CDMO agreements, it is obligated to procure raw materials from vendors specified by the customer. In addition to India, it also sources raw materials from vendors in China and the Netherlands.

The Offer and the Objects

The offer comprises of fresh issue of up to 7142857 equity shares at the upper price band of Rs 448 and 7511737 equity shares at the lower price band of Rs 426 aggregating Rs 320 crore and an offer for sale of up to 5580357 equity shares aggregating Rs 250 crore at the upper price band of Rs 448 and Rs 238 crore at lower price band of Rs 426. The company will not receive any proceeds from the Offer. All the offer proceeds (net of any offer-related expenses to be borne by the selling shareholders) will be received by the respective selling shareholders, in proportion to the equity shares offered by them in the offer for sale.

The promoters of the company are Manoj Kumar Lohariwala and Vinay Kumar Lohariwala. Manoj Kumar Lohariwala, aged 51 years, is also the Chairman and Whole-time Director, while Vinay Kumar Lohariwala, aged 47 years, is the Managing Director.

The company proposes to utilize the net proceeds from the fresh issue towards repayment and/or prepayment in part or in full, of certain outstanding loans of the company amounting Rs 144.4 crore, investment in its subsidiary, UML, for repayment and/or prepayment in part or full of outstanding loans availed by UML amounting Rs 23.6 crore, funding working capital requirements amounting Rs 72 crore and balance towards general corporate purposes.

As at October 31, 2023, its total secured borrowings amounted to Rs 457.70 crore on a consolidated basis. Further UML has availed a loan of Rs 30 crore from HDFC Bank Limited, pursuant to the master facility agreement dated April 9, 2019, and a loan of Rs 145 crore from HDFC Bank Limited, pursuant to the facility agreement dated June 14, 2023. Also as on October 31, 2023, its total outstanding borrowings in respect of working capital facilities were Rs 158.55 crore, on a consolidated basis.

Promoter group selling shareholder Manoj Kumar Lohariwala post-issue shareholding shall decrease to 29.9% from 38.01% pre issue shareholding while Vinay Kumar Lohariwala post-issue shareholding shall decrease to 21.8% from 28.82% pre issue shareholding.

Strengths

The company holds EU GMP certification and exports its products to Canada, UK, and Rest of the World Market. Acquisition of Sharon gives further edge in regulated market as Sharon have strong presence in UK, Canada, and Australia. The company holds drug manufacturing licenses for the manufacturing of various formulations from the Himachal Pradesh State Drug Controlling and Licensing Authority. The recently acquired Sharon has two manufacturing units located in Dehradun, Uttarakhand and Taloja, Maharashtra along with a research facility. Both the manufacturing facilities are GMP certified by the respective states. The company also holds approvals to sell various products to export destinations in less regulated markets like Ghana, Nigeria, and Afghanistan. Going forward, the group’s exposure in regulated markets may increase following acquisition of Sharon which primarily caters to regulated exports markets such as Canada, United Kingdom, Europe, andAustralia, among other.

The company is engaged in the contract-based manufacturing of pharmaceutical formulations since 2005 which has led to well-established relations with its customers and suppliers. The company manufactures formulations for both domestic and foreign pharmaceutical companies including several known entities, such as Cipla. In addition, the company also manufactures generic formulations for government entities on tender basis which accounts for 6-7% of the total operating income. The company also sells its products under self-owned brands through wholly owned subsidiary UML. These contributed around 13% of the total operating income in FY23.

The company manufactures a wide variety of drug compositions in the form oftablets, capsules, syrups, and injectables. The product line finds its application in a wide range of therapeutic segments like antiallergic, anti-diabetic, analgesic, anti-malarial, antibiotic formulations, dietary supplements, steroids, anti-inflammatory, nonantibiotic formulations. etc. With the acquisition of Sharon, the group’s portfolio is expected to diversify further into manufacturing of Active Pharma Ingredients (API), Intermediates, Formulations (own brands), and Contract Manufacturing for finished formulations. It has a diversified product portfolio with presence mainly in acute therapies along with presence in chronic therapies.

The Indian CDMO space has seen traction in the recent times with big pharmaceutical companies preferring to outsource its R&D as well as manufacturing activities. Many of the pharmaceutical players to move to asset light model have been outsourcing these activities. The Indian CDMO market has grown at a rate of 14% CAGR (compounded annual growth rate) in the last five years from fiscal 2018 to fiscal 2023, and this trend is expected to continue over the next five years from fiscal 2023 to fiscal 2028 with the Indian CDMO market projected to grow at approximately a 12-14% CAGR over the next five years from Rs 1310 billion in fiscal 2023 to Rs 2,400-2,500 billion in fiscal 2028. The CDMO segment growth is expected to be driven by strong demand from outsourcing of development and manufacturing of new products by big pharmaceutical companies including both Indian and multinational and global companies.

In CDMO business, the company developed strong relationships across the Indian pharmaceutical industry. In fiscal 2023, it had 182 CDMO customers. Some key customers include Cipla, Glenmark Pharmaceuticals, Wockhardt, Corona Remedies, Emcure Pharmaceuticals, Lupin, Intas Pharmaceuticals, Leeford Healthcare, Medley Pharmaceuticals, Cachet Pharmaceuticals, Eris Healthcare, Indoco Remedies, J. B. Chemicals and Pharmaceuticals, Oaknet Healthcare, Zuventus Healthcare, Ajanta Pharma, Mankind Pharma, and Smart Laboratories.

The Indian domestic formulations segment (consumption) is expected to grow at a CAGR of 9-10% over the next five years from fiscal 2023 to reach approximately Rs 2.8-3.0 trillion in fiscal 2028, aided by strong demand because of rising incidence of chronic diseases, increased awareness, and access to quality healthcare.

The global pharmaceutical market has grown at a CAGR of 5% from approximately US$ 1,135 billion in calendar year (CY) 2017 to approximately US$ 1,457 billion in CY 2022. It is expected to sustain 4.5-5% CAGR growth over the next five years from 2022 to 2027 to reach approximately US$1,750 to 1,800 billion in CY2027.

The global pharmaceutical market is expected to be driven by a rising ageing population, growing cases of chronic diseases, better access to medicine in emerging markets and strong development of generics market.

The global formulation CDMO market grew at approximately 7% CAGR from 2017 to 2022 with increased outsourcing by big pharma companies driven by advantages offered by CDMOs, including reduction of time to market, cost-savings, ability to reallocate internal resources towards drug development, diversification of production sites and the reduction of complexity of business activities. The global CDMO formulations market is expected to reach US$ 40-45 billion by 2027.

Weaknesses

The domestic formulations industry is highly fragmented in terms of manufacturers and products, with 300 to 400 organized players and approximately 15,000 unorganized players. Contract manufacturing is also characterized by high fragmentation and competition, with many organized and unorganized players. As a result, the bargaining power of contract manufacturing players is lowered owing to high competition.

The company has recently acquired Sharon. The combination of two independent businesses is a complex, costly, and time-consuming process. The overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of customers and other business relationships.

The company is required to transfer, obtain, renew or maintain statutory and regulatory permits, licenses and approvals connected with Sharon’s business that became a wholly owned subsidiary of UML as of June 30, 2023, and any delay or inability in transferring, renewing or maintaining such permits, licenses and approvals could adversely affect its business, results of operations and financial condition.

The company’s products and manufacturing processes are subject to stringent quality standards and specifications, typically specified by its CDMO customers and failure to comply with the quality requirements and technical specifications may lead to loss of business from such customers and could negatively impact business, results of operations and financial condition, including cancellation of existing and future orders which may expose it to warranty claims.

The company is dependent on the import raw materials from China, China SEZ and Hong Kong. Its dependence on China, China SEZ and Hong Kong for its raw material supplies exposes it to political, economic, and social conditions in greater China.

The company is subject to risks associated with rejection of supplied products, and consequential claims and associated product liability costs due to defects in products, which could generate adverse publicity or adversely affect business, results of operations or financial condition.

The company is required to obtain, renew, or maintain statutory and regulatory permits, licenses, and approvals to operate business, and any delay or inability in obtaining, renewing, or maintaining such permits, licenses and approvals could result in an adverse effect on results of operations.

The company operate in a highly regulated industry and its operations are subject to extensive regulation governing the pharmaceutical market, including anti-corruption laws and extensive environmental and workers’ health and safety laws and regulations in India.

If any of its products or products it manufactures for its customers cause, or are perceived to cause, side effects, its business, results of operations and financial condition could be adversely affected.

The availability of counterfeit generic products passed off by others as its products, could adversely affect its reputation, goodwill, and results of operations.

With raw material costs forming around 55% of the total income in FY2023 and high competition in the unpatented formulations segment, the profitability margins remain susceptible to volatility in raw material prices.

Valuation

For FY2023, consolidated sales were up by 16% to Rs 926.38 crore. OPM rose 30 bps to 12.3%, which led to an 18% increase in operating profit to Rs 113.65 crore. Other income increased 219% to Rs 9.2 crore, while interest cost rose 252% to Rs 19.97 crore and depreciation increased 48% to Rs 11.08 crore. PBT increased 7% to Rs 91.79 crore. Tax expenses were 10% higher at Rs 23.84 crore. Net profit increased 6% to Rs 67.95 crore.

FY2023 EPS on post-issue equity works out to Rs 11.9. At the upper price band of Rs 448, P/E works out to be 37.7.

As of 19 December 2023, its listed peers such as Torrent Pharmaceuticals trades at TTM P/E of 54.7, Laurus Labs trades at TTM P/E of 58.3, Ajanta Pharma trades at TTM P/E of 36.1, J. B. Chemicals and Pharmaceuticals trades at TTM P/E of 46.7, NatcoPharma trades at TTM P/E of 12.4, Eris Lifesciences trades at TTM P/E of 31.3, Indoco Remedies trades at TTM P/E of 33.2, Suven Pharmaceuticals trades at TTM P/E of 40.5 and Windlas Biotech trades at TTM P/E of 18.3.

For FY2023, Innova Captab’sEbitda margin and ROE stood at 13.3% and 24.6%, respectively, compared to 30% and 20.1% for Torrent Pharmaceuticals, 26.5% and 19.7% for Laurus Labs,23.6% and 17.4% for Ajanta Pharma, 22.4% and 16.5% for J. B. Chemicals and Pharmaceuticals, 38.4% and 14.8% for NATCO Pharma, 32.5% and 17.1% for Eris Lifesciences, 17.3% and 13.8% for Indoco Remedies,45.7% and 23.7% for Suven Pharmaceuticals and 13.7%, and 10.6% for Windlas Biotech.