Concord Bio IPO review (May apply)

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Review By Dilip Davda on August 1, 2023

•    CBL is an Indian biopharma company having many niche products. 
•    Though its top line marked growth for the last three fiscals, its bottom line posted inconsistency with lower profits for FY22.
•    Based on FY23 financial data, the issue appears fully priced. 
•    This being a purely secondary issue, the company is not receiving any funds. 
•    Well-informed investors may park funds for the medium to long-term rewards.

ABOUT COMPANY:
Concord Biotech Ltd. (CBL) is an India-based biopharma company and one of the leading global developers and manufacturers of select fermentation-based APIs across immunosuppressant and oncology in terms of market share, based on volume in 2022 (Source: F&S Report), supplying to over 70 countries including regulated markets, such as the United States, Europe and Japan, and India. It commanded a market share of over 20% by volume in 2022 across identified fermentation-based API products, including mupirocin, sirolimus, tacrolimus, mycophenolate sodium and cyclosporine. (Source: F&S Report). 

As of March 31, 2023, it had a total installed fermentation capacity of 1,250 m3. In 2016, the company launched a formulation business in India as well as emerging markets, including Nepal, Mexico, Indonesia, Thailand, Ecuador, Kenya, Singapore and Paraguay, and has further expanded to the United States. CBL manufactures (i) bio-pharmaceutical APIs through fermentation and semi-synthetic processes, across the therapeutic areas of immunosuppressant, oncology and anti-infectives; and (ii) formulations, which are used in the therapeutic areas of immunosuppressant, nephrology drugs and anti-infective drugs for critical care. 

APIs are active pharmaceutical ingredients which have effects such as preventing or curing diseases. Formulations refer to drug products that are used by patients, such as tablets, capsules or injections. Immunosuppressants are drugs that are typically used by patients undergoing organ transplants, as these drugs suppress the immunity of the patient such that the body accepts the transplanted organ. Further, the immunosuppressant is also used for the treatment of autoimmune disorders. Anti-infectives are medicines that prevent or treat infections and include anti-bacterial and anti-fungal medications. Oncology and nephrology drugs are used in the treatment of cancers and kidney conditions, respectively.

CBL is amongst the few companies globally that have successfully and sustainably established and scaled up fermentation-based API manufacturing capabilities (Source: F&S Report). Fermentation is challenging as it involves working with microbial strains and cultures, controlling multiple processes and performing various purification steps. 

As of March 31, 2023, it had six fermentation-based immunosuppressant APIs, including tacrolimus, mycophenolate mofetil, mycophenolate sodium, cyclosporine, sirolimus and pimecrolimus. CBL aims to continue to grow its immunosuppressant API portfolio, which will remain one of the key contributors to its API business in the near future. 

As of March 31, 2023, the company had 23 API products. it had filed 128 Drug Master Files ("DMFs") across several countries for APIs, including 20, 65 and four, respectively, in the United States, Europe and Japan, as of June 30, 2023. DMFs are documents filed by pharmaceutical manufacturers in respect of certain drug products, such as APIs, which contain proprietary information relating to such drug products.

As of March 31, 2023, CFL 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, the annual installed production capacity of the formulation manufacturing facility in Valthera amounted to 801.64 million units, with an average dosage capability of 0.45 million tablets, 0.36 million capsules and 646.46 bottles of dry syrup per shift, which is defined as eight hours of production.

It had over 200 customers in over 70 countries as of March 31, 2023, for APIs and formulations. It has entered into long-term supply agreements with some of its customers. As of March 31, 2023, it had 1234 employees on its payroll and additional 950 contract workers.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden secondary issue by way of the book-building process. It's an Offer for Sale (OFS) of 20925652 equity shares of Re. 1 with a price band of Rs. 705 - Rs. 741 per share. The company mulls mobilizing Rs. 1550.59 cr. at the upper cap. The issue opens for subscription on August 04, 2023, and will close on August 08, 2023. The minimum application to be made is for 20 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 20% of the post-IPO paid-up capital of the company. Since no fund is going to the company, this issue is a pure secondary offer to provide an exit to some of its stakeholders and to avail listing benefits. 

The company has reserved 10000 shares for its eligible employees and offering them a discount of Rs. 70 per share. From the residual quantity, it has allocated not more than 50% for xx, not less than 15% for HNIs, and not less than 35% for Retail investors.  

Kotak Mahindra Capital Co. Ltd., Citigroup Global Markets India Pvt. Ltd., and Jefferies India Pvt. Ltd. are the joint Book Running Lead Managers (BRLMs), and Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued the initial equity shares at par value, the company issued further equity shares in the price range of Rs. 5 to Rs. 249.86 (based on Re. 1 FV) between August 2001 and July 2022. It has also issued bonus shares in the ratio of 1 for 1 in November 2010, 1 for 1 in November 2013, and 1 for 10 in July 2022. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 2.27, Rs. 3.83, and Rs. 227.14 per share. 

Since this is a purely secondary issue, post-IPO paid-up capital will remain the same at Rs. 10.46 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 7752.06 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, CFL has (on a consolidated basis) posted a turnover/net profit of Rs. 630.75 cr. / Rs. 234.89 cr. (FY21), Rs. 736.35 cr. / Rs. 174.93 cr. (FY22), and Rs. 888.48 cr. / Rs. 240.08 cr. (FY23). Though its top line continued to post growth, its bottom line posted inconsistency with lower net profit for FY22. As of March 31, 2023, its paid-up equity capital of Rs. 10.46 cr. is supported by free reserves of Rs. 1279+ cr.

For the last three fiscals, it has reported an average EPS of Rs. 20.79 and an average RoNW of 20%. The issue is priced at a P/BV of 6.01 based on its NAV of Rs. 123.31 as of March 31, 2023, as well as on a post-IPO basis (at the upper cap). 

If we attribute FY23 earnings to its post-IPO paid-up equity capital, then the asking price is at a P/E of 32.29. Thus the issue appears fully priced based on its financial performance so far. 

DIVIDEND POLICY:
The company has paid a dividend of 60% (FY21), 741.50% (FY22), 512% (FY23) and interim dividend of 683% for FY24 so far. It will continue to follow a prudent dividend policy post-listing of shares, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Divi's Lab., Suven Pharma, Laurus Labs, and Shilpa Medicare as their listed peers. They are currently trading at a P/E of 54.15, 29.13, 24.94, and 53.95 (as of July 31, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The three BRLMs associated with the offer have handled 33 public issues in the past three fiscals, out of which 10 issues closed below the issue price on the listing date. 

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