Innova Captab coming with IPO to raise upto Rs 587 crore

Innova Captab 

• Innova Captab is coming out with a 100% book building; initial public offering (IPO) of 1,30,92,094 shares of Rs 10 each in a price band Rs 426-448 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on December 21, 2023 and will close on December 26, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 42.60 times of its face value on the lower side and 44.80 times on the higher side.
• Book running lead managers to the issue is ICICI Securities and JM Financial.
• Compliance Officer for the issue is Neeharika Shukla.  

Profile of the company

The company 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. Its business includes (i) a contract development and manufacturing organization (CDMO) business providing manufacturing services to Indian pharmaceutical companies, (ii) a domestic branded generics business and (iii) an international branded generics business.

The company’s CDMO services and products include commercial large-scale manufacturing of generic products. It also enters into loan license agreements with its customers. Its 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. It also has added products using new technologies like nano technology. Its CDMO product portfolio spans across both acute and chronic therapeutic areas. It manufacture products across some of the key therapeutic areas identified by, including cephalosporins, proton pump inhibitors, anticholinergic and heparin NSAIDs, analgesics and antipyretic, anticold and antiallergic, antiemetic, antidiabetic, antispasmodic, antifibrinolytic, cardiovascular, antioxidant and vitamins, antihyperuricemia and antigout, fluroquinolone and macrolide, nootropics and neurotronic/neurotrophic, antiulcerative, antimalarial anxiolytic, anticonvulsant and antipsychotic, bladder and prostate disorders, antifungal, anthelmintic and antiviral anticholinergic and anti-asthmatic and bronchodilator and erectile dysfunction. 

The company’s branded generics business consists of the development, manufacture and distribution of generic formulation products, which are marketed and distributed in India under its own brand names through online and offline channels. Its branded generic products are generic medicines for which the patents have expired, that are sold directly to its distributors, stockists and retailers. It has developed a diversified branded generics product portfolio including tablets, capsules, dry syrups, dry powder injection, ointments and liquid orals. It sells its domestic branded generic products through its pan-Indian network of distributors, stockists and pharmacies.

Proceed is being used for:

• Repayment and / or prepayment in part or in full, of certain outstanding loans of the company.
• Investment in the company’s Subsidiary, UML, for repayment and / or prepayment in part or full of outstanding loans availed by UML.
• Funding working capital requirements.
• General corporate purposes.

Industry overview

The Indian pharmaceutical industry is the world’s third largest by volume and was valued at Rs 3.6-3.8 trillion (including bulk drugs and formulation exports) as of fiscal 2023. The industry can be broadly classified into formulations and bulk drugs. Formulations can further be divided into domestic formulations and export formulations, both having almost an equal share in the market. At present, low-value generic drugs constitute a large part of Indian exports. India accounts for approximately 3.5% of total drugs and medicines exported globally, and exports pharmaceuticals to more than 200 countries and territories, including highly regulated markets such as the US, the UK, the European Union and Canada. India has a complete ecosystem for the development and manufacturing of pharmaceuticals, with companies having state-of-the-art facilities and skilled/ technical manpower. Moreover, the country has several renowned pharmaceutical educational and research institutes and a robust ecosystem of allied industries.

The Indian domestic formulation market has seen healthy growth in the recent times. As of fiscal 2023, the Indian domestic formulation market contributed to approximately 2-3% of the total global pharmaceutical market. Indian domestic formulations market (consumption) grew at a healthy rate at a CAGR of 9% from fiscal 2018 to fiscal 2023. The Indian domestic formulations segment (consumption) is expected to grow at a CAGR of 9-10% CAGR 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. One of the key growth drivers for the Indian pharmaceutical industry is the increasing prevalence of noncommunicable diseases such as cardiovascular disease, stroke, cancer, diabetes and chronic lung diseases. The chronic segment in general is expected to grow at a CAGR of 10-11% from fiscal 2023 to fiscal 2028. In addition, a growing population and, in turn, growing demand for medicine generally, is expected to fuel the growth of the Indian pharmaceutical industry. India is expected to become one of the leading countries in the world in terms of spending on medicine over the next few years. Along with the abovementioned factors, favourable initiatives and schemes from the Government of India to encourage companies to manufacture ingredients domestically (PLI scheme) will also support the growth of the domestic pharmaceutical industry.

The pharmaceutical CDMO industry is still highly fragmented. One reason for the fragmentation is the fact that many players are privately held or are part of private equity firms’ portfolios. CRISIL expects that the CDMO space is poised for consolidation in the coming few years. Many pharmaceutical companies are seeking advanced supply chain opportunities in order to optimize the development of their molecule. Going ahead consolidation in the CDMO fragmented space is expected to gain traction because of the need to provide better and wider portfolio of services. Some of the Indian Pharma and CDMO players have consolidated in recent times and are looking to strengthen their portfolio by acquiring different businesses or by backward integration. Also, bigger pharmaceutical players are partnering with CDMO firms with better and wider manufacturing capabilities to get one point solution for their requirement. With drug approval and regulatory compliance being one of the critical factors in pharmaceutical manufacturing, experienced and established CDMO pharmaceutical players may be better placed to cater to the large and complex requirements of the clients.

Pros and strengths

Leading presence and one of the fastest growing CDMOs in Indian pharmaceutical formulations market: 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 capabilities in more complex delivery forms such as modified and sustained release forms and tablets in capsules. Its CDMO product portfolio spans across both acute and chronic therapeutic areas. It manufacture products across some of the key therapeutic areas identified by CRISIL Research, including cephalosporins, proton pump inhibitors, anticholinergic and heparin NSAIDs, analgesics and antipyretic, anticold and antiallergic, antiemetic, antidiabetic, antispasmodic, antifibrinolytic, cardiovascular, antioxidant and vitamins, antihyperuricemia and antigout, fluroquinolone and macrolide, nootropics and neurotronic/neurotrophic, antiulcerative, antimalarial anxiolytic, anticonvulsant and antipsychotic, bladder and prostate disorders, antifungal, anthelmintic and antiviral anticholinergic and anti-asthmatic and bronchodilator and erectile dysfunction. 

Well established relationships with marquee CDMO customer base: The increasing use of outsourcing by pharmaceutical companies has created opportunities for the company to build more strategic relationships with its customers. It typically enters into long-term CDMO agreements ranging mostly between two to five years with its customers resulting in predictable and stable cash flows. Its customer engagements are dependent on it delivering quality products consistently. Its potential customers may require considerable amounts of time to approve it as suppliers to ensure that all their quality controls are met and that it meets all their regulatory requirements across a variety of jurisdictions and multiple regulators. It aims at putting great importance on maintaining its relationships with its top pharmaceutical customers, building its customer base and strengthening its product basket for existing customers. 

Highly efficient operations, including its world class manufacturing facilities and supply chain: The company has two manufacturing facilities in Baddi, Himachal Pradesh. Its facilities produce tablets, capsules, dry syrups, dry powder injections, ointments and liquid orals. It was ranked third among its peers in terms of its finished tablet and capsule manufacturing capacity in India. Its manufacturing capacity helps it to provide customers with large volumes and satisfy their requirements. It continuously aims to improve cost-efficiencies and increase productivity in its operations through use of automation in process equipment as well as use of software in capacity and resource planning. It has implemented building management system to control its environment, a fully automated water management system including purified water and water for injection. In the operations, it has an automated contained material handling system which contributes in improving its quality and obtaining higher yield. It also has an electronic camera inspection system, wherever required, to identify and remove defects. In addition, it has integrated auto cartoning and auto collect and shrink machines in its packaging process.

Rapidly growing domestic and international export branded generics businesses: The company’s branded generics business consists of the development, manufacture and distribution of generic formulation products, which are marketed and distributed in India. Its domestic and international export branded generics businesses have been growing rapidly. It has developed a diversified branded generics product portfolio including tablets, capsules, dry syrups, dry powder injection, ointments and liquid orals. Its products’ strong brand recognition coupled with its long-term relationships and ongoing active engagements with its distributors has helped it expand its product offerings and geographic reach. It also sells certain of its generic drug products online through various e-commerce pharmacy sites. Its sales and marketing team focuses on maintaining its relationships with its distributors, building its retail pharmacy base and launching new products. As of October 31, 2023, it had a total sales and marketing team of 287 personnel focused on its domestic branded generics business. 

Risks and concerns

Depend on limited number of contract development: The company’s CDMO business is focused on providing products and services across a diverse range of generic pharmaceutical products for Indian pharmaceutical companies who market such products under their own brand names to the end users. Its business, results of operations and financial condition are dependent on its relationships with and continued supply to its Indian pharmaceutical customers. However, some of its customers may start manufacturing at their own facilities and may discontinue the use of its CDMO services and products. Further, it typically plans and incur capital expenditure for future periods. Delays in successfully entering into contracts for utilization of upcoming capacity may result in lack of proportionate increase in its revenues and results of operations, vis-a-vis an installed capacity increase. In addition, there can be no assurance that it will be able to maintain historic levels or increased levels of business with its significant customers. If it is unable to maintain relationships with the Indian pharmaceutical companies on existing or favourable terms and conditions and if there is delay in replacing these discontinuations with its new products or new customers or maximize utilisation of its installed capacities, it could have an adverse impact on its business, results of operations, margins and financial condition. 

Depend on China, China SEZ and Hong Kong for raw material supplies: 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. Further, its raw material suppliers may be adversely impacted by the economic downturn in their national or regional economies, disruption in their banking and financial systems, economic weakness, unfavourable government policies, rising inflation, lowering of spending power and customer confidence, and political uncertainty.

Business is capital intensive: The company’s business requires a significant amount of working capital primarily as a considerable amount of time passes between purchase of raw materials and sale of its finished products. As a result, it is required to maintain sufficient stock at all times in order to meet manufacturing requirements, thus increasing its storage and working capital requirements. Further, it is required to partially finance a portion of the purchase orders received through its own sources and are therefore required to maintain a sufficient amount of working capital. Consequently, there could be situations where the total funds available may not be sufficient to fulfil its commitments, and hence it may need to incur additional indebtedness in the future, or utilize internal accruals to satisfy its working capital needs. Further, it requires a substantial amount of capital and will continue to incur significant expenditure in maintaining and growing its existing infrastructure and any additional fund raise, equity or debt, could have a significant effect on its profitability and cash flows and it may be subject to additional covenants, which could limit its ability to access cash flows from operations. 

Pharmaceutical market subject to extensive regulation: The company operates 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. The development, testing, manufacturing, operations, marketing and sale of pharmaceutical products are subject to extensive regulation in India and other countries where it exports its products. It is required to obtain and maintain a number of statutory and regulatory permits and approvals under central, state and local government rules in the geographies in which it operates, and for certain facilities involved in producing products for exports, international regulatory authorities, such as regulatory authorities in the Africa and Asia. Further, as it expands its operations and geographic scope, it may be exposed to more complex and new regulatory and administrative requirements, language barriers, lack of brand recognition and legal risks, any of which may require expertise in which it has limited experience as well as impose significant compliance costs on it.

Outlook

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. It has license to manufacture products through two state of the art manufacturing facilities while maintaining WHO-GMP, EU-GMP and other major registrations. With the support of its world class manufacturing facilities and a reliable supply value chain, it is continuously thriving to maintain highly efficient operations. The foundation of the company is its in-house research and development (R&D). which helps to focus on to build an increasingly complex product portfolio and attract and retain customers. It proudly possesses a strong team of 1000+ employees. As a responsible corporate entity, it is been continuously endeavouring to comply with Environmental, Social & Governance compliance requirements covering the aspects of Legal compliance, ethics & business conduct, quality & patient safety, human rights, labour and employment, health safety and well-being of employees, sustainability & environmental responsibility, quality management system. On the concern side, the company depends on third party qualified contract research organisations to conduct clinical trials and studies of its new products and expect to continue to do so. It relies on such parties for successful execution of its clinical trials and studies, however, it does not control many aspects of their activities. 

The company is coming out with an IPO of 1,30,92,094 equity shares of face value of Rs 10 each. The issue has been offered in a price band of Rs 426-448 per equity share. The aggregate size of the offer is around Rs 557.72 crore to Rs 586.53 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 16.45% from Rs 8,034.09 million for Fiscal 2022 to Rs 9,355.78 million for Fiscal 2023. The company’s profit for the year increased by 6.26% from Rs 639.53 million in Fiscal 2022 to Rs 679.54 million in Fiscal 2023. Meanwhile, the company intends to use its reputation and brand in its CDMO business to expand its customer base for its new products. Further, its R&D has played a key role in the expansion of its commercialized product portfolio. Its R&D capabilities for new products will be significant in attracting new customers to its business. In addition, it is looking to establish a new R&D center in Panchkula, Haryana. It has already acquired land for the same. The new R&D center will be equipped with advanced equipment and instruments and will focus on the development of generic and complex generic products.