Concord Biotech Ltd – IPO Note – Equity Research Desk

Company Overview:

Concord Biotech an India-based biopharma company and 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), supplying to over 70 countries including regulated markets, such as the United States, Europe and Japan, and India. The company commands a market share of over 20% by volume in 2022 across identified fermentation-based API products. As of March 31, 2023, the company has a total installed fermentation capacity of 1,250 m³. In 2016, the company launched its formulation business in India as well as emerging markets, including Nepal, Mexico, Indonesia, Thailand, Ecuador, Kenya, Singapore and Paraguay, and have further expanded to the United States. The company is backed by Rare Enterprises (via RARE Trusts), an Asset Management company of the Late veteran Investor Mr. Rakesh Jhunjhunwala.

Objects of the Offer:

• Carry out the Offer for Sale of up to 2,09,25,652 Equity Shares by the Selling Shareholder.
• Achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Investment Rationale:

• Strong Portfolio: Concord Biotech is amongst the few global companies that have successfully and sustainably established and scaled up fermentation-based API manufacturing capabilities. 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. Concord 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 4, respectively, in the United States, Europe and Japan, as of June 30, 2023. As of June 30, 2023, Concord had a portfolio of 57 brands and 77 products manufactured by them, including 23 APIs and 53 formulations. In addition, as of March 31, 2023, they had 80 out-licensed formulation which they distributed in India under their brands.

• Client Base: Concord had over 200 customers in over 70 countries as of March 31, 2023, for both their APIs and formulations. They have entered into long-term supply agreements with some of their customers. Their API customers include Intas Pharmaceuticals Ltd and Glenmark Pharmaceuticals Ltd. As of March 31, 2023, they had an average of 8 years of relationships with their 10 largest customers by revenue for the financial year 2023. The revenue from top 10 customers accounted for 44.17%, 43.51% and 44.28% of the overall revenue in FY21, FY22 and FY23.

• Financial Track Record: The revenue from operations of the company has grown at a CAGR of 20% from Rs.340 crs in FY18 to Rs.853 crs in FY23. Similarly, the Profit After Tax (PAT) of the company has grown at a CAGR of 19% from Rs.100 crs in FY18 to Rs.240 crs in FY23 with a PAT Margin of nearly 28% in FY23. Concord has been able to maintain a high profit margin because of their niche and complex product portfolio. In terms of Geography, India is contributing 51% of the overall revenue in FY23, followed by US with 17% and Rest of the World with 32%. Segment wise, API consists of the 89% of the overall revenue and the rest 11% is generated by Formulations in FY23. The balance sheet of the company is very strong with a minuscule debt (virtually zero debt), resulting a debt-to-equity ratio of 0.02x.

Key Risks:

• Regulatory Risk – The manufacturing facilities and products of the company are subject to periodic inspections by few regulatory authorities (ex. USFDA), and non-compliance with their requirements may subject to regulatory action, including a temporary or permanent restriction to market and sell the products in certain markets or result in the withdrawal of a product from certain markets.

• OFS – The IPO is a complete Offer for Sale (OFS) by the Selling Shareholder. The Selling Shareholder will receive the entire proceeds from the OFS and the Company will not receive any part of the proceeds of the Offer. Helix Investments Holdings is the only selling shareholder which will offload up to 2,09,25,652 shares.

Outlook:

The company is operating in the niche pharma space with solid fundamentals. According to RHP, the listed peer group of the company are Divi’s Laboratories Ltd, Suven Pharmaceuticals Ltd, Laurus Labs Ltd, Shilpa Medicare Ltd, etc. At the higher price band, the listing market cap will be around ~Rs.7750 crs and the company is demanding a P/E multiple of 32x based on FY23 EPS and 35x based on the three years weighted average EPS. The peers are trading at an average P/E multiple of 36x. When compared to its peers, the issue appears to be fully priced. Based on the above views, we provide a ‘Subscribe’ rating for this IPO for a medium to long-term Holding.

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