Concord Biotech, an API maker based on fermentation, will be open for IPO subscription till August 08, Tuesday. The IPO which is entirely an offer for sale by non-promoter (Helix Investments) has been subscribed 2.2 times till Monday. The IPO is priced at a marginal premium to API peers, at 32 times FY23 earnings. But considering the entry barriers and growth visibility of the company, we recommend investors subscribe to the issue.

Entry barriers

Finished dose formulations account for 11 per cent of FY23 revenues and APIs accounted for 89 per cent. Concord manufactures fermentation-based APIs where living organisms are used as starting materials, compared to chemical-based APIs. These APIs are used in therapies addressing immunosuppression (post organ transplants), immunology, oncology and anti-infectives.

There is a technological barrier in establishing manufacturing know-how for fermentation with multiple steps and in scaling up the commercial facilities that manufacture the API. Even separation and purification of the output can be a differentiator as the use of microbial strains makes it prone to a high risk of contamination.

In fermentation APIs, China has a large presence but is mainly focused on large-scale products like penicillin and antibiotics. In smaller APIs for specific products, Concord has built 20 per cent of the global market share in several products (Tacrolimus, Cyclosporine, Mycophenolate, and others). This has been built over several years of relationship which also adds to entry barriers.

Growth visibility

Concord Biotech has 23 APIs in its portfolio with 6-immunosuppresants, 5-antibacteial, 3-antifungal, 6-oncological, and others. The company will focus on expanding the volume share, cross-selling products to clients. and gaining from higher genericization of the end product (from 40-50 per cent generic share to 60-75 per cent).

The company has barely utilised its new facility in Limbasi (800 sq. meters of fermentation capacity out of a total of 1,250 sq. meters) which reported a 31 per cent capacity utilization in FY23 after commercialisation in FY22. This compared to 70 per cent utilisation for its Dholka (450 sq. meters) facility, its only other fermentation plant. And the Limbasi facility cleared US FDA inspection (zero observations) only in June 2023, which implies that contribution from the lucrative market is yet to be reflected in FY23 financials. The new Limbasi plant will house anti-infective and oncology fermentation lines where Concord wishes to expand.

The facility will also house an injectables facility. Concord generated close to 11 per cent of revenues from formulation sales in FY23 from India, Emerging markets, and USA. The company markets 27 brands in India and EM and four formulations for US markets. The injectables will leverage the existing products’ marketing infrastructure and the backend API availability to scale up in the lucrative injectable formulations. Concord is also developing CDMO operations, which can be a large opportunity in 3-4 years.

Financials and valuation

Concord reported revenue of ₹853 crore in FY23 at 17 per cent revenue CAGR in FY21-23 and the growth is in line with its historical growth rate according to the company. The company reported a 40 per cent EBITDA margin and 28 per cent PAT margin in FY23, which reflects the complex nature of fermentation-based APIs.

The reported margins are API sector leading which supports the valuation of 32 times FY23 earnings. The higher installed capacity which is underutilized till FY23 also supports subscribing at a higher value per earnings. As peak utilisation is achieved valuation comfort from improved earnings can be expected.

Risks: Apart from plant-based risks (to be expected in pharma), the 220 days for working capital turnover is also a key monitorable. Utilisation of Limbasi plant with secured clients and contracts is crucial aspect of valuation premium. The company does not bear a significant pricing growth lever as its supplies primarily to generic clients.

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