Waiting to IPO?

by / Thursday, 01 September 2016 / Published in News & Updates

Will the bullish response to last year’s IPOs in the pharma and healthcare sector spur more companies to test the market in 2016? Will these hopefuls succeed in timing their IPOs just right? Or is this just hype and hope? By Viveka Roychowdhury

Last year’s IPOs of Syngene International and Alkem Laboratories in the pharmaceutical space and Dr Lal Path Labs and Narayana Hrudayalaya in the healthcare sector were pleasant surprises to say the least. All four IPOs did much better than others in the ring and many analysts predicted that 2016 would see many more such bids from pharmaceutical and healthcare enterprises.

The rationale was these favourable responses would finally encourage promoters and investors of companies said to be ripe for an IPO to take the plunge to book profits and exit, either partially or fully.

But other experts were not so impressed. They cautioned that just four successful IPOs were not enough to sway sentiment towards the sector and determine that it was finally getting its due from the market.

Across sectors, the numbers show that the urge to IPO seems to be picking up. According to a PTI report dated November 23, last year saw 40 companies filing their draft documents with SEBI to float IPOs, with 31 getting approval, including some pending from 2014. By November, 18 companies had launched IPOs and collectively raised nearly Rs 11,000 crore, making 2015 the best in four years in terms of fund raising through initial share-sale programmes. In contrast, just six IPOs had hit the market in 2014, together garnering a mere Rs 1,261 crore, while three firms had launched their public issues in 2013 to mobilise Rs 1,284 crore.

The first good news specific to the pharma sector was that the IPO of Syngene International, Biocon’s contract research and manufacturing subsidiary was heavily oversubscribed, by as much as 32 per cent on the first day of the IPO itself. Perhaps more importantly, the stock continued to surge post IPO, even touching 45 per cent at one point of time.

The Alkem Laboratories IPO, slated to raise Rs 1,350 crore, saw the issue subscribed 44 times, reportedly with the high net worth individual (HNI) category subscribed nearly 130 times. Similarly, the Dr Lal Path Labs’ IPO was oversubscribed 33 times. This time, the charge was led by institutional investors who reportedly put in bids worth 63 times the allocated amount. These successes had a positive impact on the Rs 613 crore IPO of Dr Devi Shetty’s Narayana Hrudayalaya.

The calm before the storm?

20160315ep23A quarter later, with the heat and dust settled, sentiments remain mixed. Munish Aggarwal, Director, Equirus Capital, a mid-size investment banking firm, remains upbeat, predicting that from the capital market perspective, this is possibly the best year in the last three to five years.

He supports his prediction with two reasons. Firstly, according to him, the pharma sector boasts of many high quality scaled-up businesses which are still private. He points out that many companies like Eris Lifesciences, Intas Pharma, Mankind Pharma and many others of a similar size and scale, have contemplated IPOs in the past but changed their plans because of an inactive IPO market.

“The successful IPOs of Syngene International, Alkem Laboratories and others have put to rest these concerns and some of these companies, especially those backed by PE firms, are expected to take advantage of this IPO window to raise capital or exit,” says Aggarwal.

And secondly, Aggarwal reasons that the demand slowdown in global as well as Indian markets will have a limited impact on this sector. But in spite of his optimism, he too refrains from predicting exactly when we will see the next wave of pharma/ healthcare IPOs.

Next in line

But how narrow or wide is the ‘IPO window’? This is the proverbial million dollar question, which plagues IPO aspirants. Besides the financial gains of an IPO, there is no doubt that the company gains brand visibility and attracts attention, both from existing as well as prospective clients. For instance, take the north-based New Delhi Centre For Sight, a chain of specialty eye care centres which filed its Draft Red Herring Prospectus (DHRP) in November last year. According to its DHRP, the company plans to use the funds generated to expand the footprint to Central and East India, as well as diversify its revenue streams by serving demand in medical tourism, expanding in pharmacy and optical sales and clinical research.

20160315ep22Mahesh Singhi, Managing Director, Singhi Advisors points out that companies to be tracked are Intas Pharma, Blue Cross, Advanced Enzyme Technologies and Thyrocare Technologies, who are most likely to hit the markets first as they have already filed their DRHP with SEBI or are planning to do so. Bangalore-based Healthcare Global Enterprises (HCG) too received SEBI approval to float an IPO while Aster DM Healthcare is also said to be filing its IPO this year to fund its growth aspirations.

Singhi too says it is very difficult to give any time line since a major rout is ongoing in global capital markets including India, hinting that companies and bankers would want to wait for conditions to stabilise before hitting the market.

If priced right, these opportunities will be attractive for both retail and institutional investors reasons Aggarwal as the basic fundamentals driving this sentiment remain intact, namely, a relatively stable demand scenario, benign commodity prices and favourable currency movement.

Singhi too sees more demand for (IPOs of) pharma companies than companies in other sectors because as he points out, many IPOs like Just Dial, Inox Wind, Interglobe Aviation, Coffee Day Enterprises are now trading below IPO prices. He reasons that investors would want to go with stable businesses like pharma, which have very high entry barriers and (are) defensive businesses.

Singhi cites the size of the Indian pharma market (third largest in terms of volume and 13th largest in terms of value) and the growth potential as the major drivers. The Indian pharma industry is estimated to grow 20 per cent CAGR 2016-2020, and will touch ` 6 trillion by 2025. If it maintains this growth rate, it will outperform the global pharma industry, which is set to grow at an annual rate of five per cent between the same period.

Analysing the growth drivers, Singhi says, “This growth will be backed by increased exports and increasing consumer spending, rapid urbanisation, raising healthcare insurance among others to fire the growth in the domestic market. Going forward, better growth in domestic sales would also depend on the ability of companies to align their product portfolio towards chronic therapies for diseases such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers that are on the rise.”

In terms of investor mix, Singhi’s analysis is that retail investors (non HNI) have been largely keeping away from both the secondary and primary capital markets. He points out that the retail subscription in recent IPOs has been very low across sectors as compared to QIP portion, which got oversubscribed multiple times. He assumes that there will be heavy participation from institutional investors only in the case of pharma IPOs.

The flip side

The numbers are familiar figures found in most industry reports but will these predictions turn into fact? On the flip side, Aggarwal lists three main factors which could derail the IPO dreams of pharma companies. Firstly, and not surprisingly, the increased regulatory risk in terms of increased FDA related litigation is a real worry.

As Singhi puts it, “Muted export revenue growth and stringent USFDA compliance requirements/ warnings may be the spoilsport for the pharma sector.” So though overall pharma exports are expected to grow at about five per cent, the recent increase in US FDA regulatory actions, including several warning letters and import alerts against Indian facilities of domestic companies on quality related issues, is likely to restrict growth of exports to the US.

Volatile secondary markets and continued FII pull-out from domestic markets and a flight to safety make up this trio of red flags, says Aggarwal.

Regulatory challenges top the list of global cues which could impact this trend followed by the shift from branded generics to pure generics as is witnessed in many European countries which will lead to severe price cuts making brands redundant is another negative which could dim IPO prospects.

Thirdly, manufacturing costs across geographies are tending to become equal as pharma sourcing has become global in nature and this is diluting the manufacturing cost advantage that India enjoyed.

On the biologics side, the increasing use of biotech products pose challenges to synthetic products. On the other hand, entry into biosimilars in regulated market is still with a lot of hurdles, points out Aggarwal.

Singhi also highlights that the higher depreciation of emerging market currencies is also likely to impact export growth to semi-regulated markets. Many companies are in fact cutting back or pulling out of such volatile markets, looking to deploy resources in other territories.

According to Singhi, at a global level, the healthcare sector, (which includes pharma stocks), is leading 2016 so far in the number of filings for equity offerings. But he also points to a sobering fact. “In 2015, nine of the top 10 performing IPOs were in healthcare, but so were eight of the 10 worst performers for the year. It is difficult for investors to determine which companies will do well. Biotech companies, in particular, often have products that are still in development and not yet approved for sale when they file to go public,” he cautions.

In India, according to market estimates, almost Rs 14,000 crore was raised across sectors from the markets last year, and this year, the figure is predicted to be more than three times, at around Rs 50,000 crore. Some point out that it was a cashing out of PE investors rather than growth compulsions which led to most IPOs. But the IPO kitty looks tempting. Whether it turns out to be an illusion or reality, only time will tell.