Eris Lifesciences - 100% of sales from India Pharma Market

Stock Opportunities
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  • Recent new IPO at Rs603 with Rs8540crs market capitalization
  • Eris is a pharma company that derives all of its sales from India.
  • Chronic category contributes to over 65.6% of sales.
  • Eris has outpaced the Indian Pharmaceutical Market (IPM) growth with a CAGR of 28.9% in Chronic and 12.0% in Acute therapy segment.
  • Eris is the fastest growing company in Chronic therapy amongst the top 25 companies.
  • Eris is the 3rd fastest growing company in Cardiovascular and Anti Diabetics therapeutic segments.
  • Field force productivity of INR 4 Lac( YPM – Yield per Man per Month) is industry leading and -
  • Eris is amongst most productive companies in the Industry.
  • Eris product portfolio is primarily focused on therapeutic areas which are treated by super specialist and specialist doctors such as Diabetologists, Endocrinologists Cardiologists, and Gastroenterologists.
  • Super specialists and specialists contribute to 96.1% of our total prescriptions as compared to 61.6% for the IPM. We have a prescriber base of 50,282 doctors for Fiscal 2017 as per IMS medical audit.
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Financials from screener

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Company is zero debt.

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2Q results over the weekend

  • 25% sales growth
  • EBITDA margin expansion of 208bps
  • 35% PAT growth

Acquires Strides’ India business
Eris has agreed to acquire Strides’ India branded formulations business with 130 brands and Rs181crs sales for Rs500crs.

Key risks as I understand

  1. If products are brought under price control
  2. Business built around strong brands and relationships with specialists/ super specialists, a shift to unbranded generics is a big risk

Disclosure: Invested

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glancing at financials-

  1. company liquidated share capital from .14 to 13.75 i.e. 100 times.???
  2. tax paid does not matches profit shown.???
    imageProfit before tax 109.42 154.44 263.77
    Tax 20.16 19.59 21.88
  3. more than 80% liability from reserve???

could not understand logic…

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They did a 99:1 bonus issue in Sept 2016. Their only manufacturing facility is in Guwahati which enjoys a Income tax break till 2024.

Disclosure: Invested

Regards
SJ

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99:1 bonus issue in sep2016… any further details because no such info on bse site.

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They did it prior to the IPO, so I don’t think you will get much detail about it.

Regards
SJ

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Please go through RHP. They did it before the IPO since the no. of outstanding shares was minimal and they never diluted equity since inception. This is a long term domestic consumption play run by an owner operator who has skin in the game. Looks like a decent compounding machine.

Disclosure: Invested

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More than 10 times price to sales ratio?? Thank you very much. I am unfortunately price sensitive and won’t pay a fortune for “quality”.

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I hope you realize this company has profit margins of 25%.

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@krkarthikeyan
Let us consider 2 companies A and B. Both do sales of 100. A has profit margins of 25% so PAT = 25 while B has profit margins of 5% and has PAT of 5. Let us also assume both have networth of 50. So A has RoE of 50% while B has RoE of 10%

So according to your valuation methodology both should trade at the same price since you are looking P/S?

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@snowprince Can you please provide your feedback on Eris Lifesciences. That will be invaluable

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Hi, it’s a good company, strong hold in fast growing segments…but very small R&D spending, and too expensive.
Also in recent deal the co said the acquired ateide portfolio has 70% gross margins while stride said this portfolio has just mid single digit EBITDA margins…so as per my view single digit EBITDA margins can’t command 70% gross margins…also in past 2-3 yrs stride has acquired this portfolio at Rs 275 cr and sold it to Eris for Rs 500 cr… which is also too expensive considering currently challenging scenario in domestic market and low margins…looks something fishy
I know Eris can get product diversification with dis deal but different to digest above facts
About Q2 results, all domestic pharma cos have shown exceptional margins due to accounting changes in taxes and restore inventory post GST implementation…have to see Q3 about sustainable margins and growth

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For us, investors, who are battered by the FDA related issues in our pharma portfolio and having faced underperformance of our pharma holdings relative to broader market, Eris seems like an outstanding opportunity. One pharma company which collects all its profits from Indian pharma market, immune to FDA whims and fancies, solid margins and more than 95% prescriptions by specialists and super specialists.

Many interesting discussions are going around about its margins and balance sheet but no one here has analysed the product mix of Eris Life and sustainability of its business model.

Lets delve into those a bit.

Eris Life claims 95% prescriptions come from Specialists/Super Specialists. Its top brands are Glimisave (Glimperide for diabetes), Eritel (Telmirarstan for hypertension), Rabonik (Rabeprazole for gastroesophageal reflux disease), Remylin (Mecobalamin+Colecalciferol for absorption of calcium and protein synthesis), Tayo (Vitamin D for absorption of calcium), Olmin (Olmesartan for hypertension), Atorsave (Atorvastatin for lipid lowering), LnBlock (Cilnidipine for hypertension) and Tendia (Teneligliptin for diabetes).

I am not a qualified doctor but I have undertaken a course on pharmacology and to the best of my knowledge these medicines are prescribed by General Practitioners not Super Specialists. Why would an oncologist or a cardio-thoracic surgeon or an immunologist prescribe these kinds of medicines? These are lifestyle drugs not complex molecules.

Now lets analyze the pricing details of Eris products and how it is placed in comparison to competitors from other leading manufacturers. Many of its products are priced at a considerable premium to Cadila, Sun, Lupin, Ajanta, Pfizer, Wochardt etc (Source : 1mg.com). So how does a small pharma company sells its products at a premium to top notch brands and products that are manufactured in GMP Certified labs?

Eris seems to have a very strong sales team that is quite adapt in deal making with doctors. Except that, it has no international presence, no API business, no skill set in manufacturing complex molecules and marketing high end drugs. More importantly, if the Govt someday decides that doctors would prescribe only generic salt names, prices of these products may crash upto 90%.

It’s a risk worth taking or not is the for the investor to decide.

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The most attractive part of Eris is Mr. Bakshi’s credentials and the fact that Guwahati plant has tax breaks till FY24. Around 80% of manufacturing happens from there and the present capacity utilisation is also very less there so no major capex investments needed as per me. They have plans to shift Strides acquired products to this factory. Acquisition will be funded by internal acqural and debt so finance cost will go up but they said its earnings accretive from the start. Also some major part of sales of Strides come from single state of TN while Eris is more present in Western and Northern India. So they can market the products pan India and there is no major product overlap also. They have also publicly stated that they have no plans of exports and will concentrate only within India, so USFDA related issues are gone.

One negative thing I found from this years annual report is that they had paid Rs6042/- as interim dividend last year just before IPO. Nothing was paid out as interim or final dividend this year.

I think its not tracked widely by analysts so not much institutional interest yet. Once it gets widely tracked with better and consistent earnings growth, we should see more investor interest.
disc - invested from IPO and added frequently after that

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This is what management has said on a conference call on Monday Nov 20, 2017

  • Gross margins can expand from current level due to shift manufacturing in-house. Overhead will be lower as Eris may take over only 1/3rd the current field force
  • Strides was strong in South India while Eris is strong in North and West. So that means there is decent chance of higher sales growth due to geographical expansion post acquisition
  • By the way current gross margins is 69%.
    So EBITDA margins of the acquired portfolio can be meaningfully higher than current levels.
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@devaki.tripathy thanks for bringing up issue of product prices. Could you please elaborate on which products are priced higher than Cadila, Sun, Lupin, Ajanta, Pfizer, Wochardt etc?

I did a quick check on top Eris brands (Glimisave, Eritel, Rabonik) with substitutes on 1mg.com and found that most of Eris drugs are priced at par with name brand drugs. I compared Eris with top brands for the respective molecule as listed by 1mg for prices. Only unknown brands are selling at a discount to Eris and name brands are selling at par or at a premium to Eris. Only Mankind Pharma had few drugs that are much lower than Eris.

Eris brands are ranked in top 5 by prescription so these should be compared with other name brands. In spite of among the top ranked brand, its market share is still around 5-7%. that means the market is quiet fragmented.

Branded generics is a viable business model not only in India but other other unregulated and semi-regulated markets where quality of manufacturing is questionable and government is unable to enforce quality standards across thousands of small pharma companies. Ironically US FDA is able to enforce its quality standards in India for drugs that are exported to US but Indian FDA cannot enforce quality standards for drugs sold in India. This is one reason doctors prescribe branded generics as brand carries quality value.

Another point I noticed is that these medicines costs about 4 to 12 rs/tablet which patients take about once or twice a day for a total monthly cost of 300 to 600 rs/month at retail price level. These aren’t expensive drugs at all something that patients will be actively searching for a cheaper substitutes.

Disc: Invested since IPO and thereafter.

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@Yogesh_s, these are really good points that you are made. However, considering everything, the stock trades at approx 30 times FY18 earnings (basis IPO valuation done on www.sptulsian.com). Isn’t is grossly overvalued when pharma biggies are trading at sub 20 PE.

Will appreciate your views pls.

Disc: Invested since IPO.

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The news is a bit old but I don’t know how many investors are aware of this issue.

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