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Credits: Most of the content of this post is public information that has been referred from the company website, annual reports and conference call transcripts.
In this issue of the Indian Dhandho newsletter, we are going to dive deep into a less talked about pharmaceutical company - Eris Lifesciences. So buckle up, sit tight and grab a drink to enjoy while you read.
Company Overview
Eris Lifesciences Ltd is the only publicly listed Indian pharmaceutical company with a pure-play domestic branded formulations business model. Established in 2007, Eris is by far the youngest company in the IPM Top-25.
Since inception, the company has focused on chronic and sub chronic lifestyle related therapies. It is a fully-integrated pan-India business with a strong focus on high-end super-specialist doctors and consulting physicians.
Revenues of the company have grown 6x in the last 10 years (since FY11) and 2x in the last 5 years (since FY16). Net profits have grown ~ 17x in the last 10 years and 2.6x in the last 5 years.
The company has maintained an ROIC in excess of ~ 30% over the last 12 years. Fourteen years into the business, the company retains its fundamental strengths in terms of a chronic-focused portfolio (91% of sales).
Management History
Amit Indubhushan Bakshi is the promoter of the company. He holds the positions of Chairman and MD on the company’s board.
He hails from Kanpur and started his career and worked as a sales staff in pharmaceutical companies such as Torrent Pharma, Eli Lilly, Intas Pharma for 12 years. At Intas Pharma, he became the Head of Sales and Marketing.
Amit started Eris is 2007 along with some of his field staff from Intas. He has been a recipient of the ‘Entrepreneur of the Year, 2013’ by Ernst & Young LLP.
Margins
Eris enjoys gross profit margins (GPM) upwards of 80%. It has been able to achieve this by keeping tight control over the cost of production.
The company is able to make operating margins (OPM) of more than 35%.
The net profit margins (NPM) are more than 28% as it currently gets a tax and GST benefits on its manufacturing facility.
Business Profile
Top Brands
Strategic Acquisitions
The company entered into two strategic acquisitions to gain access to new formulations businesses, products and markets.
In October 2017, the company acquired the entire shareholding of UTH Healthcare Ltd (UTH) for an all-cash consideration on INR 129 million. UTH is largely engaged in the segments of Obesity, Diabetes, Gestational Diabetes Mellitus and Maternal Nutrition and Cardiovascular Diseases. The acquisition provided the company with a portfolio of products that complements its other offerings.
In December 2017, the company acquired the Indian branded formulations business of Strides Shasun Ltd (Strides) for an aggregate cash consideration of INR 5000 million. With this acquisition, the company acquired the marketing and distribution rights for India for 130+ brands in the Neurology, Psychiatry, Nutraceuticals and Women Healthcare therapy areas.
Initial revenue - 180cr
Focused on top 5 brands with 140cr revenues
Revenues have grown at a cagr of 11% since acquisition
'Renerve' brand has grown at cagr of 18%
Cost of production went down from 35% to 22% due to in house manufacturing.
Therapy Areas
Oral Diabetes Care
Oral Diabetes Care is the company’s largest therapy area, contributing INR 4,701 mn or 32% of its business. Over FY 11 to FY 21, its Oral Diabetes Care franchise has grown 1.5x faster than the market at a CAGR of 31%.
With a long-standing and established presence in Oral Diabetes Care, Eris continues to fortify its high ranking in terms of revenue rank of #5 and prescription rank of #3 among Diabetologists.
Cardiac Care
Cardiac Care is the company’s second largest therapy area, contributing INR 3,885 mn or 26% of its business. Over FY 11 to FY 21, its Cardiac Care franchise has grown 1.4x faster than the market at a CAGR of 22%.
Eris is ranked #4 in terms of prescription rank among Cardiologists and #11 in terms of revenue in the Cardiac Care space.
Vitamins, Minerals and Nutrients (VMN)
Vitamins, Minerals and Nutrients (VMN) comprises the company’s 3rd largest therapy area contributing to INR 2,972 mn or 20% of its business. Over FY 11 to FY 21, the VMN franchise has grown 1.1x faster than the market at a CAGR of 19%.
Central Nervous System (CNS)
Company’s 4th largest therapy area, CNS contributed INR 974 mn or 7% of its business. In FY 21, Eris’s CNS segment de-grew by 4% yoy while the CNS market grew by 5%.
Gastro Intestinal (GI)
The largest therapy area in the company’s acute franchise, GI contributed to INR 889 mn or 6% of its business. Over FY 11 to FY 21, its GI franchise has grown 1.2x faster than the market at a CAGR of 17%.
Gynaecology
Company’s gynaecology segment contributed INR 519 mn or 4% of its business. Over the last decade, Eris has outperformed the gynaecology market by 4.1x by growing at a CAGR of 49%.
Medical Devices
Through its in-licensing partnership with Microlife, the company has brought a range of world-class medical devices to India. This includes the Circa range of blood pressure monitors, blood glucose monitors and infra-red thermometers.
Manufacturing
Eris has a state-of-the-art manufacturing facility at Guwahati, Assam which accounted for 74% of all products sold (by value) in FY21.
The manufacturing facility is eligible to avail of certain tax incentives including income tax exemption till FY 24 and GST subsidies until FY25. This can be seen from the Net profit margins of 28-34%.
The facility is WHO GMP guidelines compliant. An important point to note here is that this is not a requirement as per current Indian medical standards, however the company believes in great quality control.
Maximization of in-house manufacturing continues to remain its core strategy as it gives best control over quality, supply security and manufacturing cost.
Expansion
Eris has proposed to commission a new formulation manufacturing facility in Gujarat before the end of FY23.
This will be a Greenfield project with a land area of 10 to 12 times of the Guwahati facility and will be operated parallel to the existing Guwahati facility.
In addition to oral solid dosages, the new facility will have the ability to manufacture dosage forms like sterile injectables and oral liquids.
The new manufacturing facility will house a pharma R&D unit with laboratories for formulation, analytical and microbiology.
The capital outlay in the first phase would be Rs. 120 to 130 crores of which 70% to 75%, that is Rs. 90 to 100 crores will be deployed in the remainder of FY22.
All capital requirements for the new project will be funded through internal accruals.
The government of India has put up an incentive for setting up of new facilities as part of the Make-in-India initiative. So under section 115BAB, the company plans to do this in a fully owned subsidiary and that will make the facility eligible for a 15% tax rate.
Distribution Network
As of April 2021, the company has 23 sales depots, 2133 pan-india stockists and more than 500,000 chemists under its network.
Strategy and Triggers for growth
Tier-1 Metro Focus
The company’s choice of Tier 1 metro is very closely linked to its choice of doctor specialty and since inception it has been focused on specialists and consulting physicians.
Metro tier-1 accounts for 75% to 80% of the super specialty business.
This is probably because most of the patients suffering from diabetes, Hyper-tention and other lifestyle diseases are present in tier-1 cities.
Launching new products
The company plans to launch 10 new products in FY 22 to augment existing therapy areas and enter new ones with high growth and margin potential.
3 out of 10 products are already launched:
Zomelis SG - high potential diabetes medication, already ranks #3 including innovator brands.
Remylin DX
ZAC Day - vitamin D medication
In-licensing and acquisition of products
The company plans to follow its long standing strategy to license and acquire some products from other pharma companies.
This helps them get their hands on a product that is ready and needs some marketing push within their existing network of doctors.
Threats, risks and concerns
Regulatory Overhang
The drug price control (Amendment) order limits price increases in scheduled drugs mentioned in the National List of Essential medicines (NLEM).
As of March 31st 2021, 7% of the company’s revenue were from drugs under NLEM.
Increase in competition
The entry of a new/existing pharmaceutical company with focus on domestic branded formulations in the same therapy areas can further intensify the competition.
Strengths and Opportunities
Market Focus - Eris has a pure-play domestic branded formulations focus. It has no plans to enter export markets and no plans to backward integrate into APIs.
Strong Brands - The Company continues to focus on maintaining the strength of its brand portfolio; the Top 15 Mother Brands contribute 78% of its revenue and are well placed in their segments and poised for further future growth.
Leading Prescription Ranks - The Company’s strong portfolio of Mother Brands has witnessed improvement over the years and enjoys leading prescription ranks with their respective specialties. The Company holds a dominant position in key specialty areas such as diabetologists, cardiologists, neurologists, gastroenterologists and Consulting Physicians.
Strong balance sheet - The Company enjoys a debt free status and has consistently generated profits and strong cash flows.
Increased lifestyle related diseases - Increasingly sedentary lifestyle, changing consumption patterns and rapid urbanization has led to a widespread rise in chronic ailments such as Diabetes and Hyper-tention. As the market and economy mature, India is expected to see a higher share of chronic diseases in line with other emerging and most developed nations.
Very high staff productivity - Eris boasts of one of the highest staff productivity levels (Yield per Man per Month) among the branded formulation players. As of March 2021, the productivity was INR 4.5 lakh per month. The pre-covid productivity levels have been INR 5 lakh per month, which is next only to Sun Pharma’s productivity.
Rising healthcare awareness - Enabled by rising medical information portals and healthcare start-ups, patient are becoming more aware of diseases and preventive therapies/medicines.
Increase in government health expenditure - The government has plans of increasing focus on healthcare, doubling its share of expenditure as a % of GDP by 2025.
Summary
In this edition of the newsletter we analyzed the only publicly listed Indian pharmaceutical company with a pure-play domestic branded formulations business model.
There are other innovater and small pharma players that have presence in domestic market, but none of them is completely focused on the domestic market.
Diabetes is a chronic ailment that can only be controlled either by keeping ourself fit or by consuming a regular dose of medicines.
The company is a great play on rising trend of lifestyle related diseases in India.
In some ways the key products of the company can be seen as a necessity which people with chronic ailments consume like items of daily consumption.
If you are looking for a focused, stable, consistently cash generating pharmaceutical company in your portfolio, Eris might be what you are looking for!
I hope this article helped you in understanding the business of Eris Lifesciences.
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Until next time. Take care.
Best regards,
Sahil