Akums Drugs and Pharmaceuticals

Domestic focused CDMO player

Repeat orders in the past five years from 38 of its 50 largest CDMO clients in terms of revenue boosted market share

Established in 2004, Akums Drugs and Pharmaceuticals is a pharmaceutical contract development and manufacturing organization (CDMO) offering a comprehensive range of pharmaceutical products and services in India and overseas. The company primarily provides end-to-end solutions for product development and manufacturing as well as research and development (R&D) of formulations, preparation and submission of regulatory dossiers in the Indian and global markets and other testing services.

As a CDMO, Akums Drugs produces an extensive range of dosage forms including tablets, capsules, liquid orals, vials, ampoules, blow-filled seals, topical preparations, eye drops, dry powder injections, and gummies, among others. The company had a market share of 30.2% of the Indian domestic CDMO market by value in FY 2024, up from 26.7% in FY 2021. Revenue contributions to the CDMO business from its five largest clients was 25% in FY 2024.

Akums Drugs manufactures and sells branded drugs and active pharmaceutical ingredients (APIs). The company acquired Akums Lifesciences (formerly Parabolics Drugs) in 2021. As part of this acquisition, it acquired manufacturing units at Dera Bassi and Lalru in Punjab and Barwala in Haryana, and an R&D center at Barwala, Haryana.

In addition to its core CDMO business, Akums Drugs actively markets its own branded formulations in India and across global markets. It has established a domestic and international presence through subsidiaries Akumentis and Unosource, respectively. Akumentis’ focus is on therapy areas such as gynaecology, cardiology, orthopaedic and paediatric. Unosource’s focus is on therapy areas such as anti-infectives, analgesics, central nervous system, and gynaecology.

The CDMO business contributed 78.18% to total revenue, branded and generic formulations 16.74%, and API 5.09% in FY 2024.

Since inception, Akums Drugs manufactured 4,146 commercialized formulations across over 60 dosage forms. It manufactured formulations for 26 of the leading 30 pharmaceutical companies in terms of sales in India in FY 2024.

Akums Drugs operated 12 manufacturing units, with a cumulative formulations manufacturing capacity of 49.23 billion units annually as of 31 March 2024. Further, the company expects its new injectable facility to be operational in FY2025.

Some of the manufacturing units have been accredited by various global regulatory agencies such as the European Good Manufacturing Practice (EU-GMP), the World Health Organization Good Manufacturing Practice (WHO-GMP), and the United States National Sanitation Foundation (US NSF).

Akums Drugs operated four dedicated R&D units end FY 2024. Of these, the Department of Scientific and Industrial Research and Ministry of Science and Technology, Government of India, approved two. R&D expenses were 2.66% of total revenue in FY 2024.

Akums Drugs has longstanding relationships with clients such as Alembic Pharmaceuticals, Alkem Laboratories, Blue Cross Laboratories, Cipla, Dabur India, Dr. Reddy’s Laboratories, Hetero Healthcare, Ipca Laboratories, Mankind Pharma, MedPlus Health Services, Micro Labs, Mylan Pharmaceuticals, Natco Pharma, Sun Pharmaceutical Industries, UCB, and Amishi Consumer Technologies (The Mom’s Co), among others. Existing clients contributed 94.8% to revenue and new clients 5.2% in FY 2024.

Akums Drugs has an international presence extending across 65 countries. Key overseas clients include Allegens (Vietnam), Ambica International (Philippines), Caferma SAC (Peru), JDS (Myanmar), Master Pharma (Cambodia), Olainfarm (Latvia), Pharma Apex (Myanmar), Planet Pharmaceutical (Tanzania), and Unisel (Kenya), among others. The company derived 93.55% revenue from India and 6.45% from outside India in FY 2024.

Akams Drugs secured approval from the Drug Controller General of India (DCGI) for 927 formulations and granted approval for five patents in FY 2024. Further, the company received approval from the Food Safety and Standards Authority of India (FSSAI) for 923 formulations.

Akums Drugs aims to utilize its leadership position to further expand market share and solidify its position in the CDMO market.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 680 crore and an offer for sale of 1,73,30,435 equity shares, aggregating up to Rs 1176.74 crore, by promoters Sanjeev Jain and Sandeep Jain, and Ruby QC Investment Holdings.

The price band for the IPO is Rs 646 to Rs 679 per equity share of face value Rs 2 each.

The objectives of the fresh issue are allocating Rs 387 crore for repaying or prepaying existing borrowings, Rs 55 crore to support increased working capital needs, and the remaining funds for general corporate purposes.

The promoters are Sanjeev Jain, Sandeep Jain, and Akums Master Trust. The promoters and the promoter group hold an aggregate of 12,14,79,380 equity shares, aggregating to 82.44% of the pre-offer issued and paid-up equity share capital. Their post-IPO shareholding is expected to be around 75%.

The issue, through the book-building process, will open on 30 July 2024 and will close on 1 Aug 2024.

Strengths

The Indian domestic CDMO market is projected to expand at a compounded annual growth rate (CAGR) of 14.3% from FY2024 to FY 2028, almost doubling its past growth rate. The company is positioned to capitalize on this growth, as it was the largest India-focused CDMO in terms of revenue, production capacity, and clients served in FY2023.

A broad client base comprises established longstanding CDMO relationships with many. The clientele of 1,524 companies spans various sectors including pharmaceuticals, nutraceuticals, cosmo-derma, wellness, e-commerce, healthcare providers, as well as central and state government entities. As many as 26 of the 50 largest clients in terms of revenue had a legacy of more than 10 years with the company as of 31 March 2024. Their revenue contribution grew from Rs 1354.85 crore in FY 2022 to Rs 1441.53 crore in FY 2024.

Akums Drugs received repeat orders in the past five years from 38 of its 50 largest CDMO clients in terms of revenue as of 31 March 2024, highlighting the company‘s dedication to delivering high-quality products and services that meet the evolving needs of its clients.

Akums Drugs possesses extensive and rapidly expanding R&D capabilities across its product range. Its commitment to R&D led to the creation of 222 innovative formulations since the company‘s inception.

Akums Drugs has strong presence across the pharmaceutical value chain, operating as a CDMO as well as a marketer of formulations and manufacturer of APIs. Moreover, its presence is amplified through global export initiatives.

Akums Drugs is venturing into new therapeutic areas such as neurology, psychiatry and orphan diseases. This strategic move will help the company diversify its portfolio and tap into previously untapped market segments.

Akums Drugs is expanding its global presence to access new markets and customer segments. Furthermore, the company is scaling its API business. This will lead to cost efficiencies through economies of scale in production.

Akums Drugs is run by experienced promoters and management team. Its promoters and managing directors Sanjeev Jain and Sandeep Jain have extensive experience in the Indian pharmaceutical industry.

Weaknesses

Akums Drugs reported negative earnings in both FY2024 and FY2022. It exhibited significant volatility in its OPM and RoE.

The CDMO business requires significant capital expenditure. Delays in obtaining necessary capital or accessing it at unfavorable rates can harm operations. The capex for the CDMO business was 7.17% of total revenue in FY 2024.

The manufacturing units and R&D centres are concentrated in Haridwar, Uttarakhand. This geographic concentration exposes it to social, political, civil or economic disruptions in Haridwar or Uttarakhand in general.

About 35% of the raw materials for the API business were sourced from China in FY 2024. Additionally, 11.52% of raw materials for its CDMO business are sourced from the same origin. Any delay, interruption, or reduction in the supply of these raw materials could have a negative impact on the business.

The Indian pharmaceutical market is subject to extensive regulation. Any failure to comply with the existing and future regulatory requirements in the pharmaceutical market could adversely affect the business. Moreover, the international expansion efforts may expose it to intricate regulatory requirements, potentially imposing substantial compliance costs on its operations.

Akums Drugs received various notices from regulatory authorities in India alleging instances of non-compliances, including certain violations of Companies Act, Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, Drugs and Cosmetics Act, 1940, and other applicable law by the company and subsidiaries in the past. Failure to defend these proceedings successfully may have an adverse effect on its business operations and reputation.

There are outstanding legal proceedings (including criminal) involving the company and certain of its promoters, subsidiaries and directors. Any unfavorable decision in connection with such proceedings may adversely affect business and reputation.

Valuation

Consolidated sales increased by 14.32% to Rs 4178.18 crore in FY 2024 as compared with FY2023. The OPM decreased by 631 bps to 17.56%, leading to 63.61% decline in OP to Rs 122.98 crore. OI slid 26.2% to Rs 34.03 crore. Interest cost increased 9.45% to Rs 50.61 crore. Depreciation rose 11.37% to Rs 125.64 crore. Loss before tax and extraordinary items were Rs 19.25 crore as compared with profit of Rs 224.8 crore. Tax credit was Rs 46.07 crore in FY 2023 as compared with tax expense of Rs 52.48 crore in FY2023. Net loss was Rs 4.04 crore as compared with profit of Rs 94.86 crore.

Akums Drugs reported negative earnings in FY2022 and FY2024. However, these losses were primarily due to accounting adjustments related to fair value changes in financial instruments (put option liability) amounting to Rs 494.17 crore in FY2022. Based on restated financial data, although the issue pricing appears aggressive, excluding such accounting provisions reveals that the company achieved a net profit of Rs 243.30 crore in FY2022, Rs 53.85 crore in FY2023, and Rs 358.56 crore in FY2024. With these earnings, the FY2024 EPS amounts to Rs 22.78, resulting in a revised P/E ratio of 29.79. This changes the perspective. After the IPO, the provisioning for the put call liability will be eliminated, presenting a clearer financial picture of the company.

Listed peers such as Divi‘s Laboratories traded at TTM P/E of 79.47, Suven Pharma at TTM P/E of 78.68, Gland Pharma at TTM P/E of 43, and Torrent Pharma at TTM P/E of 67.81 as of 28 July 2024. Akums Drugs’ adjusted (for fair value changes to the financial instrument) OPM and RoE stood at 12.22% and 17.19%, respectively, in FY 2024 as compared with 28.11% and 11.78% for Divi‘s Laboratories, 38.6% and 14.64% for Suven Pharma, 23.53% and 11.59% for Gland Pharma, and 31.39% and 24.15% for Torrent Pharma, respectively.

At the higher price band of Rs 679, the offer is made at post-issue EV/ FY2024 sales of 2.52 times on a post-issue equity share capital of Rs 31.47 crore of face value of Rs 2 each. The listed industry peers company are Divi‘s Laboratories, trading at 15.71 times its EV/ TTM sales, Suven Pharma at 22.47 times, Gland Pharma trades 5.21 times, and Torrent Pharma at 10.27 times.