Claris Lifescience

Claris Lifesciences has entered the capital market on 24^th November 2010 to raise Rs. 300 crore via the public issue, priced in the band of Rs.278 to Rs. 293 per share. The issue comprises a fresh issue of 102-108 lakh equity shares of Rs. 10 each (depending on the price at which the book is discovered) and constitutes about 17% of post-issue paid-up capital of the company. The issue will close on 26^th November 2010, in which retail investors can apply for upto Rs. 2 lakh worth of shares.

The company is one of the largest sterile injectables pharmaceutical companies in India with a market presence in 76 countries worldwide. With 5 manufacturing plants at a single facility in Ahmedabad, its product portfolio comprises of 128 off-patent products, across therapeutic segments such as anaesthesia, critical care, anti-infectives, renal care, infusion therapy, enteral and parenteral nutrition and oncology, which are offered in various delivery systems, such as glass and plastic bottles, vials, ampoules, pre-filled syringes and non-PVC/PVC bags.

A lot of 'issues' surround the public issue of this company:

Firstly, an erstwhile promoter of Claris Lifesciences, Sushil Kumar Handa (father of company's present promoter Arjun S Handa), was operating a very similar business as the company, under the name Core Healthcare Limited, for about 2 decades, which eventually got suspended from trading from both BSE and NSE, a few years back, for non-compliance of listing, shareholding and corporate governance norms. Both the promoter and company got into several litigations for financial mismanagement and regulatory irregularities by SEBI and are also presently listed on MCA's investor protection website http://www.watchoutinvestors.com/.

Secondly, very recently on 1^st November 2010, US Food and Drug Administrator (USFDA) issued a warning letter to the company, barring it from selling its products in US, due to several violations of Current Good Manufacturing Practice (CGMP) revealed at the company's main plant in Ahmedabad, during an inspection in June 2010. Moreover, an inspection at New Jersey, US, also revealed that the company was marketing an unapproved new product in the US. In addition to this, customer complaints on its products being contaminated with fungus and bacteria also remain unresolved, as of date. Presently, an import alert is sustaining on the company, which prohibits it from selling in the US, until the alert is withdrawn.

If one recalls, a similar ban was imposed on Ranbaxy in September 2008 by USFDA, due to poor quality standards at two of its India plants, which is yet to be lifted by the US regulator. This only indicates the stringent quality control procedures required to be followed and maintained by pharma companies in order to cater to the regulated markets.

Although the company states that these products under alert by USFDA accounted for about 3% of its sales for the first 5 months of CY10, foraying into and re-gaining market share in the vital regulated market of US will be a big challenge for the company, given that its dependence on regulated markets has been increasing in the recent years. The company's sales in regulated markets increased from 4% of total sales in CY08 to 36% of total sales during 5 months of CY10. 

Thirdly, marketing approvals in 17 countries, which account for over 11% of sales, are not in company's names.

Fourthly, some of company's products have been recalled from US, Canada, Denmark, Finland, Australia and New Zealand - all being regulated markets, due to contamination complaints, resulting in recall costs of about Rs. 7.4 crore, in addition to the loss of goodwill. The recalled products comprised of 3.7% of sales for 5 months ended 31^st May 2010.

Lastly, pursuant to USFDA ban, the company's products were also banned by Kuwait regulator during June-August 2010.

All this puts doubt and a big question mark on the future of the contract manufacturing deals of the company with other pharma giants such as Pfizer. Also, the company's Abbreviated New Drug Applications (ANDAs) will remain pending for approval, until the alert gets lifted by USFDA.

While the company has cash and bank balance of Rs. 156 crore, as of 31^st May 2010, it is still raising Rs. 300 crore via the IPO. Of this, Rs. 158 crore will be used towards establishing new plants while Rs. 38 crore will be utilized to build an R&D department. Rs. 50 crore will also be used towards loan pre-payment.

For CY09, it reported total sales of Rs. 744 crore with PAT of Rs. 125 crore, resulting in EPS of Rs. 24.4. For 5 months of CY10, sales were flat at Rs. 325 crore with PAT of Rs. 58 crore, resulting in EPS of Rs. 11.3. As of 31^st May 2010, the company's networth was Rs. 572 crore and BVPS was Rs. 112. Total outstanding debt, as on that date, was Rs. 371 crore.  

Going forward, April 2011 onwards, the company's tax liability will increase, as the income tax exemptions under section 10B for export-oriented units, which it presently enjoys, will expire. Its average rate of tax has been around 9% during January 2009 to May 2010.

At the upper end of the price band, the company is issuing shares at PE multiple of 12 times, which will result in a market cap of Rs. 1,800 crore and an EV of Rs. 1,965 crore, on listing. This is very high considering the issues surrounding the company. Also, the income tax holiday which will expire in the next 6 months, will put added pressure on the company's bottomline.

Considering all this, investors are advised to exercise caution, largely being expensive and more especially on issues directly affecting its core business.