Health-related companies are going public and many more are lining up; here's why

Riding on bullish investor interest, companies in the healthcare, pharmaceuticals and diagnostics sector are rushing to tap the initial public offering (IPO) market. The Covid-19 pandemic, which created special interest in healthcare and related sectors, seems to have been the trigger. According to PRIME Database, which tracks India’s primary capital markets, at least 13 IPOs were launched in the past two years in these sectors. That is a significant rise from earlier years. “There is a pickup in the number of IPOs in the past two years. There were three IPOs in one year on an average over the past five years, but there were seven IPOs per year in the past two years, which is a very good number,” says Pranav Haldea, Managing Director of PRIME Database Group. The most recent IPO, in November 2022, was that of Global Health, which operates the Medanta hospital in Gurugram. The IPO comprised fresh issuance of shares worth up to Rs 500 crore and an offer-for-sale of up to 50.76 million equity shares.

As Haldea points out, the pipeline of IPOs in healthcare, pharmaceuticals and diagnostics looks strong. Data from PRIME Database shows that at least eight companies from the sector have already received markets regulator Securities and Exchange Board of India’s (Sebi) approval for raising around Rs 18,000 crore, and would launch their IPOs soon. These are GPT Healthcare, Wellness Forever Medicare, API Holdings, Kids Clinic India, Macleods Pharmaceuticals, Yatharth Hospitals & Trauma Care Services and Concord Biotech. In addition, several others have filed their Draft Red Herring Prospectuses (DRHPs) with Sebi for IPOs, and are awaiting approvals, including Mankind Pharma, Infinion BioPharma, Innova Captab, Healthvista India and Blue Jet Healthcare. These companies may together raise another Rs 9,700 crore, according to PRIME Database. New Delhi-headquartered Mankind Pharma’s IPO size alone is expected to be approximately Rs 5,500 crore, one of the largest by a domestic pharma company.

“We like companies that are focussed on the manufacturing of active pharmaceutical ingredients (APIs), which are the biologically active component of a drug product, and have proven capability to be either cost leaders or have strong research and development capabilities,” says Aditya Sood, Fund Manager at InCred Multicap Portfolio. Several of the bourse-hitting firms answer to that description.

Not surprisingly, more are planning to join the party. Companies like Emcure Pharma, VLCC Healthcare and Skanray Technologies have made announcements about launching their IPOs of Rs 4,500 crore, Rs 300 crore and Rs 400 crore, respectively. In diagnostics, Vijaya Diagnostics was listed on the BSE on September 14, 2021, and online pharmacy PharmEasy is also planning to come up with an IPO, per PRIME Database.

Then, biotech major Biocon’s subsidiary Biocon Biologics says it will look at an IPO over the next 12-24 months, with the exact timing being governed by market conditions. The company, which raised about $330 million in January 2021 from private equity investors such as True North, Tata Capital, Goldman Sachs and ADQ, acquired the global biosimilars (medicines similar to their branded reference medicines) business of its long-term partner Viatris in November 2022. “These investments and the Viatris acquisition are a testament to Biocon Biologics’ proven capabilities and reflect the high level of conviction investors have in the company,” says Shreehas Tambe, CEO & MD of Biocon Biologics. “With over $70-billion worth of biologics expected to lose exclusivity over the next five years, we are well positioned to capitalise on this opportunity and unlock value for all stakeholders.”

However, while the 13 IPOs since November 2020 have garnered around Rs 9,000 crore from the primary market, these firms have delivered mixed returns to investors so far. Data collated by PRIME Database shows that Krishna Institute of Medical Sciences, Sigachi Industries, Ami Organics, Rainbow Children’s Medicare and Global Health have gained between 35 per cent and 78 per cent from their respective offer prices as of February 8, 2023. The biggest gainer has been Tatva Chintan Pharma Chem Limited, a Gujarat-headquartered specialty chemicals manufacturing company. It listed on the bourses on July 29, 2021, and its share price has increased nearly 85 per cent to Rs 1,998.55 on February 8 from the issue price of Rs 1,083.

On the other hand, Krsnaa Diagnostics, which made its market debut on August 16, 2021, has declined 53 per cent to Rs 445 on February 8 compared to its issue price of Rs 954. Windlas Biotech, Glenmark Life Sciences, Medplus Health Services, Vijaya Diagnostics Centre and Supriya Lifesciences have all declined between 18 per cent and 48 per cent so far (February 8, 2023) from their respective issue prices.

According to a research done by ACE Equity and Bank of Baroda, in CY22 (till mid-December), IPOs in edible oil, insurance and hospital & healthcare services contributed 56 per cent of the total issuances of Rs 55,472 crore in the primary market. “While the edible oil industry has performed very well on the stock market, the insurance industry (read: LIC) has taken a hit, while returns in the healthcare services industry are modest at best,” says Sonal Badhan, Economist with Bank of Baroda’s Economics Research Department.

Let’s now take a deeper look at some of the companies joining the public markets. Tatva Chintan Pharma Chem, which had revenues of Rs 433.6 crore in FY22, saw its Q3FY23 top line grow to Rs 120.6 crore from Rs 104.67 crore in Q3FY22. The company is expanding manufacturing capacity at its existing plant in Dahej SEZ, Gujarat. It is also expanding its R&D facility at Vadodara, which is expected to be completed by FY23-end, it said in a regulatory filing. The company has successfully completed plant-scale trial runs of a new product using continuous flow chemistry (a kind of chemical reaction), which is expected to be commercialised by 2024.

Another new entrant on the bourses, Ami Organics, reported a growth of 7.9 per cent in its consolidated revenues at Rs 152.4 crore in Q3FY23 as against Rs 141.2 crore in Q3FY22. The performance was driven by growth in the advanced pharma intermediates business, while the specialty chemicals business remained flat in terms of growth.

The biggest success, of course, has been Medanta or Global Health. Led by Dr Naresh Trehan, a noted cardiologist, Medanta is considered amongst the top private hospitals in North India, specialising in cardiology and cardiac science, neuroscience and oncology. “Over the past three years, Medanta has expanded its network to cities like Lucknow and Patna, which are underserved and have dense populations. We expect a 17 per cent CAGR in revenues over FY22-25E, led by ramp-up of Lucknow and Patna hospitals along with steady growth from mature hospitals,” Jefferies Group said in a November 2022 report. ‘Mature’ hospitals refer to the group’s original hospitals at Gurugram, Indore and Ranchi, which accounted for 81 per cent of its revenue and 77 per cent of its total operational bed capacity in FY22. “Medanta’s expansion into Central and East India along with a 550-bed expansion underway in Noida (phase I to be commissioned in FY25) should de-risk it from any adverse policy decisions impacting the Delhi/NCR region,” the Jefferies report said.

Glenmark Life Sciences, meanwhile, reported a rise in revenue to Rs 540.7 crore in Q3FY23, from Rs 522.5 crore in Q3FY22. Anand Rathi Research says the company is able to sustain margins despite industry headwinds.

“With capex coming live, diversification of product portfolio and increasing geographic presence, we expect Glenmark Life Sciences to perform better,” Anand Rathi said in a report.

For Vijaya Diagnostics, non-Covid-19 revenue witnessed healthy growth in Q2FY23; it was up 15.1 per cent and 15.9 per cent YoY and QoQ, respectively. Covid-19 revenue, not surprisingly, slumped 67.6 per cent YoY. “We expect 6.9 per cent CAGR in patient volume growth over FY22-FY25E driven by the addition of new centres and increasing footfalls. We remain positive on the stock mainly due to the company’s B2C focus (95 per cent of revenue in Q2FY23), highest margin within the industry and continued focus on deeper expansion in its dominant regions,” says Vinay Bafna, Research Analyst at ICICI Securities. The diagnostics sector remained sought after last year due to Covid-19 and is expected to remain in the limelight with non-communicable disease testing and preventive healthcare tests rising.

Will the upcoming IPOs in the sector be able to retain investor interest? “Healthcare and pharma sectors have done well and have a good visibility for revenue and profit growth in a country like India where higher insurance coverage, greater affordability and new supplies have all resulted in medium-term demand visibility. These sectors are defensives and, hence, the seemingly high Nifty price-to-earnings (P/E) ratio does not impact their valuations much,” says Deepak Jasani, Head of Retail Research at HDFC Securities. “Also, a lot of unlisted companies have investments from private equity or venture capitalists who would want to exit (at least partially) after remaining invested for two to four years. Appetite from IPO investors also remains strong as possibility of getting high negative returns from these IPOs is minimal (unlike new-age tech companies).”

According to CRISIL Research estimates, the Indian healthcare industry is expected to post a healthy 13-15 per cent CAGR between fiscals 2022 and 2026. The government’s increased investment in healthcare is also a factor—the central government’s allocation towards Ministry of Health and Family Welfare clocked a promising 11 per cent CAGR between FY11 and FY23, albeit healthcare budget as share of GDP at 1.98 per cent is still rather low.

Nonetheless, overall it is a healthy state of affairs.

With inputs from Rahul Oberoi

@neetu_csharma