During November 2020, Advent Int, a global private equity investor had acquired 74% stake in RA Chem Pharma Ltd (which earlier was held by Micro Labs Ltd).

Further, Advent envisages to build a merchant API platform and, in the process, has acquired a 100% stake in another two companies by the names, ZCL ( August, 2022) and Avra Laboratories Private Limited ( September, 2022).

The combined Total Operating Income of these three entities is about ₹1,300 crore. The three entities at the combined level derived around 80% of revenue from exports and ~70% belongs to the API segment. Substantial share of CDMO (30%+) in business with growth faster (35%+ CAGR) than other segments

• RA Chem Pharma Limited (RACPL): Initially incorporated in 1996, RA Chem Pharma Limited (RACPL), is engaged in manufacturing of Active Pharmaceutical Ingredients (API), Formulations and Clinical research activity at its four manufacturing facilities. The company has a strong pipeline with 114 approved DMFs and 63 approved ANDAs. As of June, 2021, the company has 19 DMFs and 20 ANDAs pending for approvals.

• ZCL Chemicals Limited (formerly Zandu Chemicals Ltd) is one of the well-known pharmaceutical companies in India engaged in manufacturing and exports of advanced drug intermediates and Active Pharma Ingredients (APIs). Established in 1991, it is headquartered in Mumbai and has a state-of-the-art successfully inspected and audited USFDA, EDQM, KFDA, WHO GMP, and COFEPRIS, Japanese MOH accredited facility with a capacity of 227,000 litres (60,000 gallons) along with strong R&D capabilities.

• AVRA: Established in the year 1995, Avra is among the first in India to focus on providing high-end contract research and manufacturing of advanced intermediates and APIs covering oncology and other therapeutic areas. Avra was founded by AV Rama Rao, who is a highly experienced scientist by profession. It has several active process patents and is the only company in the world to develop and successfully commercialise a synthetic process for Irinotecan

Revenue Growth:

The total Operating Income at the combined level has witnessed a growth of about 23% from ₹1,060 crore during FY21 to ₹1,309 crore during FY22. Even between FY2020-21 growth was ~22% (from 866 Crs. For FY20)

The growth is driven by an increase in the sales volumes of existing products in new markets. The two-top selling products – ALPHA-Ph-2-piperidine acetic acid and Mebeverine (cumulatively account for 16% of FY22 sales) – increased by more than 50% as compared with FY21 owing to increased demand. (soure of growth, sustainable??)

Margins:

The profitability margins of the company marked by PBILDT margin were 26.68% in FY20 to 21.84% in FY21 and 27.22% for FY22. The PBILDT margins moderated during FY21 due to incurring of considerable onetime professional charges of Rs.26.98 crore

Profit after-tax (PAT) margin of the company has gone up from 16.59% during FY21 to 16.76% during FY22.

28% EBIDTA, growth of 28% between FY20-22.

Revenue Mix by Geo/Segments:

On a combined basis, the domestic sales of the three companies are only around 20% in FY22. The majority of the sales, ie, 80% are derived from exports. The company at the combined level derived over 50% of its TOI from regulated markets, with Europe contributing about 27% and the US contributing about 20%.

• RACPL: major revenue derived from exports (70.65% during FY21 against 70.75% during FY20). The company exports its products across the regulated pharmaceutical markets of Europe (18.09%), Asia Pacific (8.43%), Middle East (12.73%) and Latin America (11.10%).
• ZCL: 88% revenue from regulated markets. 42% revenue from Innovators. 30% are patented products.

Therapeutical Mix:

The company at the combined level has over 100 products, top 10 products contribute about 45% to the TOI. Furthermore, in terms of the therapeutic segment, the company derives about 47% of its TOI from therapies such as anti-depressant (17%), anti-spasmodic (10%), attention deficit hyperactivity disorder (ADHD; 8%), anti-psychotic (6%), and anti-epileptic (5%).

Leadership (top 3 position) in 8 key molecules driven by deep cost position due to backward integration/ Amongst top 3 players globally in most of our key molecules including Betahistine, Drotaverine, Entacapone, Fluvoxamine, Lamotrigine, Mebeverine, Midazolam and Quetiapine amongst others

• RACPL: RACPL has a presence across 42 therapeutic segments and majorly caters to niche therapeutic segments viz. Anti Spasmodic, Anti-Depressant, Veterinary products; besides Anti- fungal and Obesity.
• The top 5 therapeutic segments contribute to 56% of the revenue during FY21 as against 49% during FY20. For FY 21, the revenue contribution of Anti Spasmodic stood at 16%, Anti Depressants stood at 15% , Anti epileptic stood at 10%.
• RACPL has a diversified product portfolio with top 10 products contributing to 67% of the revenue during FY21 as against 39% during FY20.
• Further, RACPL has a diversified client base comprising some of the reputed players in the industry viz. Selectchemie, Helm De, Welding, Intas Pharmaceuticals; Aurobindo Pharma among others.

Infra:

• RACPL has four units i.e. two API unit and two formulation units (located at Nacharam and Jadcherla Hyderabad). Further the company has Bio Analytical and Bio Availability studies unit located at Balanagar, Hyderabad and one API R&D unit in Kukatpally, Hyderabad.

• ZCL has an API and R&D facility at Ankleshwar, Gujarat, and these facilities are successfully inspected and audited by regulatory authorities such as the USFDA, EDQM, KFDA, WHO GMP, and COFEPRIS, a Japanese MOH accredited facility.

• Avra has two API and two R&D facilities and its manufacturing facilities are located in Hyderabad (USFDA and WHO GMP-approved) and Vizag. These facilities are duly approved by various regulatory authorities.

Working Capital:

The working capital cycle of Cohance, although improved, still remains elongated and stood at 148 days during FY22 (FY21: 152 days).

The average inventory days increased from 107 days during FY21 to 114 days during FY22. The high closing inventory is on account of orders which materialised in Q12023. Furthermore, the company has to maintain an inventory of semi-finished goods and finished goods to meet the expected demand as part of its growing business, resulting in a stretched working capital cycle for the company.

• For standalone RACPL: Average Inventory days improved from 98 days during FY20 to 92 days during FY21. Further, Average collection period stood high at 115 days during FY21 (115 days during FY20).

Capex:

RACPL has completed capex of Rs.70 crore during FY21 without any cost or time overruns. This capex was funded through term loan of Rs.44 crore and balance Rs.26 crore from internal accruals. Further, during FY22 the company was scheduled to incur additional capex of Rs.70 crore which will be funded through term loan of Rs.8 crore and balance through internal accruals. The proposed capex pertains to capacity expansion at API and FDF units and towards regular maintenance and upgradation at other unit.

Likewise, Avra was scheduled to increase production capacity by ~50% (100 KG/day to 158 KG/day with a capex of ~15 Crs,

Overall, at Cohance Level, >2x expansion potential on invested capex – Fully invested in capex with current capacity at 7 plants – enough to support 2x current scale

Gearing:

During the year, the company at the combined level, has reduced its long term debt from ₹95.19 crore to ₹77.34 crore. Contrastingly, the short-term debt has increased from ₹89.14 crore to ₹149.39 crore to fund working capital requirements.

at the combined level, the total cash and liquid funds are about ₹270.72 crore as on March 31, 2022, which provides an additional cushion.

The net cash flow from operations with an improved scale of operations is expected to remain at about ₹300-350 crore going forward

I think more clarity will emerge once the consolidated (Suven + Cohance) pro-forma financials are released and internal re-alignment of portfolio (between CRAMS, API, Formulations). However, on the face of it, looks like this will be broadly ~ 60% CDMO/CRAMS/Research and 40% API/Formulations entity at consolidated level.

From growth perspective, will have enough head room considering the recently concluded capex by RACPL and Avra (50% addition from current capacity). For Cohance side, even in past two years the growth rate has been ~22%ish. Cohance website is indicating about 2X capacity headroom (ex of Suven for now). Even on Suven side, they have earmarked ~600 Crs (mostly internal accruals) over 3 years towards bolstering R&D infra.

As with most PE investments, Advent will have an accelerated growth road map. Within India and Globally, they are well invested and networked in pharma domain to drive cross sell and synergies. ( In the recent Suven call someone hinted about Advent aspiration for making the Cohanc platform a $1B entity)

Another interesting possibility/conjecture could be related to Bharat Serum and Vacines Ltd. Advent had picked majority stake in Biopharma player BSV in 2019 for ~$250M – 257M. Bharat Serum is a niche player in Gynecologic and assistive productive segment with revenue of ~900 Crs in FY20. Further, BSV have strengthened market position with recent acquisition of TTK health’s reproductive business segment. So far, BSV/TTK health are not part of the Cohance platform however, interestingly have significant management/Board overlap across Cohance and BSV+TTK. Will be too early to conclude one way or other since consolidation may depend on product/tech synergy and Advents exit horizon for BSV. However, even at separate stand alone entity basis, may have overlapping business opportunities.

From Product portfolio perspective, what caught attention is the mention of “Amongst India’s leading manufacturer of high purity electronic chemicals”. My understanding is that these are product offering by Avra Synthesis which is different entity (from same promoters) then merged entity Avra labs.

[Worth evaluating further,what is the key product/tech differentiation between Avra Labs and Avra synthesis]

Even otherwise, Avra has some interesting product relationships (with innovators for blockbuster drugs):

• Ticagrelor ( Brilinta) – The drug is produced by AstraZeneca. Avra provides complete GMP manufacturing of Ticagrelo
• Lenalidomide (Revlimid) – Avra provides complete GMP manufacturing of Lenalidomide API for Form-A, Form-B and Form-I and has an Open Part DMF available.
• Carfilzomib – Anti Cancer Drug
• Eltrombopag (Promacta) – It is being manufactured and marketed by Novartis under the trade name Promacta in the US and is marketed as Revolade in the EU. Avra provides complete GMP manufacturing of Eltrombopag Olamine API.

Likewise, ZCL has impressive profile – 43% revenue from Innovators, 30% from Patented products. Also, noticed that they have API for one of the successful commercial product Jardiance (Dapagliflozin) and multiple combination doses around same under development stage.

On flip side, Suven had an envied margin profile to the north of 40%. Current Cohance EBIDTA are around 28%. Merged entity will have a drop in margins. Also, working capital is really elongated at ~150 Days for API side of the business. Finally, modality of merger, valuation of entities, extent of dilution and overall consolidation deal structure are big monitorable for now.

Thanks,
Tarun
Disc: Invested, No recent transaction, tracking the development.