After a flurry of IPOs (initial public offerings) in September and a record number of subscriptions, things have slowed down a bit in the primary markets. The latest company to test the IPO market—Gland Pharma Ltd—is finding things particularly slow. This is surprising, given the huge rally in pharma stocks in the past year.
While there was fairly decent institutional demand, which helped the issue sail through, the retail portion of the issue was subscribed only 0.24 times. Only half of the shares set aside for high net-worth investors found takers.
What explains the relatively tepid demand, especially from retail investors? Did the fact that Gland Pharma is 74% owned by Chinese drug firm Fosun Pharma hurt demand? Market analysts say anti-Chinese sentiment due to the border dispute may have had a small role to play in the reticence shown by domestic investors. But investors largely stayed away because of rich valuations, which rule out the possibility of quick listing gains, they point out.
Note that a third of the anchor book is reserved for domestic mutual funds, and this was fully subscribed by them. The anchor portion of the IPO is where 30% of total shares on offer are sold to institutional investors. In the IPO book-building process, bids by domestic institutions were lower than those by foreign portfolio investors, unlike earlier IPOs where the reverse held true. While domestic institutional investors haven’t shunned the issue, the extent of participation is subdued compared to some recent IPOs.
Gland Pharma is largely into the injectables segment where entry barriers are relatively higher. Besides, it boasts of a strong customer base. With about 96% of its business coming from B2B segment, some investors feel the company has a strong moat.
The company has a decent pipeline of about 52 abbreviated new drug applications pending, and it seems to be banking on the high number of injectables that are going to go off-patent in the next few years. So, that should give the firm some headroom to expand revenues, say analysts.
But the company and its promoters are extracting their pound of flesh by pricing the IPO to perfection. Initially, there was a lot of buzz in the grey market, assuming the pricing would be close to ₹1,300 a piece. But with the upper end of the IPO price band set at ₹1,500, expectations of listing gains have dwindled, and this is reflected in the poor subscription numbers in the retail segment.
The relatively decent institutional participation suggests Gland Pharma is being viewed as a long-term bet. Gland’s price-earnings multiple works to about 30 times FY20 earnings.
Note that the company has clocked an annual growth rate of about 38% in five years till 2019.
But its mainstay injectables business is likely to face rising competition in the US, point out some analysts, and it remains to be seen if growth stays strong going forward.