Eris Lifesciences: Costly prescription

Segments it operates in offer scope for growth but valuations too expensive for comfort

A focus on faster-growing chronic therapy segments, especially cardiovascular and anti-diabetes, has helped Ahmedabad-based pharma company Eris Lifesciences to post faster growth rates than peers. While the top 35 companies in the Indian pharma market have grown their domestic revenues by an average of 12 per cent over the FY13-17 period, Eris has grown its revenues by 21.7 per cent. 

Though the chronic segment accounts for a third of the industry revenues (the other being the acute segment), it accounts for two-thirds of the company’s revenues. Even within the chronic space, while the sector’s growth in cardiovascular and anti-diabetes has been 12-19 per cent in the FY13-17 period, for Eris the growth has been 26-35 per cent, albeit on a smaller base. 

Given the relatively lower competition in the various niche segments of the chronic space, margins in this space are typically better than those in the acute segment. What aids profitability is also the fact that the company’s medicines are prescribed by super-specialists, which include diabetologists and endocrinologists who typically write higher value drugs per prescription. Moreover, these medications are recurring in nature unlike those in acute therapies which could be for a limited period. Even in the acute segment, which accounts for 34 per cent of revenues, the company focusses on therapies related to lifestyle-related disorders and require treatment over a longer period. 

With the higher growth in its top brands and change in the product mix, as well as lower outsourcing after commercialisation of its Guwahati facility, aided the company in improving its operating profit margins from 22 per cent in FY12 to 37 per cent in FY17. While its lone facility is operating at less than a third of its capacity, higher production could help improve the margins. A lot will depend on volume growth. This is because the other two levels of revenue growth, new product launches and prices are not major triggers as of now. The company is focusing on existing product lines and pricing continues to be competitive. The other area of focus would be to improve the productivity of its field force which is currently at Rs 4 lakh per medical representative per month in FY17 compared to Rs 2.6 lakh in FY12. 

While there are a number of positives going for the company and its growth trajectory is impressive, however, valuations at 34x its FY17 earnings per share is on the higher side. This is higher than the price-to-earnings of listed MNC industry peers of Abbott India, Sanofi and Novartis which trade in the 31-34x range. Ajanta Pharma, too is trading at 27x its FY18 estimates while top Indian generic majors with a large US presence are trading at around 20-25x.