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Over the course of the last 18 months, the most nondescript part of the healthcare business has been rewarded the most.

Stock prices of all active pharmaceutical ingredient (API) makers in India are through the roof. In some cases, it’s increased as much as 500%-800%. The China-plus-one concept was already gaining ground in the global market. Pharma companies were looking for alternative suppliers because Chinese API companies were shutting down left and right under the environmental compliance crackdown in the country.

The Covid-19 pandemic only stoked the simmering API crunch.

Temporary API supply disruption became a catalyst for permanent capacity enhancement for Indian companies. In the last few months, the three large API players—Divi’s Laboratories, Laurus Labs, and Aarti Drugs—have invested and allocated capital expenditure (capex) worth at least Rs 9,000 crore ($1.2 billion). Others have similar plans as well.

In this API season, Glenmark Pharmaceuticals, one of the top ten pharma companies in India, has chosen to list its fully-owned API subsidiary Glenmark Life Sciences (GLS). The initial public offering (IPO) closed its subscription last week. The Rs 1,513.6 crore ($204 million) public issue was subscribed 44.17 times, and was sold at a price band of Rs 695-720 (~$9) per share.

The stock is believed to be conservatively priced at 14X its EV EV Enterprise value is a value reflecting a company's total market value. It is more comprehensive than a company's market capitalisation and is used as an alternative to it / Ebitda Ebitda Earnings Before Interest, Taxes, Depreciation and Amortisation , lower than its peers.

One reason for the conservatism could be that the company wants to be prudent and leave money on the table for public investors. Another plausible reason is that Glenmark Pharma’s confidence is low from years of below-average growth and it doesn’t want to set high expectations, especially when close to 40% of GLS’ business comes from the parent company.

Glenmark hived off GLS—Life Sciences in its name is more positioning, less biotechnology—in 2018 when the China-plus-one story began to emerge. “The time was ripe but Glenn [Saldanha] wasn’t clear what he wanted to do with this company. The roadmap wasn’t there. He was in search for some years,” says an analyst with a brokerage in Mumbai. He tracks pharma and has attended several Glenmark analyst calls.

The time is even riper now.

The upsurge in the valuation of API companies in the past year is also because of formulation companies stocking up APIs. (Akin to defensive buying of semiconductors by consumer electronics companies this past year.) “If earlier they’d stock for three months, they began stocking for six to nine months, even for a year, in some cases.

AUTHOR

Seema Singh

Seema has over two decades of experience in journalism. Before starting The Ken, Seema wrote “Myth Breaker: Kiran Mazumdar-Shaw and the Story of Indian Biotech”, published by HarperCollins in May 2016. Prior to that, she was a senior editor and bureau chief for Bangalore with Forbes India, and before that she wrote for Mint. Seema has written for numerous international publications like IEEE-Spectrum, New Scientist, Cell and Newsweek. Seema is a Knight Science Journalism Fellow from the Massachusetts Institute of Technology and a MacArthur Foundation Research Grantee.

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