IPO: Indegene

Indegene is a commercialisation service provider to the life sciences industry. It is coming up with its IPO (initial public offering) on May 6, 2024. Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality: Indegene's three-year average ROE and ROCE are about 31 and 35 per cent, respectively. It generated positive free cash flows in two out of the last three financial years.
  
• Growth: Its revenue and net profit grew at an annual growth rate of 55 and 20 per cent, respectively, during FY21-23. However, its EBIT and PAT margins have plummeted during the same period.
  
• Valuation: The stock is valued at a P/E and a P/B of 37.2 and 5.2 times, respectively. For comparison purposes, there are no listed players domestically.
  
• Overview: The lack of in-house talent and domain expertise and ever-increasing regulatory scrutiny in the life sciences industry present an opportunity for third-party solutions providers to support businesses across different stages. Moreover, analysis of the latest drug pipeline from the 10 largest pharmaceutical companies reveals that 31 per cent of the drugs are in phase three (the final stage of drug development). This scenario is advantageous for commercialisation service providers like Indegene.

About the company

Founded in 1998, Indegene is a third-party commercialisation service provider to the life sciences industry, serving biopharmaceutical, emerging biotech, and medical devices companies. The company offers solutions across various stages of the life sciences value chain, assisting in drug development, clinical trials, regulatory processes, pharmacovigilance and complaints management, and sales and marketing.

Broadly, the company offers four services:
(i) Enterprise commercial solutions,
(ii) Omnichannel activation,
(iii) Enterprise medical solutions, and
(iv) Enterprise clinical solutions and consultancy services.

Strengths of Indegene

• High client stickiness: Its implemented solutions are deeply integrated into clients' workflows, which leads to high client stickiness. This is evident in its financials, with revenue from its top 10 clients increasing over FY21-23.

Weaknesses of Indegene

• Geographical concentration: Indegene's business is heavily concentrated in North America and Europe (97 per cent of its FY23 revenue). Any adverse natural, economic, or geopolitical event could affect the company.
  
• Highly competitive life sciences industry: With few barriers to entry, companies offering solutions similar to Indegene's make the industry extremely price competitive. Subsequently, this could adversely impact the company's operating results.

Risk report

Company and business

• Are Indegene's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's earnings before tax were Rs 404 crore as of December 31, 2023 on a TTM basis.
  
• Will Indegene be able to scale up its business?
  Yes. The overall outlook for the life sciences industry remains positive. In addition, 31 per cent of the drug pipelines of the ten largest pharmaceutical companies are in phase three, which bodes well for commercialisation solutions providers like Indegene.
  
• Does Indegene have recognizable brands with client stickiness?
  Yes. Its implemented solutions are deeply integrated into clients' workflows, which leads to high client stickiness. This is evident in its financials, with revenue from its top 10 clients increasing over FY21-23.
  
• Does the company have a credible moat?
  No. Because of low entry barriers, it faces competition from its peers and does not have a competitive advantage over them.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  N/A. The company has no promoters and is professionally managed.
  
• Do the top three managers have more than 15 years of combined leadership at Indegene?
  Yes. The top three executive managers have over 30 years of leadership experience at Indegene.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Indegene free of promoter pledging of its shares?
  Yes. The management has not pledged any shares.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. Its ROE and ROCE stood at 22 and 21 per cent, respectively, on a TTM basis as of December 30, 2023, and its three-year average ROE and ROCE are 31 and 35 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive operating cash flows in the last three years.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Its net debt-to-equity ratio was 0.4 as of December 2023.
  
• Is Indegene free from reliance on huge working capital for day-to-day affairs?
  No. Due to the nature of the business, Indegene has to extend credit to its clients, which leads to significant delays in receiving payments. In the past, the company has also taken out loans to fund its working capital requirements.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. It will use 27 per cent of the IPO proceeds for capex over the next three years. Moreover, its debt-to-equity is 0.4 as of December 2023 and its healthy cash flows should be enough to fund further expansion activities.
  
• Is Indegene free from meaningful contingent liabilities?
  Yes. Its contingent liabilities as a percentage of equity is 0.05 per cent as of December 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a 3.4 per cent operating earnings yield on its enterprise value based on its TTM earnings as of December 2023.
  
• Is the stock's price-to-earnings less than its peers' median level?
  N/A. It is valued at a price-to-earnings ratio of 37.2 times as of December 2023.
  
• Is the stock's price-to-book value less than its peers' average level?
  N/A. It is valued at a price-to-book ratio of 5.2 times as of December 2023.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

Also read: Another IPO frenzy begins