Know your stock | Is Eris Lifesciences on the verge of a turnaround?

ERIS LIFESCIENCES

Eris Lifesciences is pouring in huge investments in the domestic market through the acquisition of multiple brands in an effort to diversify its business. However, the mid-cap company's recent acquisitions have failed to garner cheer from investors so far as they have shown reluctance towards the drugmaker with the stock having dropped nearly 31% since its lifetime peak in October 2021.

Despite the decline in its stock value, analysts are optimistic about the company's future prospects and believe that it has all the ingredients in place to stage a bounce back.

Before we explore the reason behind the optimism within analysts, let us know more about the company.

The beginnings

Eris Lifesciences is a pharmaceutical company that was established in 2007 with its core focus on domestic branded formulations. The company specializes in chronic and sub-chronic therapies which account for the majority of its revenue, and its product range spans across India’s chronic care market valued at over Rs 55,000 crore .

The company's flagship therapy is diabetes care, which clocked in 29 percent of its branded formulations revenue for the fiscal year 2022. The company also holds a spot in the list of top five companies in India in terms of revenue and prescription share for oral diabetes products. In addition to diabetes care, Eris Lifesciences has also forayed into insulin therapy since the beginning of 2022.

Cardiac care is another major segment where the company operates and accounts for 24 percent of its total revenue. Lately, the company has also been focusing on diversifying its business by entering into three emerging therapies, namely dermatology, neuropsychiatry and gynaecology, which now make up 20 percent of its branded formulations revenue and is growing at a rate of around 25 percent per annum.

Eris Lifesciences has a primary manufacturing facility in Guwahati which accounted for the production of roughly 80 percent of all its products sold in FY22. The company has also earmarked a capital expenditure of Rs 130 crore to set up a new manufacturing facility in Gujarat which is expected to enhance its production capabilities. For distribution, the drugmaker has established a pan-India network that includes more than 2,000 stockists and over 500,000 chemists.

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While the stock has been an underpreformer for several months, foreign institutional investors too seem to maintain a positive outlook for Eris Lifesciences. This is reflected by the company's shareholding data, which reflects a rise in FII holding over the past three quarters. FII holdings in Eris Lifesciences rose to 15.50 percent at the end of the December quarter from 13.31 as on the end of FY22. The rise in FII holding also aligns with the correction in the stock which FIIs used as an opportunity to lap up more shares. Domestic institutional holding has remained stable at around 10 percent for the past few quarters.

Chrys Capital, UTI Mutual Fund , Vanguard , HSBC Mutual Fund, Kuwait Investment Authority Fund, Kotak Mutual Fund, Government Pension Fund Global - Norges Bank and Kuwait Investment Authority Fund are some of the big names who own stake in Eris Lifesciences.

Why has the stock corrected?

The correction in the stock came on the back of an overall decline within the pharmaceutical sector and weak financial performance in the third quarter of FY23. Over the past one year, the stock has plummeted 20 percent while the S&P BSE Healthcare index corrected around 11 percent.

The drugmaker posted a net profit of Rs 99.4 crore in the December quarter, down 4.5 percent from the corresponding quarter in the year ago period. The weak bottomline came on the back of a capital expenditure taken for the acquisition of Oaknet. Revenues in the same quarter grew around 9 percent on year to Rs 326.8 crore alongside a contraction in EBIDTA margin which came down to 38.1 percent from 40.3 percent in the year ago period.

The way ahead

Eris Lifesciences has been on a spree of acquisitions in a bid to diversify its offerings. The company has recently acquired nine dermatology brands from Dr Reddy’s Laboratories. The company had entered the dermatology with the acquisition of Oaknet Healthcare and then moved on to acquire nine derma brands from Glenmark Pharma.

With the three acquisitions in place, analysts at Nirmal Bang Institutional Equities expects the drugmaker's dermatology segment to contribute 15 percent of total revenue. Most analysts also believe that the company's recent list of acquisitions sits well in-line with its focus on diversifying its portfolio and will fill gaps in its cosmetic dermatology range.

The company also plans on leveraging a pipeline of patent expirations which are due over the next three years within the cardiometabolic segment. Adding to that, the company will focus on expanding its injectable anti-diabetes franchise and central nervous system (CNS) and women health offerings.

In terms of inorganic growth, the company will continue to look for high-value opportunities, especially in the CNS, women health and dermatology segments. Along with that, the drugmaker has also given a guidance of 25-26 percent rise in revenue on an EBIDTA growth of 14-15 percent for FY23.

Why the optimism?

Analysts' optimism towards Eris Lifesciences largely stems from expectations of strong growth making its way through the kitty of acquisitions done by the company.

Analysts at Anand Rathi Share and Stock Brokers believe the recent deals in the derma segment will place Eris

in the third rank with a 7 percent market share in the covered dermatology market. "Factoring in the recent deals, we expect 21%/24%/12% revenue/EBITDA/PAT growth over FY23-FY25," the Anand Rathi Share and Stock Brokers wrote in a research note.

Mitesh Shah, Research Analyst at Nirmal Bang Institutional Equities also shared similar views as he feels the acquisition would strengthen Eris’ presence in the fast-growing cosmetic dermatology segment, which is growing faster than the entire dermatology market.

"After witnessing some moderation in its base business, the company has taken inorganic routes to support growth, with a strong capex of Rs 1,200 crore. While dermatology seems like an interesting segment from a growth perspective, the key monitorable that remains to be seen will be the way the management manages to scale the newly acquired brands," Param Desai, Senior Research Analyst at Prabhudas Lilladher noted.

In addition to the acquisitions, the drugmaker's higher reliability on the domestic market, which is expected to drive growth for pharma companies in the upcoming years also works in its favour. "At a time when companies with higher exposure in the US market are facing pressures from price erosion and higher regulatory scrutiny from the US Food and Drug Administration, the fact that Eris is a play on the domestic growth story sparks our optimism," Shah said.

Shah also highlighted that the company has recently hired some talent from Cipla, which will further put it on track to become one of the fastest growing companies in the domestic market.​

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