Sai Life Sciences is an innovator-focused, contract research, development, and manufacturing organization (CRDMO). Provides end-to-end services across the drug discovery, development, and manufacturing value chain, for small molecule new chemical entities (NCE), to global pharmaceutical innovator companies and biotechnology firms.

Possess both (a) discovery / contract research and (b) chemistry, manufacturing, and control (CMC) / contract development and manufacturing organization capabilities.

CRO services include integrated discovery capabilities across biology, chemistry, and drug metabolism and pharmacokinetics (DMPK). Provided services for more than 200 small molecule discovery programs in the past five years and the six months period from September 30, 2024.

CDMO services include comprehensive capabilities that support customers in the development and scaling up production of active pharmaceutical ingredients (APIs) and intermediates for clinical phase and commercial phase supplies.

In H1 FY2025, the contract research business contributed 42.86% to total revenue and contract development and manufacturing 57.14%.

As of September 30, 2024, the CDMO product portfolio included more than 170 innovator pharmaceutical products, including 50 commercial and late-phase products. Of these, 38 products are used in the manufacturing of 28 commercial drugs, and 12 products are used for 11 APIs that were either undergoing or had completed Phase III clinical trials. These products usually provide greater return potential and a steady revenue stream, as they are either already commercialized or near commercialization. In addition, portfolio consists of 120 products in various stages of development across pre-clinical, Phase I and Phase II clinical trial stages.

As of September 30, 2024, approximately 28% of the combined total of 50 late-phase products (commercial, Phase III, and post-Phase III) and 35.83% of the 120 early-phase products in the portfolio are APIs. This percentage of APIs in the product portfolio reflects customers‘ confidence in quality and regulatory compliance.

Operates five facilities with a total production capacity of 5.26 lakh liters per day, each serving a specific role in drug discovery and development: (1) a large production site in Bidar, India (Unit IV), (2) a smaller facility in Bollaram, India (Unit III) for early-phase materials, (3) a pilot manufacturing facility in Hyderabad, India (Unit II), (4) a Greater Boston facility in the US for larger discovery programs, and (5) a Manchester facility in the UK for technology transfer to India-based sites.

The manufacturing facilities have obtained multiple regulatory approvals from the United States Food and Drug Administration (USFDA), the Pharmaceuticals and Medical Devices Agency, Japan (PMDA), and the state-level drug control departments, which are branches of India‘s Central Drug Standards Control Organization.

One of the few Indian CRDMOs to combine discovery and development operations in the US, the UK and India, with manufacturing capabilities in India.

During the Financial Year 2024 and the six-month period ending September 30, 2024, over 280 and 230 innovator pharmaceutical firms were served, respectively, including 18 of the top 25 pharmaceutical firms by revenue in 2023, across regulated markets like the US, the UK, Europe, and Japan. Additionally, CRO services were provided to more than 60 clients on an ongoing basis for their integrated drug discovery programs.

Aims to increase average spending from existing customers through deeper engagement and cross selling of services. In addition also plans to secure new customers.

Expanding capacity to support future growth by adding new production blocks and ancillary facilities at the Unit IV Bidar Facility, along with a new Unit VI Bidar Facility. Additionally, the Discovery laboratory capacity is being expanded by fully utilizing the available space in Hyderabad, India. Capital expenditure for H1 FY24 was Rs 127.80 crore.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 950 crore and an offer for sale of 3,81,16,934 equity shares aggregating up to Rs 2092.62 crore by existing shareholders.

The price band for the IPO is Rs 522 to Rs 549 per equity share of face value Re 1 each.

The objectives of the fresh issue include Rs 720 crore for the repayment/prepayment of all or certain outstanding borrowings, with the remaining amount allocated for general corporate purposes.

The promoters are Kanumuri Ranga Raju, Krishnam Raju Kanumuri, Kanumuri Mytreyi, Sai Quest Syn, Marigold Partners, Sunflower Partners, Tulip Partners and Lily Partners. The promoters and promoter group hold an aggregate of 7,97,48,670 equity shares, aggregating to 41.82% of the pre-offer issued and paid-up equity share capital. Their post IPO shareholding is expected to be around 35.24%.

The issue, through the book-building process, will open on 11 Dec 2024 and will close on 13 Dec 2024.

Strengths

One of the largest integrated Indian CRDMOs by revenue in Financial Year 2024, with strong capabilities to provide full support from discovery to commercialization (follow the molecule). Additionally, there are multiple opportunities to attract customers at various stages of their journey from discovery to commercialization.

The product portfolio and customer base are well diversified, covering commercial, late-stage, and early-stage CMC molecules, as well as discovery programs. In H1 FY25, no individual customer contributed more than 8% of the total revenue.

One of the few CRDMOs to have a differentiated delivery model of having research laboratories for discovery and development located near overseas innovation hubs in United States and United Kingdom, complemented by large-scale research laboratories and manufacturing facilities in cost competitive locations in India.

Well placed to benefit from the increased demand for Indian CRDMOs providing integrated services, further bolstered by the US Biosecure Act.

Manufacturing facilities feature flexible manufacturing setups, including large-scale reactors for high-volume products and some production areas specifically designed to accommodate modern drug development pipelines that produce relatively smaller quantities but involve more intricate chemical processes.

Strong technical and R&D infrastructure capabilities have led to a cost reduction of over 70%, which is reflected in the improvement in margins.

Fast growing, integrated Discovery capabilities with focus on biology, chemistry and DMPK services. The number of customers outsourcing their integrated discovery programs increased from 29 in the Financial Year 2019 to over 60 in the Financial Year 2024.

Extensive experience of promoters and senior management personnel.

Weaknesses

The pharmaceutical industry is subject to extensive regulation. Any failure to comply with the existing and future regulatory requirements in the pharmaceutical market could adversely affect the business.

Its subsidiary, Sai Life Sciences Inc. has incurred losses in the past. Any further losses in the future, may adversely affect business.

Heavy reliance on international markets, as 97.4% of total revenue in H1 FY25 and 97.95% of total revenue in FY2024 were generated from customers outside India. This significant dependence expose the business to risks associated with exchange rates, regulatory changes, or geopolitical factors in those regions.

There have been instances of non-filing with the RoC in the past, as well as discrepancies related to certain statutory filings and corporate records. There is no assurance that regulatory proceedings or actions will not be initiated in the future.

Pricing pressure from customers may affect company‘s margins, profitability, and pricing ability, adversely affecting business and finances.

There are outstanding legal proceedings (including criminal proceedings) involving the company, its directors, and promoters. An adverse outcome in any of these proceedings could negatively affect the business.

Some Promoters have pledged their Equity Shares with a lender. Any exercise of such pledge by the lender could dilute the shareholding of the Promoters, which may adversely affect business and share price.

Valuation

In H1 FY2025, net sales increased by 5% to Rs 675.29 crore compared to H1 FY2024. The OPM improved by 896 bps to 19%, resulting in a 99% increase in operating profit to Rs 128.34 crore. OI rose by 25% to Rs 18.07 crore. Interest costs increased by 1% to Rs 42.15 crore. Depreciation costs grew by 18% to Rs 66.99 crore. PBT surged to Rs 37.26 crore, compared to a loss of Rs 19.75 crore. Tax expenses were Rs 9.25 crore, compared to a credit of Rs 6.84 crore. Net profit stood at Rs 28.01 crore, compared to a loss of Rs 12.92 crore.

Net sales increased 20% to Rs 1465.18 crore in FY2024 as compared with FY2023. The OPM improved 593 bps to 19.48%, leading to 73% increase in OP to Rs 285.49 crore. OI increased 4% to Rs 29.09 crore. Interest cost rose 11% to Rs 85.91 crore. Depreciation cost went up 20% to Rs 119.44 crore. PBT surged 566% to Rs 109.23 crore. Tax expenses were Rs 26.43 crore as compared with Rs 6.42 crore. Net profit soared 729% to Rs 82.81 crore.

The TTM EPS on post-issue equity works out to Rs 5.95. At the upper price band of Rs 549, P/E is 92.

Total outstanding borrowings amounted to Rs 764.49 crore as on September 30, 2024. As much as 94% of the debt will be repaid from the issue proceeds, bringing down interest costs substantially and boosting profit. The TTM EPS works out to Rs 9.86 if 94% of its interest cost is removed, keeping all other items, including tax rate, same. The re-worked P/E at the upper price band moderates to 56.

Listed peers such as Divi‘s Laboratories traded at TTM P/E of 86, Suven Pharmaceuticals trades at TTM P/E of 137, and Syngene International at TTM P/E of 75 as on 09 December 2024. The OPM and ROE stood at 19.48% and 8.49% respectively, in FY 2024. These were 28.11% and 11.78% for Divi‘s Laboratories, 38.6% and 14.64% for Suven Pharmaceuticals, and 29.08% and 11.97% for Syngene International, respectively.