3 Caveats Before Considering the Mankind Pharma IPO

Investing millions in quality control.

Hiring global consultants.

Modernisation.

Automation.

You name it and they have done it all.

Owners and shareholders of Indian pharma majors have lost a fortune of stock market wealth over the past decade. And the reasons are not too hard to find.

They may have offered lifesaving products in a country of more than a billion odd people.

Also, they offer cheaper generic drugs to global markets. But the drug makers in India fail to take home enough profits themselves.

When companies in other sectors were wriggling under the pains of Covid-19, most Indian pharma companies basked in the glory of being cheap vaccine and drug suppliers.

But the pandemic was a short-lived honeymoon period for the sector.

In fact, even as markets get excited about the latest pharma IPO in the offing, some caveats are in order.

Now, don't get me wrong...

Mankind Pharma, which begins its initial public offering (IPO) today, has its strengths.

Mankind Pharma is India's fourth largest pharma company in terms of domestic sales, as of December 2022.

The company develops, manufactures, and markets a diverse range of acute-to-chronic therapies. Some of the well-known consumer healthcare products include Manforce, Prega News, Unwanted 72, Gas-o-Fast, Health OK, and AcneStar.

In fact, Mankind's 38 brands rank in the top-5 in their therapy categories and clock sales of Rs 1 bn to 3 bn annually.

Mankind Pharma also has a wide distribution network in India. With over 11,000 stockists, and 75 clearing and forwarding agents, the company enjoys an all-India dominance. Its sales are prominent in north, south, and west India.

But like its peers and most domestic pharma companies in India there are certain risks that Mankind Pharma cannot sideline.

Rather, despite all its strengths, Mankind Pharma may find it impossible to go past these risks to fetch premium valuations.

There are 3 reasons for this...

Regulatory Risk

Facing a USFDA scrutiny or getting warning letters from the US drug regulatory literally hangs like a knife over every pharma stock in India.

Companies like Cipla, Lupin, Glenmark, and Sun Pharma once formed part of the BSE 30 and Nifty 50 indices. But no more.

These companies still own some of the buggiest pharma brands. But the constant regulatory interference has taken a huge toll on their capex and production planning.

Not to mention a total embargo on exports until the regulatory concerns are ironed out.

Low R&D Outlay

Indian pharma companies have dramatically cut down on their R&D spends. Especially on new generic drug discoveries.

The R&D expenditure is now lower relative to sales than before Covid-19. They stand at 4.4% of net sales, compared with 20% in the US.

Further just five of the top pharma companies in India account for two thirds of the R&D spends. Which means smaller drug makers spend next to nothing on R&D for new product launches.

This low focus on R&D has also made the sector a hotbed of copycat drugs and injectables, which leaves a lot of room for regulatory concern.

Pricing Pressure

Through Drug Price Control Orders (DPCOs), the Indian Government attempts to keep medicine prices under check.

According to various studies, currently, around 14% of drugs by value, and 25% by volume fall under price controls.

Such price controls leave very little upside for the margins and return ratios of the large pharma companies.

Now, it's true that the regulatory and pricing controls have caused investor apathy for the leading pharma stocks. But the irony is that the country is second only to the US in terms of the largest number of USFDA approved plants.

So, it remains to be seen whether Mankind Pharma gets more speculative interest in the IPO. Or whether investors are more willing to bet on its long-term potential despite the risks.

The Equitymaster Screener can help you screen pharma stocks that offer a stiff competition to Mankind Pharma.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)