Prime Stock recommendation: A unique digital play in the life sciences space
Outsourcing now extends beyond IT and BPO and this company operates in this transformed ecosystem.
N V Chandrachoodamani
Chandrachoodamani started his capital market career in mid 2000s with Equity Intelligence India and then worked with several capital market Intermediaries in various roles over the last 15 years. Most of his career experience has been in equity research and PMS. Most recently, he was with MOAT, a PMS firm. He is a graduate in mathematics, a post graduate in finance, and holds a CFP certification. LinkedIn|Twitter
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23 thoughts on “Prime Stock recommendation: A unique digital play in the life sciences space”
Much of the growth has come post covid – probably in remote comfortable world. This has reversed a lot in last year, with companies calling people in office. How do we draw the comfort on sustainability of this revenue and growth?
Valuations for pureplay services business, without any competitive advantage to protect its margin, customer base seems a bit high. Also growth has significantly slowed down in last 2 years.
Founder profiles and their long tenure at the company are comforting though.
Welcome your query sir,
Generally, the outsourcing industry had a demand tailwind in the aftermath of Covid and that faded away as the world normalized.
That’s why we saw growth plateauing out for most of the services players in FY23 and FY24
Now again the demand for IT services is coming back. And within that, Indegene is a Co. that is assisting pharma Cos in sales as well as digitisation. We believe this Co. has steady runway for growth in this industry with its domain expertise and for reasons mentioned in the report.
Hope this clarifies
Thank you
Thanks. I agree on the runway ahead.
Is there any sizeable competitor for Indegene in the market, that we can compare against?
Yes, definitely there is competition.
First thing is Indegene competes with global Contract Sales Organisations (CSO) for major share of their business while in digital transformation related areas, it competes with all major IT services players as well
The graph we have put in the report shows it with names of competitors and areas they are operating in.
If global pharmaceutical Cos increasingly adopt digital channel for commercialization of their drugs, then a purely play digital commercialization player like Indegene stands an equal opportunity or at an advantage to large global CSOs.
But if all Pharma Cos decide to go by physical or legacy channels for commercialization of drugs, the Indegene has NO role at all.
So, Indegene is a small player in an emerging trend where more and more pharmaceutical Cos want to adopt digital channel
or omni channel for commercialization of their drugs. This also arises from the need to reduce cost, pricing issues and lack of block buster drugs.
If the trend evolves well and Indegene’s management executes well then they could lead this trend or be a major player in years to come. Effectively, the overall drug commercialization cost for pharma Cos will also go lower as a % of their revenue.
So, it is a bet on a trend and on a Co. from India that built specialized domain expertise in this area and also on the management who execute it.
Hope this clariries
Thank you
Hi Chandra,
Just curious why this “Buy” recommendation did not come at the time of the IPO just a few months back.
Regards
Welcome your query sir,
It’s a very relevant question. Honestly, IPOs are done in a hurry these days and it leaves us with little time to properly understand a Co.
There are two key factors here;
1. Eventhough we are giving the call later at premium to IPO price, we could spend enough time to listen to their interactions (concall) post IPO, look at earnings trajectory, challenges, etc in detail.
2. There is lot of correlation with US interest rates, bio-tech funding improvement, etc and buyers also turn to these kind of opportunities based on US outsourcing trend (similar to IT). So, it appears better on timing as well Vs at the time of IPO
Hope this clarifies
Thank you
Thanks Chandra & all those who raised pertinent queries. Insightful for any discerning investors! Real value!
Welcome your comments and thank you sir
As analysts, we also come across several challenges in analyzing companies and these kinds of feedback help us to look at and fill some critical blanks that we may have left
One thing about the company. If the profits are so good and there is cash on the balance sheet, why are they not paying any dividends? It would be useful to get their views. Thank you
Welcome your query sir,
The Co. has clearly mentioned that it is looking forward to growth through both organic growth and acquisitions.
This is their view as well and so any dividend expectation will be disappointing.
It is for this reason that we have classified it under “high risk” even though the “outsourcing” nature of business merits classification as a “Compounder”
Hope this clarifies
Thank you
Thank you. I always smell a rat when cash balances and debt both appear. And not paying dividend is not good governance, in my books. There is always easy money available to fund acquisitions.
Sir, to clarify, they have paid out entire debt out of IPO proceeds.
As at the end of H1FY25, the Co. is debt free. Only 88 Cr lease liabilities in books under “borrowings”
Thank you. Appreciate your speedy response.
Ram Yeleswarapu who was the then CEO of Take solutions is part of Senior Management Team at Indegene.
Thanks for bringing it to our notice and you are right sir.
I was going through his LinkedIN profile and he was the President & CEO at Take Solutions for 15 Years. Not sure whether he held any equity
At Indegene, he is assuming the role in its upcoming Clinical trial solutions segment that is currently less than 5% of its revenues and he took his role at Indegene in 2021
Still it is a bit concerning because what happened at Take Solutions is a complete value destruction for sharehodlers.
Will put my best efforts to investigate on his appointment and revert.
Thank you
Hi Chandra,
There was a similar company Take Solutions serving the same industry. It got mired into lot of issues. How the corporate governance part is being taken care.
Welcome your query sir,
I m actually not aware about that Co. Not tracked.
But a quick glance at it showed that it was into virtual healthcare tech as a biz. Second, it has been continuously amortizing lot of its spend, which tech Cos do (a red flag)
Comging to Indegene, we looked at few things;
1. The founding team comprising 5 members have been running this together for the last 25 years
2. Infosys Co-founder N S Raghavan is largest shareholder followed by PE Carlyle
3. The board also comprise Ex Infosys CFO Praveen Rao
4. Auditors also among top 5
5. Don’t see any bloated amortizations other than goodwill due to acquisitions
So, we have done our possible checks on business and governance side. Still, if a Co still wants to take investors for ride, it can.
But we believe this Co. is not so.
Hope this clarifies
Thanks You
Came here to ask the exact same Question – how different is this compared to Take solutions – which also had backing from a trusted promoter (Shriram finance promoter if i remember right). Take solutions hasnt lived upto all the great expectations that were getting baked in almost a decade back.
Also , ” the key distinction is that Indegene and other LS specialists possess deeper subject matter expertise and focus more on the core commercialization activities for patented drugs” – what kind of specialists? Are these Engineers with core expertise in that area or Doctors & PhDs with core expertise?
Welcome your query sir,
First of all, I haven’t had a detailed look at Take Solutions at any point of time to comment on it. A quick glance at its business obviously shows some mention of similar “service lines”. But it appears like the Co was catering to digital/tech solutions need of Cos (working on software side)
In the case of Indegene, revenue source is not from selling a digital/tech solution, but from providing services related to commercialization of a drug by using digital/tech solutions (~68% of revenue). They are working in a specific area where the competitors are identifiable as CSO/Contract Sales Organisations
Just below a third of remining revenue largely comes form regulatory and compliance related areas.
And on the structure and team that need to deliver this solution, the Co says that 22% of its employees in delivery side are MBBD/PHD/BPharm/MPharm. The rest comprise of engineering and sales talents
Hope this provides some data/info to alleviate some of your concerns
Thank you
wrt Indegene, I haven’t been able to wrap my head around on their exact ‘product’ or ‘service’ – I have held a small tracking position for some time now.
Take solutions was on the lines of providing backend services like documentation, filing , compliance processes and clinical trial support and managing these processes.
I haven’t tracked Take solutions for 6-7 years but looks like promise of revenue growth has turned into accelerated revenue degrowth. Need to check what exactly transpired but customer stickiness in these services might not be as strong as companies claim.
Thanks for the detailed article. Helps a lot in understanding this business line better.
Welcome your query sir,
Let me try to provide some insight on the business side;
If we take the overall pharmaceutical outsourcing, it falls under 3 categories
1. Contract research handled by Contract Research Organisations (CRO) like Syngene in India
2. Contract sales handled by Contract Sales Organisations (CSO) where Indegene comes and we don’t have anyone else here. (Technically, the so called “domestic only pharma” are buying/licensing products from MNCs and using their sales network to only Sell. They don’t develop anything, but “manufacture” and “sell” on license. And here Sales is the largest function and in a way they are acting as Contract Sales Organisations only (CSO))
3. Custom Development and manufacturing organisations (CDMO) like Divis, Suven, Larus, Neuland, etc comes in to play
In these 3 categories, Indegene falls under Category 2 – Contract Sales organisation (CSO) from which it derives ~70% of its revenue. Rest 30% comes from regulatory and compliance work (you may find overlapping in this area with Take solutions, you are right)
We have explained this in the report as well
Now, post your query, I also tried to dig deeper to find out what exactly happened at Take Solutions. Because your concern is valid and not dismissive. From what I understood, Take Solutions did not have any domestic revenue (see standalone P&L) and all it had was US business revenue. They rebranded their services under “Navitas Lifesciences” in 2015 and after that it appears like they went for an acquisition using debt and that backfired. Finally, they sold Navitas Lifesciences (the whole biz of Take Solutions) at a valuation that is just equal to total debt in the books (debt take-over, Zero equity valuation). This happened in 2021.
This is what I understood
Incidentally, Navitas Lifesciences is surviving, and recently I was seeing like firms like Wipro are tying up with it in the area of Clinical research digitization (In 2023). Here’s the link related to it
https://www.wipro.com/analyst-speak/wipro-positioned-as-a-leader-in-everest-group-life-sciences-operations-peak-matrix-assessment-2023/
I m still trying my best to address all the concerns raised in the comments on this call and will revert as soon as I get the right feedback
Hope this clarifies and please do feel free to write again for any further clarification
Thank you
Hi Chandra,
Thanks a lot for your clarification. 1 correction UB Pravin Rao was Infosys COO and Interim CEO when Vishal Sikka resigned and the current CEO Salil took over.
Oh, OK. Noted, thanks.
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