Analysts back CMO Arch’s IPO on CRAMS biz potential

29-Nov-2011 - Last updated on 29-Nov-2011 at 11:34 GMT

An expanding CRAMS business and bulk drug strength makes Indian CMO Arch Pharmalabs’ IPO a solid investment, analysts report.

In March Arch filed its prospectus ahead of an anticipated INR10 ($0.19) a share initial public offering (IPO). Having analysed Arch Indian credit rating agency ICRA found the CMO (contract manufacturing organisation) has “above-average fundamentals”.

ICRA wrote: “The grading factors in the substantial scale up of the company’s contract research and manufacturing services (CRAMS) business catering to a strong pipeline of novel drugs by leading innovator companies.”

Arch has pushed into the higher margin CRAMS sector in recent years. In 2011 the unit accounted for 13 per cent of net sales, close to double the proportion it made up two years earlier. ICRA said the pipeline of innovators drugs handled by the CRAMS unit will support sustainable growth.

The API (active pharmaceutical ingredient) business has also moved towards higher margin products. “There has been a shift in the revenue contribution from isoxazole penicillin side chains to high-margin oncology API, gemcitabine, and its intermediates”, credit rating agency Care Ratings wrote.

Arch began targeting innovator companies around 2006, shifting focus away from generics, and has since inked deals with Codexis and DSM. To support the needs of innovators Arch has expanded its capabilities, adding simulated moving bed technology and capacity for high potency APIs.

IPO funds

Arch hopes to raise INR135 crore, around a third of which will be spent on capital expenditure at existing facilities and other investments. Care Ratings said the investment is small compared to Arch as a whole and as such a delay “is not likely to have a material impact on the company’s operations”.

The capital expenditure will add capabilities at some of Arch’s 11 Indian manufacturing plants, five of which produce APIs and the rest handle intermediates. Care Ratings said Arch’s “regulatory approved manufacturing facilities…are expected to drive the future growth of the company”.