Why Mankind Pharma’s IPO could be a milestone

Mankind Pharma’s successful IPO raises hope for IPO-wannabes but the real hard work starts after the IPO party ends. Most companies face an IPO hangover, with share prices dipping post the IPO as they struggle to meet raised investor expectations. Will Mankind Pharma buck this trend?

Mankind Pharma’s IPO was oversubscribed 15.32 times, thanks largely to qualified institutional buyers (QIBs). The response of retail investors was slightly more circumspect, bidding for 92 per cent of the allotted 35 per cent shares.

In spite of this dampener, Mankind Pharma’s IPO holds out hope to other companies, pharma and non-pharma, planning for their IPOs. But only if the pricing is right and the company’s financials pass muster.

Mankind Pharma ticks all the right boxes. It has a good product mix of consumer and Rx brands with most leading or in the top five brands in their categories. It has a strong differentiated pipeline, proven leadership, healthy CAGRs, etc.

But like most of its pharma peers, it also faces challenges. Regulatory oversight is a major concern, especially as most pharma companies are turning to third-party manufacturers to keep costs down and be more flexible. Pharma companies in India are set to face higher scrutiny, by global as well as national regulators, thanks to recent high-profile cases of violations of good manufacturing practices (GMP).

For instance, the Drug Controller General of India (DCGI) along with state drug control heads, has been on a clean-up drive since March. As per reports, around 200 companies suspected of faulty manufacturing practices are on the radar. 76 pharma companies in 20 states have faced such inspections, resulting in 26 pharma companies receiving show cause notices. Thus the GMP bar will only rise further.

Secondly, increasing price control in the domestic market impacts Mankind Pharma more than some of its peers, as approximately 97 per cent of its revenues (past three years + nine months ending December 31, 2021) are from India. In the latest recalibration of prices of medicines in the National List of Essential Medicines (NLEM), the National Pharmaceutical Pricing Authority (NPPA) has capped the prices of 651 of the 870 drugs listed in the NLEM. While a seven per cent reduction in costs of these medicines is welcome news for patients, this will impact the balance sheets and strategies of pharma companies in India.

Thirdly, while pharma companies in India might benefit from the China+1 policy, companies like Mankind Pharma are still dependent on China and other countries for certain raw materials.

These challenges force smaller pharma companies to cut R&D expenses. Industry reports estimate that five of the top pharma companies in India account for two-thirds of the R&D spends. This is not a good sign as it will translate into a thin product pipeline, with few to none differentiated new products.

This cautious investor sentiment in pharma is also reflected in the recently released India Private Equity Report 2023 from Bain and Indian Venture and Alternate Capital Association (IVCA), titled ‘Trial by fire: Indian PE ecosystem stays resilient in a globally challenging year’. As per the report, pharma was one of the sectors which saw a slowdown in PE activity in 2022.

The Bain-IVCA report points out that the long-term outlook for the pharma sector in India is positive, led firstly by a deep pharma ecosystem with consistent improvement in quality, compliance, reliability and cost. Will pharma companies continue to invest in quality systems and upskill their employees to work on such systems?

Secondly, regulatory enablers are boosting manufacturing, such as PLI 2.0 being expanded to high-value goods, and government investment in bulk drug parks to boost local API manufacturing. Finally, tailwinds from global sourcing diversification, and the opportunity for generics where India has the largest share in global supply by volume, make the sector a long-term bet, as per the Bain-IVCA report.

While Mankind Pharma’s IPO re-validates the long-term potential of the India Pharma Inc narrative, it won’t take much for the story to unravel. Pharma leadership will thus need to strategise carefully on the most efficient way forward.