Indegene IPO: Should you subscribe?

Indegene, a digital-led outsourcing partner for global life sciences companies, presents a unique opportunity in both fields — life sciences and technology-based services. The company has secured client relationships with global biotech majors operating for more than two decades. The rising scope for technology adoption in life sciences can support the early mover – Indigene, which is servicing pharma companies.

But investors should note that the IPO is priced at 33.5 times annualised 9MFY24 earnings (post-issue) which appears to factor the positives. GIven the fact that there are no comparable peers, domestic or global, and deceleration in growth witnessed in FY24 (9M), we believe investors can wait and watch for now to ascertain the earnings growth prospects post listing. An investment call can be made later after tracking the company’s quarterly earnings.

Business model

Indigene generated 69 per cent of its FY23 revenues from the top 20 biopharmaceutical companies by servicing their sales and marketing operations, regulatory compliance systems and branding and channel analytics. The company operates under four segments: Enterprise Commercial Solutions (ECS, 59.3 per cent of 9MFY24 sales), Omnichannel Activation (OA, 12.1 per cent), Enterprise Medical Solutions (EMS, 23 per cent) and Others (5.6 per cent). These segments address biopharma companies’ vast global presence spanning 10-12 developed markets and 30-50 developing markets as well.

ECS serves clients by generating customised marketing plans and running campaigns, developing engagement models for doctors, patients, and payors, and consolidating promotional activity through websites, emails and social media. Most aspects of enterprise sales and marketing are handled in this segment.

OA segment handles product-wise branding and promotion activities. This segment augments sales force at lower costs and higher efficiency through emails, virtual sales representatives, and social media. Cult Health, a recent acquisition, aids in marketing strategies and creative design, while proprietary NEXT tool assists with customer segmentation and channel optimisation.

While the above two are recurring activities, EMS relating to regulatory compliance is event-driven but finds recurring application as well. The segment consolidates large-scale regulatory and medical operations, which include writing medical content, regulatory submissions and product labels, all the while ensuring compliance. The segment also handles pharmacovigilance services and real-world evidence (“RWE”) based medical research for backing claims of efficacy and safety for doctors and patients. The pharma industry faces high regulation from development to commercialisation, and even post-sales activity.

The Others segment is foraying into clinical trials and data management outsourcing.

The company workforce is also unique. Close to a fifth of the non-administrative employees are from medical sciences background, including PhDs or M.Pharm working with technology team in delivering solutions. The company straddles the intersection of CRO/life science specialities and digital solutions, which acts as an entry barrier.

Growth

Indegene reported sales growth of 72 per cent in FY22, recovering from FY21 and its Covid impact but followed it with 39 per cent growth in FY23 as well. The under-utilisation of digitalisation in Biopharma and life sciences has driven such growth in the last two years, according to the management. Of the 65 clients it services, 16 were added in FY23 itself, which points to the surge in demand in the last two years. Sales and marketing, the largest service cost for life sciences industry, has only witnessed 7-12 per cent outsourcing compared to 37-42 per cent for drug discovery, as mentioned in the RHP. EMS segment, addressing sales architecture, is the largest segment for Indegene.

The company has also mined existing clients for a larger share of the wallet. Indegene reported three clients generating more than $25 million per year for the first time in FY22 and increased it to four in FY23. The scale and range of services that are offered by Indegene across sales, compliance and branding should drive higher outsourcing too which, combined with rapid digitalisation, should aid the company.

High valuation

At 33 times earnings, Indegene should sustain earnings growth of over 20 per cent over the medium term (3-5 years) to justify valuations. The recent 9MFY24 performance has decelerated to 15 per cent revenue and 11 per cent earnings growth year-on-year as client addition decelerated. While digitalisation offers high growth opportunities, the client base limited to life sciences, the gradual pace of outsourcing growth and a limited history of operations do not support high valuation multiples.

The pace of contract wins for digital transformation in mainstream IT industry drove valuations to 30-40 times in FY21-22 before falling to 20-30 times currently.

While investors can wait and watch for now, they can look to accumulate the Indegene stock post listing at lower multiples, which accommodates the risk of volatility in deal wins.