Celestial Labs, a Hyderabad based company in the bio-informatics and bio-technology sector, is open for subscription with an initial public offer, IPO of 50-lakh equity shares of Rs 10 each at a price of Rs 60 per share aggregating Rs 30 crore.

Of the total issue, 2-lakh shares have been reserved for employees and the net offer to the public constitutes 48-lakh shares. The issue comprises of 44.67% of the fully dilutes post-issue paid capital of the company.

Khandwala Securities report on Celestial Labs IPO:

Company overview

Celestial Labs is in the field of IT/Bioinformatics, Biotechnology and Consultancy work. It offers enterprise resource planning solutions, data warehousing, bioservices like clinical data management, gene sequence analysis, molecular modeling and design and development of drug molecules. Celestial has developed a Denovo Drug design tool for the first time in India to reduce the life cycle of the new drug molecule development from 20 years to 5 years.

Investment Rationale

Biotechnology Industry

The 4th BioSpectrum -ABLE Biotech Industry survey shows that the biotechnology industry is growing in excess of 35% for the third year in a row. The industry grew from Rs 6,521 crore in revenues in 2005-06 to Rs 8,541 crore in 2006-07. Total investments in this industry increased from Rs 504 crore in 2001-02 to Rs 1,650 crore in 2005-06. This shows tremendous scope for growth in the industry.

Cost advantages and skilled manpower

India enjoys significant advantages in terms of cost and skilled manpower as compared to USA. The cost of developing a new drug is just USD 100-200 million as compared to USD 500-900 million in USA. For conducting a Phase I trial, the cost is 50% lower than USD 20 million required in USA and 60% lower than Phase II study. Also, labour cost is 1/7th that of USA.

India has a strong pool of scientist and engineers, vast institutional network and cost effective manufacturing. There are over a hundred National Research Laboratories employing thousands of scientists. There are more than 300 college level educational and training institutes across the country offering degrees and diplomas in biotechnology, bio-informatics and the biological sciences, producing nearly 500,000 students on an annual basis. More than 100 medical colleges add ~17,000 medical practitioners per year. About 300,000 postgraduates and 1,500 PhDs qualify in biosciences and engineering each year. Thus, India has emerged as a significant player in the biotechnology industry. (Source: indiainbusiness.nic.in)

Qualified and experienced Team

The promoter of the Company Mr Aditya Narayan Singh holds a B.Tech Degree in Agricultural Engineering, MBA and has also been awarded a Doctorate in Technology Management from USA. He has rich experience in the biotechnology field for about 2 decades. He is ably assisted by a team of qualified professionals having diverse experience in the fields of construction/engineering/finance/marketing and corporate laws. The Company’s employees are very well qualified holding B.Tech, MSc., PhD., MBA and LLB degrees.

Track record

The company has developed a Denovo Drug design tool for the first time in India which will reduce the life cycle of new drug molecule development from 20 years to 5 years. It has successfully developed a bio-molecule to treat leucoderma/vitiligo and multiple cancers.

Concerns

High research and development costs

Developing a new drug molecule involves huge investments in terms of time and money, coupled with little revenue in the years of development. If the Company’s competitors are able to launch new products prior to the launch of the Company’s products, then the entire project initiative involving substantial costs can go waste resulting in huge losses for the Company.

Anti biotechnology propaganda

In USA and Europe, there is widespread opposition against genetically engineered food and bio-agricultural products. Even in India, companies like Monsanto and Cargill have faced opposition in this regard. Farmers groups and civil society organisations had expressed deep concerns over the country’s regulatory authority approving new biotech (Bt) cotton hybrids for cultivation. Also, the use of patients in developing countries to conduct clinical trials on pharmaceuticals developed for sale by advanced countries has become the subject of much controversy. There is opposition from human rights group and social activists within and outside India.

Risk of rejection of IPRs and Government regulations

The company has applied for a patent relating to “Anti cancer peptide drugs with novel activity and their biotechnological production” and “Novel human basic fibroplast factor active site, mutated at one or more positions to increase the efficacy of vitiligo treatment”. It has also applied for registration of Copyright of 5 titles ‘Ratna’, ‘Vyasa’, ‘Sahakar’, ‘CELSUITE’ and ‘Dhanvantari’. If these applications are rejected by the concerned authorities, the Company may lose business to its competitors.

The Company’s activities - pre-clinical testing, clinical trials, manufacturing and marketing are subject to regulation by Govt. authorities of India, USA, Europe and other markets. These regulations may result in restrictions on the Company’s products, including withdrawal of the products from the market or suspension of manufacturing operations.

Knowledge intensive industry

The Company operates in a very knowledge intensive industry. Development of alternative technology, which may be better than the existing technology (thus rendering it redundant), can have adverse material impact on the Company’s prospects. Also, key employees with the required expertise, joining a competitor or forming a competing company, may adversely affect the Company.

IPO Grading of 1

CRISIL has assigned Grade 1 indicating poor fundamentals of this public issue by Celestial Labs. This represents CRISIL’s overall assignment of the fundamentals of the issue in relation to other listed Equity securities in India.

Valuation

The company is offering its shares at a PE multiple of 13.04x on expanded capital. The company is proposed to be listed on BSE & NSE. We recommend investors to subscribe to this issue with a long-term view.