­Extensive experience and established track record in pharma R&D
SPARC is a Mumbai based - clinical stage bio-pharmaceutical company and is part of the SPG. It was incorporated in 2006 when the innovative product group was carved out of SPIL. Mr. Dilip Shanghvi and other individuals in the promoter Group along with Shanghvi Finance Private Limited (SFPL) own a majority stake in SPARC (65.67 percent as on September 30, 2023). Currently Mr. Dilip Shanghvi is the Chairman. He is supported by a highly qualified and experienced senior management team. Mr. Anil Raghavan is the CEO and has an experience of over two decades in the pharmaceutical industry. The rest of the senior management team also have extensive experience in the pharmaceutical industry working in past for companies such as Merck, Sanofi-Aventis, Glaxo Smith Kline and Dr. Reddy’s amongst others. The team is also supported by a scientific advisory board consisting of experienced professors from leading medical education institutions across the globe. Acuité believes that SPARC will derive benefits from its established track record and experienced management in the pharmaceutical industry.

Also, SPARC has issued equity warrants with value to the tune of Rs.1,112 Cr. in FY22 at exercise price of Rs.178 per warrant. Each warrant was converted into 1 equity share on preferential basis upon receipt of 25% of the issue price (i.e. Rs.44.50 per warrant) as warrant subscription money and the balance 75% of the issue price (i.e. Rs.133.50 Cr. per warrant) was payable within 18 months from the allotment date at the time of exercising the option to apply for fully paid up equity shares of Re.1/ each of SPARC against each warrant held by the warrant holder. The subscribers have brought in around ~Rs.409 Cr as on June 2022 and the balance Rs.703 Cr. was received by the company in January 2023 against conversion of warrants. With the same the entire proceed of the preferential issue stands received. Further, SPARC has obtained approval in Aug 2023 AGM for raising a sum upto Rs.1800 Cr. by way of fresh issuance.

Robust R&D Pipeline and synergies with SPIL
SPARC is engaged in research & development activity and generate their revenue primarily from license fee, royalty on technology and R&D services. It has undertaken research in the field of Oncology, Neuro Degeneration, Ophthalmology and Dermatology. It currently has 2 USFDA approved products and also have a robust R&D pipeline with 5 products at various stages of development, these target epilepsy, glaucoma, different kinds of cancer, and Parkinson’s disease. Besides these it has more than 10+ pre-clinical assets under development. SPARC currently looks at developing NCE (New Chemical Entities) and New Biological Entities (NBEs). The company has completely transitioned into NCE and NBEs from NDDS (New Drug Delivery Systems) and started commercializing them at various location such as US, India and RoW as NCEs have higher revenue potential. As the product progresses towards the end of its development process SPARC licenses the same with various pharmaceutical companies. It regularly partners with SPIL - its Group Company which has a robust presence in the overseas market along with other pharmaceutical companies.

Furthermore, the company in the past has licensed many of its product to SPIL such as Bevetex and Xelpros. This synergy with SPIL makes it a key entity for SPG. Also, one more product of SPARC’s NDA i.e Sezaby was approved by the USFDA and it licensed the US commercialization rights of Sezaby to Sun Pharmaceutical Industries Inc. Under the terms of the license agreement, Sun Pharma paid SPARC an upfront payment of $10 Mn. SPARC will also be eligible to receive milestone payments contingent upon the achievement of regulatory and sales milestones, as well as tiered royalties on sales.  

SPIL is one of the leading listed Pharmaceutical companies in India with consolidated revenues of was Rs.43885.68 Cr. on which it posted a net profit of Rs.8,512.94 Cr. for FY23. The company has a presence in about 100 countries (including USA, Europe, Emerging Markets, Canada, Japan and Australia & New Zealand) with product portfolio more than 2000 products. The company generates around 65 per cent of its total consolidated revenue is from overseas markets. SPIL is the 4th Largest Specialty Generic Company in USA. Its investor base includes leading domestic and foreign institutional investors. The Promoter Group hold ~54.48 per cent as on September 30, 2023. Out of the promoter holding, Shanghvi Finance Private Limited holds ~40.30 per cent and balance ~14.18 is held by Promoter Group in individual capacity and through other entities. It has presence in specialty medications for ophthalmology, dermatology and oncology, in generic medications for psychiatry, anti-infective, neurology, cardiology, orthopedic, diabetology, gastroenterology, ophthalmology, nephrology, urology, dermatology, gynecology, respiratory, oncology.

­­Long gestation periods, capital intensive nature of operations and susceptibility stringent regulatory environment
SPARC is a clinical stage bio-pharmaceutical company which undertakes pre-clinical and clinical stage research and development. Drug development process involves long gestation periods with constant investments. Heavy costs have to be incurred to carry out research, conduct clinical trials and compensate a highly qualified work force every year. However, the major payouts come when a product is near commercialization and a licensing agreement is signed. There is an inherent mismatch of cash flows in the R&D segment. SPARC has some regular revenues which it earns as royalty and fees for carrying out research activities. Although they are low compared to the cost that the company incurs for carrying out the R&D activities. On account of this SPARC has generated losses for all the three years under study. Its revenue and operating loss stood at Rs.238.78 Cr and Rs.214.05 Cr in FY23 as against Rs.137.25 Cr and Rs.186.75 Cr in FY22 respectively. This necessitates periodically capital infusion. The company also faces significant regulatory risks. Since it is engaged in new drug development it has to adhere to a stringent compliance and regulatory environment. Costs incurred on products under development for a long time may get impacted by any adverse regulatory action. However, this is mitigated to some extent on account of the strong support and resource mobilization ability of the promoters. Acuité believes completion of product development without significant time overruns or regulatory setbacks will remain a key monitorable.