Suven Life Sciences – The Embedded Triggers
First of all pharmaceutical business is not my forte, this analysis was done to learn a new industry
About Company – Suven Life Sciences, in the business of design, manufacture and supply of Bulk Actives, Drug Intermediates & Fine Chemicals, catering to the needs of global Life Science Industry.
1. CRAMS – Contract Research And Manufacturing Services – This segment accounted for 95% of the Company’s top line in 2013-14; the business grew 20% CAGR over the 10 years leading to INR 514 crore. This is a very high margin business, reason company is having high ROCE, ROE
2. New Chemical entity – Cash guzzling unit of the company , 338 crore has been spent on drug discovery till 2014, the expected outflow in next 3-4 years is going be high as well as 1 molecule is entering phase 2 and three others in IND and phase 1. Important note no revenue realised till date
3.Formulations development – Suven is engaged in the development of formulations, an extension of its business model. The Company expects to develop and collaborate with a partner, out-license the product in exchange for royalties and revenues. The Company expects to focus on niche and small molecules (global sales about US$20 to 40 million), which are generally off the radar of most large pharmaceutical players. This is a superb annuity business from 2014 till 2028 their USFDA ANDA for Malathion lotion (Taro) is going to produce 2- 2.5 USD million ( ~ 11 INR Cr) annually. The management expects to file 3-4 ANDA with USFDA in next two years. This potentially can become $ USD 10 million (~45 INR Cr) million annuity for future years
Management – My take management is extremely focussed and highly conservative (in terms of accounting), The CEO comes out openly on CNBC and says that investors get excited over filling of patents , they should not be as filing has no material impact to top/bottom line of the company. Guidance are conservative, they expense R&D instead of capitalising it. The Annual reports are quite informative on progress of the company. 2014 Annual report is a delight to read if anyone is interested to under company in details. Management compensation is reasonable
Though I have to say the company’s website needs to be uplifted it is very outdated.
Possible risk – Mr Jasti is 65 and I don’t see any succession planning put in place.
Size of business opportunity ( Straight from Annual Report 2014)
Besides, the US$58 billion research spending by the top-50 global pharmaceutical companies represents a large market for companies like ours with annual revenues worth just H500 crore. Of the US$12 billion pre-clinical research market, only half a billion worth of projects are outsourced, a proportion that we feel will significantly increase. If anything, the pressure is on companies with established business models like ours to scale our presence and account for a larger share of the customer’s wallet and widen our presence across a larger number of markets, therapeutic segments and customers.
Also read this 2011 ICRA report- http://1drv.ms/1r8CNZG,it highlights key drivers for CRAMS in pharmaceutical industry
- Patents expiry
- Falling R&D productivity
- Focus on generics
- Cost pressure
Quality of Earnings – I have done last five years earnings quality analysis you can see details here – http://1drv.ms/1r8D1zV
They key thing that that has triggered my interest is company’s positive enterprising and defensive profits in 2014, a continuation in this box can create value for investors.
Management has guided that CRAMS division will do sales of 450 Cr for FY15 (lower than FY14) and expects it to grow 20% annually for few years. Given management’s conservative guidance in past I tend to believe they can achieve it.
Let’s transport ourselves in year 2024 (Wish I could do in reality)
CRAMS business had grown 20% for three years from FY15 on wards , 15% for next two years and 10% for next three years. We would end up with sales of INR 1643 crore in year 2024
NCE Segment – In spite for 1 molecule in phase 2 and several others in IND phase in 2014 no commercial success for company till 2024, hence no revenues from this division. Highly unlikely – Read this from 2014 Annual report – It would be relevant to indicate that one of the partnerships (NCE molecule development) for a similar programme in July 2013 between two global pharma companies generated US$150 million upfront for the molecule developer (Like Suven) for the Phase 2 programme.
Formulations Development – The company was not able to file any new findings after initial two three years (Highly unlikely )as guided in annual report 2014 they have 4 ANDA USFDA filings. The annuity earnings are INR 44 crores
With INR 1687 Crore revenues and net profit margin of 18% ( in 2014 their margin was 28%) and management has indicated that CRAMS segment is a high margin business. The net profit would be around INR 304 crores . At 15 PE the market cap would be INR 4554 crore. This means if you buy company at current market cap of around ~INR 2000 crore. The CAGR profit is around 9.57% which is below par for a long term investor.
But as you would have seen expecting company to not to commercialize any R&D work for 18 years would be real surprise. If USD 30 million is added to bottom line for year 2024 this improves our CAGR return to 15% which is good and not great. Any continuation of growth CRAMS business , additional ANDA fillings and commercialization of molecules could mean huge upside for our returns
At CMP of INR 200 there is no steep margin of safety, the company has to deliver on promises to get block buster results for investors
- As highlighted earlier management continuity beyond Mr. Jasti is not visible
- If debt is taken to fund R&D in future it will be detrimental to investors return, the company has not done so in past
- No revenue from NCE division will result in sub optimal returns for investors
– Conservative accounting they expense the entire R&D expense
– No debt is taken for R&D
– CRAMS business likely to be having consistent growth translating into revenue visibility and liquidity
– Earnings surprises from NCE Division
Disclosure – Started an initial position will add more with thorough understanding of business