LAURUS LABS LTD - Richcore Lifesciences - Acquisition - Future Prospects Dt 17 - 12 - 2020

 

LAURUS LABS LTD

Richcore Lifesciences Acquisition

Future Prospects

17 - 12 - 2020

Consolidated Q2FY21

o Revenue at ₹1,139crs, up 60% (Y-o-Y)

o EBITDA ₹378 Crs,up 172% (Y-o-Y)

o EBITDA margins at 33%

o PAT at ₹242crs, up 325% (Y-o-Y)

o PAT margins at 21%

o EPS (Diluted)(face value of ₹2/-)for the period at ₹4.5 per share (not annualised), up by 309% (Y-o-Y)

o Declared Interim dividend of ₹0.80 /-per share (face value of ₹2/-)

Consolidated H1 FY21

o Revenue at ₹2,113 crs, up 67 % (Y-o-Y)

o EBITDA ₹663crs, up 193% (Y-o-Y)

o EBITDA margins at 31%

o PAT at ₹414crs, up 475% (Y-o-Y)

o PAT margins at 20%

o EPS (Diluted)(face value of ₹2/-)for the period at ₹7.7per share (not annualised), up by 492% (Y-o-Y)

Commenting on the results announcement, Dr. Satyanarayana Chava –Founder & CEO said;

“..... Our Formulations business showcased a growth of over 180% for the quarter, mainly led by higher LMIC business and new launches in various markets, the division now contributed ~40% to overall revenues.

The generic API division also recorded a healthy growth of 22% for the quarter, led by higher growth in ARV API business owing to higher volumes.

Custom Synthesis continues to maintain its growth trajectory with a healthy pipeline and with good visibility.

With a clear roadmap, adequate, and responsible capital allocation for sustainable long-term vision, I am very optimistic about growth for the coming years.

V V Ravi Kumar, ED & Chief Financial Officer said;

“.... our ROCE on an annualised basis has improved to 37.5%.

With improved demand visibility and strong profitability and debt situation, we continue to undertake larger green-field  and brown-field  CAPEX  for  all the divisions and initiate new  manufacturing  units  on green field basis.

We are confident that the new capex will have a shorter payback period.” 

Business Highlights:

 R & D spent of ₹85 Cr and 4% of sales inH1 FY21.

 Laurus Synthesis Inc. USA ( 100% wholly-owned subsidiary of the Company) is merged with Laurus Generics Inc. USA (Step-down subsidiary of the Company) with effect from September 30, 2020.

Generic FDF

 Revenue growth of 183%for the quarter (Y-o-Y) and 202% for H1 (Y-o-Y).

Generic FDF business maintains robust growth momentum for the quarter.

The growth in the quarter was led by higher sales from tender business in LMIC; having a strong order book for coming quarters

 Launched TLE400 in LMIC markets

Launched TLE400 & TLE600 in US market

Commenced marketing of products of other manufactures by leveraging our front end

Contract manufacturing revenues from the EU region has a strong order book for FY21and beyond

 2 product validations completed for formulation apart from filling of 26 ANDAs & NDAs

 8 products received Final Approvals, and 8products have received Tentative Approvals

Synthesis& Ingredients

 Revenue showcased the growth of 36% for the quarter (Y-o-Y)and 37% for H1 (Y-o-Y)

Total Number of Active Projects in the CDMO division stood at 49 as of H1 FY21

State-of-the-art cGMP facilities to manufacture NCEs and Intermediates

Working with Large Global Innovator Pharmaceutical Companies, mid and small Biotech Companies

Generic API

Revenue from Generic API segment showcased the growth of 22% for the quarter (Y-o-Y) and 30% for H1(Y-o-Y)

The Anti-Viral segment showed growth of 20% for the quarter and19% for H1 (Y-o-Y) and is expected to have good growth for the full year

In the Other API segment -Contract manufacturing of Generic APIs showing robust growth of 18% in the quarter (Y-o-Y) and 80% for H1 (Y-o-Y)

Filed 264 patent applications and 130patent granted as on Sept 30, 2020

RICHCORE ACQUISITION

·       Laurus Labs recently acquired a 72.55% percent stake for Rs 246.7 crore in Richcore Lifesciences , a biotech firm,

·       From the VC players - Eight Roads Ventures and VenturEast;

·   Existing promoters of Richcore would continue to run the operations.

·       Richcore will be renamed to Laurus Bio Pvt Ltd.

· Subramani Ramchandrappa, Chairman & Managing Director,Richcore Lifesciences said, “Richcore and Laurus Labs coming together marks the convergence of Biotechnology and Chemistry faculties.

·     Leveraging the synergies arising from Laurus’s experience and Richcore’s innovation, we plan to build scale as we continue to serve our existing customers and enter new biotech segments.

·       We welcome Laurus Labs on board .

·   Richcore has large scale fermentation capabilities and manufactures animal origin-free (AOF) recombinant products which are used to manufacture vaccine, insulin and stem-cell based regenerative medicine.

·       This also eliminates dependency on animal and human blood derived products and in the process helps avoid contamination.

·  Richcore has expertise in the enzyme/bio-ingredients development for pharmaceutical and industrial applications.

·       Laurus Labs in turn can help in scaling up operations and transform it into a major biotech CDMO (contract development and manufacturing organization).

·       Basis for growth guidance

·       Current fermentation capacity of Richcore is 10,750 liters at Bengaluru.

·     Richcore is currently in its growth phase and its second manufacturing plant at Tumkur, near Bengaluru is expected to be completed by 31 March 2021, with a massive fermentation capacity of 180,000 liters.

·       Biotech strategy & outlook

·       Fermentation-based applications are varied and it involves high-margin applications into amino acids, vitamins, insulin, vaccines, nutraceuticals, probiotics and industrial usages.

·       In case of Laurus Labs, a few aspects of the deal make it an even more promising opportunity.

·       Typically, biotechnology based ventures have a long gestation period of 5-8 years and require an evolving skill set. With this inorganic foray, Laurus Labs has not only shortened the time frame but also acquired some novel knowhow.

·       RLife’s manufacturing facilities produce AOF products which are considered relatively safer biologic ingredients. Further, key application of RLife’s portfolio is into cultured meat and caters to the growing demand for protein without slaughtering animals.

·       Going forward, the company wants to prioritize biotech-CDMO opportunities as global pharma innovators are increasingly focused on biologics/biosimilars opportunities and looking for drug discovery and manufacturing partners. Note that in the last four years, more than 1/4^th of the new drug applications approved by US FDA were for biologics.

·       At the same time, Laurus also plans to become a vertically integrated biotech firm focusing on therapeutic areas of monoclonal antibodies (Key applications: autoimmune disease, cancer etc) and other biosimilars.

·       While the first goal of CDMO appears to be a plug and play for Laurus, given its existing strong hold in custom synthesis, the later goal of being next Biocon is a long way ahead and has a considerable execution risk.

·       In last few years, it has transformed from an API manufacturer to a vertically integrated manufacturer of ARV (Anti-retroviral) medicines.

·       Further, in recent times it has shown strong potential for oncology and CDMO opportunities. Laurus has about 50 ongoing projects in the synthesis business. Of this, only four projects are commercialized. Interestingly, taking account of contract manufacturing businesses under formulations and API, CDMO business share in sales is 20 percent versus 10 percent reported.

·       this acquisition would be largely funded through internal accruals. Also, this deal transaction is over and above the capex guidance of Rs 1,200 crore for FY21-22.

·       the capex plan includes boosting formulation capacity by 100 percent to about 10 billion tablets over 18 months.

·       the greenfield project in the CDMO segment at Vizag aims for manufacturing steroids, hormones, and oncology products.

·       in the medium term it helps in expanding the CDMO opportunities base and make it move towards a higher-margin trajectory. In the next 3-5 years, this segment can be a major driver of growth for Laurus Labs.

·       Laurus agreed to pay Rs. 246.7 crores to acquire 72.55% of Richcore’s shares from venture capitalists Eight Roads Ventures and VenturEast. Richcore is a contract developer and manufacturer of enzymes and proteins used in food and drugs.

·       Laurus said the acquisition will add one fourth revenue stream to its existing active pharmaceutical ingredients, formulations and custom synthesis divisions.

·       Recombinant is a technique where genetically engineered microorganisms like bacteria and yeast are used to produce protein of choice. The technology is used in manufacturing vaccines, insulins, and other biopharma other animal and human blood derived products and in turn produce safer medicines.

·       Richore has sales of Rs 29 crore in the first half of FY21.

·       The company currently produces naturally produced enzymes and proteins such as carboxypeptidase B, trypsin, human albumin, transferrin and human growth factor IGF-1 hormone.

·       Richcore is currently in its growth phase and its second manufacturing plant near Bengaluru is expected to be completed by 31 March 2021.

·       Chava said the current promoters of Richcore led by Subramani Ramachandrappa will continue as promoters and will be responsible for its management and operations.

·       In order to supplement future growth, Laurus has undertaken a massive capex program (Rs12bn) of which Rs5bn is allocated towards formulations, to be largely funded through internal accruals.

·       What has led to the dramatic improvement in its growth outlook?

·       In the case of ARVs – both formulations and APIs, Laurus continues to benefit from expansion in HIV patient coverage anchored by WHO guidelines and market share gains for almost all ARV offerings. 

       Broadly speaking, the company has a 15-30 percent market share in TLD (Tenofovir + Lamivudine + Dolutegravir) ARV formulations and APIs which is the preferred line of treatment. It has also filed for second line ARV APIs of Lopinavir and Ritonavir and expects to do formulation for same.

·        Additionally, we are encouraged with the business momentum in the synthesis business. Laurus has 49 ongoing projects in the synthesis business and it has incorporated a wholly-owned subsidiary to focus on R&D and manufacturing.

·       In fact, to do justice to medium-term demand, it revises its capex guidance to Rs 1200 crore for FY21-22 from Rs 700 crore earlier. Of this Rs 262 crore has been spend so far. Capex would be allocated towards FDF/API/Synthesis expansion in 40%/40%/20% ratio.  

·       The plan includes boosting formulation capacity by 100 percent to about 10 billion tablets over 18 months. Majority of the new expansion would be for developed markets demand vs LMIC so far. Further, the greenfield project in the CDMO segment at Vizag aims for manufacturing steroids, hormones, and oncology products. In the interim, de-bottlenecking worth Rs 50 crore would support capacity additions for APIs and TLE launch.

·       Key risk is that even after strong diversification over the years, the company has a substantial share from HIV treatment. 

A consistent business challenge is the monitoring of shifting treatment regimes and keeping pace with the same in terms of technical knowhow and capability. Other risks to monitor are execution risks for capex project and geo-political developments with respect to China. The company has a considerable dependency on China for key starting materials.

·       Nevertheless, there is a perceptible change in the management’s commentary for the last two quarters which points towards growth sustenance the for medium term. The company has demonstrated success with respect to backward integration initiatives and adaptation to treatment regime shift in ARV from Efavirenz to Dolutegravir

·                                  Further, margins expansion continues to be helped by operating leverage. However, due to competitive dynamics, we believe that an EBITDA margin range of 24 to 28 percent (vs. 32.8 percent in Q2 FY21) would be sustainable.

·                           Richcore Lifesciences by itself will not add substantial revenue in the immediate future. Much of the heavy lifting will be done by the formulations or the finished dosage form business, which is being scaled up through capacity addition. Sales of this business is estimated to double in current fiscal to as much as 39 percent of Laurus Labs’ total revenues.

·                   Importantly, the Richcore acquisition has larger benefits. Innovation and evolution of diseases are changing drug business. 

           As much as 40 percent of the new drugs being developed the world over are based on biologics, point out analysts at Motilal Oswal Financial Services Ltd. Laurus Labs is largely a chemistry-based company right now.

·              Richcore is a biotech firm with research and development and manufacturing facilities. It develops biotech products used to make biological drugs. 

          Laurus Labs can leverage Richcore’s technology know-how and tap the emerging opportunity in biologics, which has high entry barriers and offers superior returns relative to pharmaceutical drugs.

·            The management focus is on scaling up Richcore. It plans to add CDMO capacity, augment product portfolio and become a ‘one stop shop’ for all biotech ingredients.

      scaling up the biologics business can be time consuming. Biotechnology is both capital and technology intensive in nature. Positive developments on its ability to successfully scale up the biotechnology business and steady growth in its main business will add heft to stock valuations.