Scripscan:Suven Life Sciences ltd
Avg buy price:50
Business:Suven Life Sciences Limited, a research-based biopharmaceutical company, engages in the design, manufacture, and supply of bulk actives, drug intermediates, and fine chemicals for the life science industry worldwide. The company offers advanced intermediates, intermediates, and active pharmaceutical ingredients. The company also offers contract research and manufacturing services, including development and supply of pharmaceutical and agro chemical intermediates for new chemical entities. In addition, it provides discovery and development of new chemical entities for CNS disorders; research collaborative projects with pharmaceutical companies and drug discovery research services including in-vitro screening and molecular biology, drug metabolism and pharmacokinetics, pharmacology, toxicology and genotoxicity, and bioanalysis, as well as operates a formulation development center.Suven caters to the need of over 20 global pharma majors and has completed nearly 370 projects since its existence.Presently the company is working on 50 odd molecules(26 molecules are undergoing phase I clinical trials, 21 are in phase II and 5 are in phase III).
Real story:Suven has been striving hard for the last nine years to build an innovative, sustainable and sizeable base which consists of exciting innovation pipeline of NCE''s in CNS and growing CRAMS business.Its focus area in CNS is Cognition in Alzheimer''s disease, ADHD & Schizophrenia.Alzheimer''s disease is a debilitating neuro degenerative disease characterized by dementia and memory loss. The threat of Alzheimer''s and other neurological diseases are extraordinary.The statistics are stark: about one in three people over 85, and one in 10 over 65, will develop Alzheimer''s disease.Alzheimer''s disease, a potential billion market lacking effective medicines or a major contender but littered with high-profile drug failures in the past 2 years.During the last 10 years it has been seen almost 100 compounds that have failed in Phase 3 and only a handful of drugs have been approved for Alzheimer''s and dementia since 1990s.There is clearly a need for more effective therapies that address this and other neuro degenerative diseases; that is where suven is focusing and progressing very well.For the past nine years it has committed significant time and resources to its Drug Discovery & Development program in CNS arena where there is the highest unmet medical need with lowest success rate as well as the longest timelines hence it is taking long time to see any monetary success at Suven even though it has built an exciting innovative research pipeline.On the words of the chairman,"I have been communicating all along that it takes decades to turn new product concept into reality and to find treatments for Alzheimer''s disease but any success would bring huge monetary benefit to Suven and brings relief to the millions of people world over afflicted with Alzheimer''s.But I am happy to inform you that this is the best year ever for CRAMS segment in the history of Suven both in terms of sales and net profit even after spending Rs33 crores on Drug Discovery which was written off on the P&L account.We continue to see exciting growth opportunity in the CRAMS segment and to capture that opportunity we will be expanding our capacities by the addition of a new green field site at Vizag with an outlay of around Rs 100crs which in turn adds to the growth and profitability in the years to come".
Brokerage note:Was reading a big brokerage house note on it which a source of mine forwarded me.In a quintessence,"Suven has grown from being a pure contract research player to become a collaborative research partner. Its integrated business model encompasses all the processes from drug discovery and development services to clinical supplies,manufacturing and packaging. The company earns more than 65% of its revenues from the US and Europe. The company has three promising molecules under clinical trials, holding the potential for out-licensing opportunities in future.Under the collaborative research program (CRP), Suven works with innovator companies to develop drugs up to a certain level, after which the partner would take up the product for further development. During the development phases, it will receive milestones payments at different levels of development. When the partner company takes up the molecule for further investigation, two more revenue streams will open up for Suven. When the partner starts clinical research, Suven will get the CRAMS business and also CRO contracts.On successful commercialization of the molecule, it will get a royalty for marketing the product. Suven is the first Indian company to get into such collaborative research program.Suven’s clinical research division, Asian Clinical Trials (ACT), has entered into a strategic alliance with VPSCRO, a CRO based in Beijing, China to conduct clinical trial services in India and China. CNet revenues have grown at a CAGR of 20% over FY11-13 to Rs.258 cr on the back of higher contribution from new businesses and traction in CRAMS projects. Revenues from DDDSS and clinical research are likely to grow at a faster rate than the CRAMS business going ahead."
Fiscal 2012-13&1st quarter 2014:The Company's operational performance during the financial year 2012-13 was quite impressive with a sales volume of Rs 258crs as against Rs. 204crs in the previous year, recording a growth of more than 26 percent. The exports turnover increased by 18 percent, from Rs. 193crs in the previous financial year to Rs. 228crs.Profit After Tax (PAT) of the Company increased by 114 percent to Rs. 30crs from Rs. 14crs in the previous financial year.The Earnings Per Share (EPS) of the Company has gone up to Rs.2.64 in fiscal 2012-13 per share from the previous year EPS of Rs. 1.23 in fiscal 2011-12 per share, registering a growth of 115%.It also paid a dividend of 30 paisa per share.Suven Life Sciences Ltd’s net profit more than tripled at Rs 30 crore in the first quarter ended June 30 compared with Rs 7.90 crore in the year-ago period.Turnover of the Hyderabad-based company increased to Rs 111.8 crore which was Rs 71 crore in the 1st quarter of the preceding year.The growth in profit was a result of the commercialisation of two products under contract research and manufacturing services besides increase in sales of two regular products.
Concerns:Suven is an export earner and hence has been a beneficiary of the high USD prices.Suven has got all its manufacturing facilities in Andhra where because of the telengana issue,there has been massive power cuts resulting in lower margins for the company.The management is confident of a better situation by end of the present fiscal.The much debated govt pricing policy may impact it too just like any other pharma company.
Conclusion:I hardly understand the pharma business model.I mean where patents,molecules and litigation are often the norm of the day,you have very little to crave for or boast about.Over the past few weeks and after spending a huge amount of time with pharma industry veterans,I feel I have in parts,understood the business model and future potential of today's recommendation.The company is managed by a very honest and dynamic gentleman named Mr Venkat Jasti, who probably will make a lot of money for its shareholders in the days to come."The promoters too sensing the great future has swallowed over 16 lakhs shares from the open market in the last few quarters".Going by the 1st quarter trend, the company can deliver 120crs of PAT which will absolutely sky rocket its stock price.But based on company's guidance or say putting a more conservative estimate,PAT of 80-84crs looks reasonable.That translates into an EPS of 7 bucks.Pharma companies typically trades at high double digit PE'S.Thus assigning a mere 10 PE multiple helps me to arrive at a target price of 70 bucks, a return of over 40% from the suggested average buy range,to be achieved within the next 6-8 months.
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