Suven Pharmaceuticals (NSE: SUVENPHAR)- Specialty Pharma !

Summary

• One of the pioneers in the Indian CRAMS industry.
• Relationships built over the years create strong entry barriers in this business as Innovator companies work with only a handful of companies.
• Opportunities to venture into the attractive US formulations market through a recent acquisition of a US based front-end company.
• Opportunities also exist in the high-value speciality chemicals segment.

Suven Pharmaceuticals is an Indian Pharmaceutical company in the business of Contract Research And Manufacturing Services(CRAMS). It is one of the pioneers of the CRAMS model with capabilities from research to execution. Company is focussed on the attractive Central Nervous System (CNS) therapeutic segment. It is headquartered in Hyderabad, Telangana with its R&D facilities in Hyderabad and Medak and has 3 manufacturing locations at Medak, Nalgonda and Visakhapatnam.

Operates in New Chemical Entities (NCE) based CRAMS, the highest margin CRAMS business- at the very top of the Pharma value chain.

Within CRAMS, the company generates revenue from the following segments :

a) Base CRAMS- Suven partners with global innovator companies for developing and supplying intermediates for their NCE programmes.

b) CRAMS for commercial products- This is a high value, high margin vertical where the company supplies intermediates for NCEs that are launched globally.

c) Supply of specialty chemicals- The company supplies complex specialty intermediates.

d) Contract Technical Services: This comprises fees for technical services provided by the company to global pharmaceutical companies.

INVESTMENT SUMMARY

Suven Pharma is one of the pioneers in the Indian CRAMS industry having worked on over 800 projects with innovator companies on New Chemicals Entity (NCE) development and commercialisation. The relationships built over the years create strong entry barriers in this business as Innovator companies work with only a handful of companies due to the need to protect proprietary processes and requirement for niche R&D skills. At a given time an innovator company only works with a maximum of 1-2 CRAMS partners- Suven is one of them. Company has opportunities to venture into the attractive US formulations market through a recent acquisition of a US based front-end company. Opportunities also exist in the high-value speciality chemicals segment. Overall Suven has strong tailwinds for growth over next many years. The recent demerger of the cash guzzling NCE segment has brought focus back on the traditional CRAMS business. The current margin (20% + PAT margin) / ROCE (40%) profile is a testimony to the high entry barriers that the company enjoys.

INVESTMENT ARGUMENTS

Attractive industry dynamics

With increasing cost of research and lower probabilities of success in replacing existing medications the market for outsourcing to cost effective and research driven companies is on the rise.

Besides core functions like clinical trials and manufacturing, drug discovery is one of the recent functions to be outsourced.

Still only ~20% of global Pharma R&D spend is currently outsourced. This represents strong growth potential for integrated CRAMS players driven by chemistry capabilities, skilled manpower and cost value proposition.

High economic growth in India along with increasing reach of health insurance to the general public through various government policies have opened up multiple avenues of growth for Indian pharma industry. Government has envisioned a plan named ‘pharma vision 2020’ that aims to make India a leader in drug manufacturing. Low cost of production is an extra advantage for Indian pharma companies.

Increased outsourcing by global majors combined with the multiple unique value propositions of Indian pharma is leading to heightened interest in few players with expertise particularly in the high growth CRAMS model.

Top of the Pharma value chain

Suven Pharmaceuticals operates in NCE based CRAMS- the highest Margin CRAMS business that is out there.

Under CRAMS, Suven works with innovator companies at the clinical trial stage right till the molecule commercialisation.

Its customers include 18 global life sciences companies.

Currently, the company is working on 52 molecules. Out of these, 26 molecules are undergoing phase I clinical trials, 21 are in phase II and 5 are in phase III.

Company supplies intermediates to innovator companies for NCE development. Generally, Suven gets a new product at phase I, which gradually moves further based on the innovator’s success. The volumes supplied increase >10 times as the product moves from phase I to phase II to phase III. The profit margins for supplies in phase I are low given low volumes and R&D involved- these improve substantially in phase II and phase III.

Sticky relationships

Suven is one of the favoured R&D house for the world’s leading Pharma companies like Abbott (US), Borregarrd (US/Norway), Du Pont (US), Hoechst (Germany), Kodak (US), Degussa (Germany), Fermion (Finland), Sochinaz (Switzerland), Imation/3M (US) and many others.

The relationships have been formed after multi years of partnership-lead effort. These are tough to replace.

Promising CNS segment

Suven is one of the few players globally in the Central Nervous System (CNS) segment research. Company has built strong intellectual capabilities around the CNS segment since 2005.

Globally CNS is the second largest and fastest growing segment. A single successful molecule offers significant opportunity.

Formulations opportunity

During the last year Company invested in a minority stake in Rising Pharma, a US based generic formulation development and distribution entity with close to 40 partners. Bought cheap for 25% minority stake, Rising Pharma recently turned profitable.

Rising Pharma is in the process of filing 11 ANDA’s, with 3 to be commercialized this year. Suven gets the opportunity to bid first for these, and gets access to the lucrative US Formulations market through the distribution reach of Rising Pharma.

Suven on its own has 11 ANDAs in the pipeline. Each ANDA has the potential of $2-4 million kind of profitability. Some ANDA’s will be launched on a Profit sharing basis. Formulation business overall is likely to be high margin growth driver.

No conflict of interest with innovators because these are generics and not in a blockbuster space, and only being done in small volumes with no confrontation with customers.

Speciality Chemicals Opportunity

Under the specialty chemicals business the company has strategy of going after patented molecules. Currently, company has 2 molecules that are commercialized and being used in agrochemicals. This business has scaled up from sales of 224 crores in 2017 to 304 crores in 2020. specialty chemicals business is a long gestation business given the strategy of launching intermediates for patented molecules. Currently, 2 intermediates contribute 300 crores to sales. One of them went off patent last year. Company has 2 more intermediates in the pipeline, each of them can contribute 50 crores of sales individually.

VALUATION

Trades at 13x FY23. High entry barriers business with long term sticky customer relationships combined with strong growth visibility- can lead to rerating. Trades at >half the valuation of closest comparable Divi’s laboratories with much better business model. Divi’s only has part of its revenues coming from innovator relationships, while Suven has almost the entire revenue from long term innovator contracts.

Key financials	FY20	FY21E	FY22E	FY23E
Net Revenues (CR)	834	1,042	1,355	1,761
% growth		25%	30%	30%
Operating Profit (CR)	385	481	626	814
% Growth		25.0%	30.0%	30.0%
Net Profit (CR)	317	396	515	670
% Growth		25%	30%	30%
Diluted EPS	25	31	40	53
RoE (%)		30%	28%	27%
P/E (X)		22	17	13
Current Price				700

RISKS

Even though the company is not involved in approvals of end-clients’ innovator molecules, significant increase in regulatory rejections (FDA, etc) could impact revenues of the company.

Significant Client Concentration Risk as top 10 clients are nearly 90% of sales.

Nature of the business is such that there is going to be lumpiness in CRAMS revenue. It usually takes between 18-24 months to get client approvals with revenues getting spread over many quarters.

Suven earns close to 92% of revenues from exports exposing it to significant currency fluctuation risk.

APPENDIX

Management

Shri Venkateswarlu Jasti : He is the founder & managing director and holds a dual PG degree in pharmacy from Andhra University, Visakhapatnam, India and St. John University, USA. He has specialized in Industrial Pharmacy and worked as a registered pharmacist, were he managed the Clinton Bergen Drug Company, Park Way Central Pharma and Kayes Drug Company, USA, and has 40+ years of experience.

Dr. N. V. S. Ramakrishna : Holds a M.Sc. and Ph.D. and has been the Vice President of discovery research at Suven Life Sciences Limited since March 03, 2002. Previously he has served as Vice President of Discovery Chemistry at Zydus Cadila.

Mr M R Naidu: Holds a Doctorate in science and graduate in Mechanical Engineering and is known as a distinguished scholar. Prior to his career at Suven, he was the chairman and managing director of Bharat Heavy Plates and Vessels Limited (BHPV) and Hindustan Machine Tools Limited (HMT).

Just a side note: I’ve been tracking this stock since many years now. I hold this stock since stock price 291. Already been 2.5x. Despite the runup the long term story is still very promising!