Analyst corner: Suven Life Sciences’ earnings have reached sustainable base – Kotak Securities

The contract research and manufacturing services (CRAMS) business is the bread earner for the company, and has grown strongly over the past three years (CAGR 9 % FY15-18). This business has established a new base with the help of increased number of projects in phase II and phase I coupled with commercial/ pre-commercial supplies from FY14 onwards. Our analysis highlights that company’s earnings have reached a sustainable base (three drugs commercialised over past three years) and will continue to improve on this base going ahead.The company has a strong balance sheet with the support of best management team. It has followed a unique path with the dream of new drug development (via using cash generated from its base CRAMS business) with its own efforts, and focus on Alzheimer and central nervous system diseases, an investment opportunity with focussed return.

SUVN-502 — the molecule is currently in phase II studies, and the company has finished recruiting 563 patients closing the recruitment for phase II trial, taking the phase II trials to final stage of completion. This process can reach to final data output by 2QFY20.If data points turn positive, then this can be a huge opportunity for out-licencing. If out-licensed we expect it could garner an upfront of $150-200 million.Suven life sciences also announced the demerger of its CRAMS business from Suven Life Sciences (SLSL) into Suven Pharmaceutical (SPL). SLSL shareholders will receive one share each of SPL for one share held of SLSL.

The demerger exercise will be subjected to NCLT approvals, which should tentatively require six to nine months. Suven also entered into a “stalking-horse” asset purchase agreement to buy the assets of Aceto Corporation’s Rising Pharmacueticals and Rising subsidiaries through its joint venture partner Shore Suven Pharma, which is a joint venture between Suven and Shore Pharma Investments, LLC, of the US. The asset purchase agreement is subjected to regulatory approvals. We like Suven for its high margin profile (Ebitda margin of >30% and net margin of 20%). After a soft FY19, we expect earnings to grow 25-30% in the next two years.

The company shows steady return ratios of 22-25% ROIC and 18% ROE.We have valued the stock at 18x FY21E core EPS of Rs 19 (excluding the R&D spend) fetching a price of Rs 354. We have added the value of upfront from SUVN 502 and other three molecules put together at Rs 71 (i.e. net present value of these molecules). Hence, on an aggregate basis we derive our target price of Rs 425. There could be upside risk to the price target coming from company’s R&D pipeline.