I have previously written by Suven Life Science here and here

Reading and learning about Suven Life sciences has been huge learning curve, it has taught me few things

• Forecasting in excel and actual numbers in real world are two different things, so one should not take their excel skills seriously. If you need a proof just refer my revenue and bottom-line prediction from last few years for Suven
• Drug discovery is a long , hard and uncertain process and putting your odds is as good as throwing a dice. There are far few too many variables to model an outcome
• Entrepreneurship is a long term commitment and as Investors, we are so lucky to jump the ship after a poor quarter, not the promoter who many times has put his/her everything on line

Reviewing 2016-17 performance of the company

Firstly numbers and management’s guidance for next year

 

All figures in INR cr except %	2015-2016	2016-2017	Growth	2017-18 E
Base CRAMS [Balancing Figure]	244	253	4%	291
CRAMS Commericial Supplies	0	34	100%	60
Speciality Chemichals	224	224	0%	224
Technichal Services	32	33	3%	33
Revenue From Operations	500	544	9%	608
Other Income	19	21	11%	21
Total Revenues	519	565	9%	629
Consolidated Net Profit	71	87	23%
Margin	13.7%	15.4%
Research & Development Exp	90	99	10%

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Top line growth was 9% and bottom line grew by 23%

Business verticals

Base Crams business grew by mere 4% as number of projects in different phases remained same, profitability in the segment dipped as there were more projects in phase 1 in the mix this year

With tightening R&D budget the global innovators are not going to speed up spending, the management expects this business to grow between 10-15% for next few years

CRAMS commercial supplies – Suven has got three compounds for which it has been doing commercial manufacturing. These three compounds are into different therapeutic areas – diabetes, autoimmune /inflammatory disorder and depression

Suven got revenues of 34 crore from inflammatory compound and revenues for this compound are expected to hit 60 Crore mark next year

The other two compounds are not contributing currently however they can contribute to similar levels like the inflammatory compound in next few years

Supplying intermediates for specialty chemicals – This year it continued to supply to one large global pharmaceutical and agrochemical conglomerate. This segment has huge client concentration risk

Technical Services there was increased traction for research services and growth in fees for formulated products and companies expects to increase revenue from this division in coming years

NCE segment

The phase II clinical trial of Suven 502 is progressing slower than expected as patients enrollment has been slow due to competing trials (40% enrolled to date)

Competing molecules update from this report

Alzheimer’s disease represents a difficult therapeutic segment as we have seen no success since a long time and new innovations continue to fail.

• Lu AE58054, which is also a 5HT6 antagonist, has been discontinued for development by Otsuka in Alzheimer’s type dementia.
• Phase-2 data on RVT-101 is not encouraging. RVT-101 is expected to report Phase-3 data on Alzheimer’s disease in October 2017 and we believe the quality of data will determine the value of SUVN-502. A successful outcome for RVT-101 will raise the odds of SLSL successfully out licensing its lead asset SUVN-502 for an attractive upfront payment.

On con call management highlighted that they have received no negative observations for current 40% enrolments

Other Molecules

• SUVN-G3031 -completed Phase I clinical trial in USA and ready for Phase II.
• SUVN-D4041 -completed Phase I Clinical Trial in USA and undergoing long term toxicology studies.
• SUVN-911 – have started Phase 1 clinical trial in USA

Future

Cash outflow

• Management indicated that they have to spend 120 Cr to upgrade exiting manufacturing facility to be compliant with OEL4
• The expenditure on R&D is not going to slowdown in fact it is going to increase to about 120 cr for next year

Management indicated this will be funded through internal accruals , this year itself management generated 147 crores cash from operations and they have close to 300 crore in liquid investments

Valuations

I don’t think we should take an ex R&D PAT as company is not going to stop spending on R&D and it should be treated as an expenditure item. On expected PAT of 100 crores in FY18, the companies sells at 21 times FY18 PAT

For a company earning company earning 12-15% ROE and growing at 10-15% this seems to be fair or even above par, however we need to be cognizant that Suven is building various verticals that are yet not contributing fully e.g. commercial supplies and technical services.

Let me know your thoughts in comments below or at twitter