Suven Life sciences – Demerger to create Value?

Suven Life sciences is a company that I am tracking from 2014 This is what I wrote in 2014 on their optionality

But as you would have seen expecting the company to not to commercialize any R&D work for 18 years would be a real surprise

In 2015, I noted the possibility of monetizing their lead molecule in 2017

SUVN 502. For this molecule, we completed Phase-Ib trials and commenced preparations for the Phase-IIa (POC) trial. We hope to initiate patient trials during the second half of the current year and are hopeful of monetising this molecule post successful completion of the study in fiscal 2017

But few years with the company and I understood that

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

However we also observed that the company is building a different and more sustainable game plan

For a 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.

And in 2018 we saw, for the first time that the new pillars of their growth have gained critical mass. I quote from post

I am mightly impressed how this small company has built multiple pillars of growth, In space of 9 years they have built two revenue pillars while enhancing their core CRAMS offerings

2019 is another twist to this story, Suven has decided to demerge its CRAMS business from its Innovative NCE business, the management expects that demerger would help in

  • Profitability improvement for the base CRAMS unit as R&D expenses would be lower
  • Superior valuation for the high margin and high ROC CRAMS unit
  • Attract prospective investors for their high-risk business NCE business, I think especially large pharma companies may be interested to buy their matured pipeline

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As part of this exercise, 300 crore cash would be retained in their NCE division (parent company) to allow them to continue R&D activity for the next 2-3 years.

Another big event (or nonevent) would be clinical trial results for their lead molecule SUV-502. The results should have come by now (Jul 2019) however due to technical delays we need to wait for few more weeks. From the tone of the management, it seems that results may not be positive

“Even as I am prepared mentally for an initial setback in our NCE journey, there remains a ray of hope for a positive outcome” 

2019 Annual report

Additionally, Vishnu on twitter pointed to a very interesting podcast and summarised it very well

We need to wait for the official communication which should come in next 3-4 weeks

The other major decision this year was they invested US$ 35 million (INR ~250 Crores) in Shore Suven Pharma, Inc., (now Rising Holdings, Inc.), a US-based company for a 25% stake in the Company. The management expects to benefit by

  • Turning around the operations of the company
  • Backward integration into India through Suven both in development and supply i.e. would increase Suven’s base CRAMS business 2-3 years down the line
  • Suven, being an earlier partner, will have the option to develop new products and supply on a profit-sharing basis

In 2019, The base business kept chugging along well in spite of steep fall in commercial supplies

 

All figures in INR crore

Management indicated their inability to secure raw materials from China as one of the main reasons for shortfall in CRAMS commercial supplies. For next year they expect overall topline growth of 10-15% in CRAMS space so overall Topline would be about INR ~700 crores in FY20

The new CAPEX would be for formulation development center in Vizag, a total outlay of INR ~200 crores since the majority of the reserves would be used for NCE business division this will be part-funded by debt

How will the two companies look next year? 

 

All figures in INR crore

 

What does Mr. Venkat Jasti have to say about Suven Pharmaceutical?

I don’t need any cash to run the business, I am accruing money as you know quarter on quarter. Only thing I need is internally if we are expanding then we have to CAPEX for which we can go to the banks to get the debt.

From Earnings Transcript

By this demerger

  • Suven Pharmaceutical’s reported earnings would improve
  • High-profit margin CRAMS business would be carved out with optionality of improvement in Rising pharma Inc operations
  • Suven Life sciences can become a takeover target or partner through dilution for big pharma who is interested in IP of matured molecules

Current M-cap of INR ~3000 Crores ascribes Zero valuation to NCE business and gives a forward FY20 PE of 10X to Suven pharmaceuticals which in my view is a bargain

37 comments

  1. Y V NAGALATHA RANI says:

    HI! Vivek , Can buying suven pharma at current rate is ok ? Second looking for listening to Sajal Kapoor’s talk in IIC if you can download and provide access through google drive to listen once. Thanks

    • admin says:

      hi YV – Suven risk reward may not be favourable however one has to take call based on their risk appetite, Regarding IIC you need to reach out to them, I am not affiliated to them

      Thanks,
      Vivek

  2. Pingback: Suven – A New Beginning – Tankrich
  4. Samir Satish tambe says:

    Sir I have bought 56 thousand shares after the demerger of suven life a huge quantity presently life Suven life is on lower circuit I’m very panic and scared at what price should suven life should be settled. What is the future for suven life. What should I do please advice

    • admin says:

      hi Samir – Suvenlife is speculative so my suggestion is to evaluate if drug discovery is a business you want to hold

  5. Pingback: Suven creates value through demerger - Tankrich
  6. Pradeep sharms says:

    I have suven life sciences 50shares. Now share price has come down by 90%, this is a great loss to me. What to do now.please

      • DP says:

        What if Suven life science shares bought recently(after Demerger)?
        We understand that future of Suven Pharma is bright and expecting good share price but what about the Suven life Science?
        What is expected share price of Suven Life Science after 09th March 2020?

  8. srinath says:

    how should we see the current valuation of suven life science at 22-30 rs post demerger?
    there seems to be a huge value shift from life science to pharma and is this positive only for pharma or is it for both?

    • admin says:

      The value of Suven Pharmaceuticals is driven by their CRAMS business which is doing well
      Suven Life Sciences is more of a punt and expecting any big boy to buy this company

  9. asma says:

    I hold few hundred shares of Suven Lifesciences. Today I see that the share has fallen more than 54%!
    What does the future hold for my shares? Will I end up losing all the money I invested in this share?

  12. Darshit shah says:

    Hey very nice note.

    I agree the demerger is gonna create great value unlocking for the crams bness . However ur estimates for the profits of suven pharma (crams entity post demerger) at 300 crs for fy20 looks little aggressive. They did around 150 crs pat in fy19 and with commercial crams guided at 130 crs in fy20 frm 80 crs this year and growth of 10-15 % in base crams bness the pat in fy20 should go up by 20-25% from current year. The r&d expenses in the standalone entity currently is at 60-65 crs. The company says that 70% of this r&d exps would move to suven life post demerger, so the resultant savings in r&d exps post demerger would be 40-42 crs pre tax and around 30 crs post tax in suven pharma. So adding up 20-25% growth to 150 crs and 30 crs from r&d savings they should do 210-220 crs in fy20 post demerger. Now coming to the outcome of suvn-502, although nothing is priced in at 240 cmp currently, a -ve outcome could take the stock temporarily down by 10-15% and in that case u get crams bness at 2500 crs or so ( 210 rs price) at 11-12x fy20 which i think is a bargain for crams bness which generates so much free cash and at 40% plus ebitda margins. A +ve outcome would mean the out licensing opportunity at 100-150mn $ in suven life and this company with current and future molecules pipelines should be atleast valued at 2000 crs plus post demerger, although is US company’s like Axovant and others with just one phase 3 molecules were valued at 10000-12000 crs mkt cap at peak. So in this case even if u get the stock at 300 rs , it would still be a gr8 bargain at 3600 crs mkt cap for combined entity pre demerger. Now the point is when to buy this: 1)currently at 240 before the outcome 2) wait for the outcome and if -ve then buy it at 210 or so and if +ve then may be at 300 or so. Would like to know ur views….

    • admin says:

      Hi Darshit – Thanks
      My Calculation of PAT is 150 Crs + 20% growth = 180
      R&D savings 35 crores savings from Standalone entiy + 85 crores from US subsidiary (this year they did 60 crores and now they have two molecules to work on)
      So overall PAT ~300 Crores . I can be off though and yes my assessment is aggressive

      Regarding buying this is a good opportunity to add and as you highlighted with any sceanrio playing out more can be added

      Cheers,
      Vivek

      • Darshit shah says:

        Hey vivek,

        Can u plz confirm which US subsidiary are u referring here which did 60 crs pat in fy19. Both the US subsidiaries suven pharma inc and suven neurosciences inc dont have any revenues at present.

      • Darshit shah says:

        Oh u mean r& d exps of subsidiary which are 60 crs …but how come they will get added to suven pharma post demerger..they will remain with suven life…only those in standalone entity currently which is 60 crs…70% of that will be added to suven pharma post demerger..

        • admin says:

          Look at total R&D expense for consolidated. They will all be added back to profit whatever is not there in standalone

  14. Darshit shah says:

    Hey nice note.

    I agree the demerger is quite good as far as value unlocking is concerned. However ur estimates for suven pharma (crams entity post derger) profits are aggressive at 300 crs. They did around 150 crs pat currently and with commercial crams guided at 130 crs in fy20 and base crams to do 10-15% more..i guess 20-25% growth in pat is doable easily. Now the r&d exps in standalone entity are of roughly around 60-65 crs, out of which the company says 70% or so would move to suven life post demerger so resultant increase in profitabilty would be 40-42 crs pre tax and around may be 30 crs or so post tax in suven pharma. So adding 20-25% pat growth to 150 crs and another 30 crs frm r&d exps savings ..they should do 210-220 crs in FY20 post demerger. Now the other question is the outcome of suvn-502, although no expectations are built in at 240 rs cmp currently but a negative outcome may take the stock temporarily down by 10-15% due to sentiments, which if happens then at 2500 crs mkt cap u get the crams bness at 11-12x fy20 earnings which is a bargain for that bness which generates so much free cash at 40% plus ebitda margins. And if the outcome is positive then with future possible out licensing at 100-150mn $ in suven life sciences..the valuation of that company post demerger should be atleast 2000 crs plus with current and future molecules pipeline, although in US company’s like axovant and others with just one phase 3 molecules were valued at 10000-12000 crs plus at peak. In that scenario u can get the stock even at 300 or so, its a bargain at 3600 cr mkt cap for combined entity. The point here is i am confused and would like ur views as what to do…should we buy now or wait for the event and if -ve buy it at 10-15% lower at 210-215 or at 300 with positive outcome.

    Thanks

      • Nishanth says:

        You mean you took the 10% guidance which would make the topline 700 crore and applied average profit margins on it which would mean a profit of Rs 300 crore. And assumed that Suven Life Sciences and Suven Pharma would be 2 seperate entities which means Suven Pharma would have a standalone PAT of Rs 300 crore. Correct?

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