LAURUS LABS LIMITED Dec 01, 2016 SMC Ranking (3/5) About the company Issue Highlights Industry Pharma Total Issue (Shares) - Offer for sale 24,844,240 Total Issue (Shares) - Fresh Issue 7,009,346 Net Offer to the Public 31,853,586 Issue Size (Rs. Cr.) 1356-1364 Price Band (Rs.) 426-428 Offer Date 6-Dec-16 Close Date 8-Dec-16 Face Value 10 Lot Size 35 Equity Share Incorporated in 2005, Laurus Labs Ltd is Hyderabad based pharmaceutical company. Laurus Labs is in the business of manufacturing generic active pharmaceutical ingredients (APIs) for therapeutic areas of antiretrovirals (ARVs) and Hepatitis C. Company also manufactures APIs in oncology and other therapeutic areas. The company operates in operate in four business lines: Generics APIs, Generics FDFs, Synthesis and Ingredients. The company has also set up a R&D center in Greater Boston, United States in 2015. As of June 30, 2016, it has employed 587 scientists at its R&D center in Hyderabad and 12 scientists at its R&D centre in Greater Boston, which constituted 25.0% of its total employee strength. The Company spent Rs90.65 Cr, Rs58.64 Cr and Rs 42.44 Cr towards its R&D activities during the financial years 2016, 2015 and 2014, or 5.1%, 4.3% and 3.6% of its total revenues in such periods, respectively. Strengths Issue Composition Total Issue (Shares) 31,853,586 QIB 19,112,151 NIB 4,778,038 Retail 11,148,755 Objects of the Issue 1. Pre-payment of term loans; and 2. General corporate purposes In shares Leadership in APIs in Select, High Growth Therapeutic Areas: The company claims it to be the leading developer and manufacturer of generic APIs in select, highgrowth therapeutic areas of ARV and Hepatitis C. It also manufactures APIs in oncology and other therapeutic areas. The company is also a leading, independent supplier of APIs in the ARV therapeutic area to formulation companies catering to the large and fast-growing donor-funded access-to-medicines markets in low and middle-income countries of Sub-Saharan Africa, South-East Asia and Latin America. The company is well positioned to capitalize on the ARV API opportunity as a result of its portfolio and scale of operations. Further, it believes that it is favorably positioned to benefit from the near term patent expiry of ARV drugs in the regulated markets of US and Europe. It has a portfolio of products in the Oncology therapeutic area, a market which is expected to grow steadily at 7% to 8% between 2015 and 2020 to reach a value of US$152 billion in 2020. As of June 30, 2016, its Oncology portfolio consists of 15 active DMFs and it supplies Oncology APIs to global generic multinational pharmaceutical companies. Shareholding Pattern (%) Particulars Pre-issue Post issue Promotors and promoters group 32.86% 29.78% QIB 39.57% 36.85% NIB 18.64% 15.03% Retail 8.93% 18.34% Total 100 100 *calculated on the upper price band Book Running Lead Manager Kotak Mahindra Capital Company Limited Citigroup Global Markets India Private Limited Jefferies India Private Limited SBI Capital Markets Limited Name of the registrar Karvy Computershare Private Limited Strong R&D Capabilities and Process Chemistry Skills: The company believes research-first approach has been critical to its success and a differentiating factor from its competitors. The company is focused on undertaking dedicated R&D in its existing products and in areas where it believes there is significant growth potential. It believes that its systematic approach to selection of molecules, which involves evaluation of technical and commercial feasibility data, and customer feedback, is evident from its high proportion of active DMFs, with the commercialization of 30 out of the 37 filed DMFs, as of June 30, 2016. As of June 30, 2016, the Company owned 32 patents and had 150 pending patent applications, in several countries, and has commercialized 59 products since its inception. The company believes that its R&D efforts have led, and will continue to lead, to new, innovative processes that can increase the efficiencies of its existing products as well as address new opportunities that it has identified in the global market for its businesses. Industry Leading, Modern and Regulatory Compliant Manufacturing Capacities: The company has three manufacturing facilities in Visakhapatnam and a kilo lab facility in Hyderabad, which have received one or more approvals from WHO, US FDA, PMDA, NIP Hungary, KFDA or BfArM. The company believes quality is a key differentiator in its business and has made strong efforts to adopt uniform 1
manufacturing standards across all its facilities and to achieve standardized product quality for all its markets. In order to meet the growing demand for its products, it has increased the aggregate reactor volume of its facilities to 1,833.6 KL, as of June 30, 2016.The company believes its manufacturing facilities are capable of large scale commercial production of APIs enabling it to position itself as suppliers of choice for pharmaceutical companies seeking to leverage its technical expertise, cost effective manufacturing and capacities. Long-standing Relationships with Multi-National Pharmaceutical Companies: The Company has maintained long-standing relationships with multi-national pharmaceutical companies. It believes that its unique position as a preferred supplier of APIs to several major participants in the tender driven ARV markets insulates it from the wins and losses of its customers and significantly hedges it against revenue volatility. Its Oncology and other products are supplied to the US and European markets, where it believes its product quality, regulatory compliant manufacturing and customer relationships have helped it to strengthen its competitive position. Experienced Promoters and Qualified Operational Personnel: The Company is led by qualified and experienced Promoters and key managerial personnel. The company believes that its extensive knowledge and understanding of the global generic pharmaceutical business environment and the expertise and vision to organically scale up its business have brought success to the company. The company believes that the knowledge and experience of its senior and middle level management team members in the pharmaceutical business provides it with a significant competitive advantage as it seeks to grow its business. Established Track Record of Delivering Growth: The Company has delivered consistent growth over the last five financial years both in terms of financial and operational metrics. Its total revenues, on a standalone basis, have grown at a CAGR of 41.0% from Rs. 4,52.30 Cr for the financial year 2012 to Rs.17,88.41 Cr for the financial year 2016 and its restated profit for the year, on a standalone basis, has grown at a CAGR of 60.6% from Rs. 21.57 Cr for the financial year 2012 to Rs. 1,43.56 Cr for the financial year 2016. Strategies Capitalize on its Leadership Position in APIs in Select, High-Growth Therapeutic Areas: The Company focuses on growing its presence in its key therapeutic areas, comprising ARV, Hepatitis C and Oncology. It has built a leadership position in the manufacturing of APIs in the ARV therapeutic area and believes that there are significant growth opportunities in this area as a result of expected increase in the HIV patient pool with the current WHO guidelines recommending initiating early treatment for infected HIV patients, regardless of age and viral load. The Company has entered into an arrangement to manufacture and sell Hepatitis C APIs with NATCO, who commands a 38.5% share of the Indian Hepatitis C market, and positions it well to capture growth from higher patient volumes. In the Oncology therapeutic area, it is focused on increasing sales of its existing products and commercializing new products. It continually aims to utilize advanced technologies to bring in cost efficiency in existing API products and processes and enhance its product portfolio through investments in R&D. Expand its API Portfolio: The Company intends to continue to leverage its process chemistry skills to expand its API product portfolio. The company has developed 2
several products in the anti-diabetic, cardio vascular and gastroenterology therapeutic areas and is currently in the process of setting up dedicated capacities to manufacture products in these therapeutic areas at its Unit 3 manufacturing facility. It believes that its regulatory compliant manufacturing facilities are attracting global generic pharmaceutical companies to engage it for the contract manufacturing of generic APIs. The company currently has four customer contracts for manufacturing of generic APIs. Leverage API Cost Advantage for Forward Integration into Generic Finished Dosage Formulation: The Company is further building on its API strengths to forward integrate and become a leading FDF player in the global generic pharmaceutical market. The company believes that its presence in API production improves its ability to maintain quality and mitigates the demand-supply fluctuations that affect generics markets thereby providing for consistency and reliability of supply in an increasingly regulated global environment. The company intends to file and market its own registrations in the US and European markets and also collaborate with generic companies having front end presence for the sale and marketing of its FDF products. Develop its Synthesis Business: The Company leverages its strong process chemistry skills to provide synthesis services. As part of its synthesis business, it works with global pharmaceutical companies for providing analytical and research services, clinical research supplies and commercial scale contract manufacturing services. The company also intends to provide services to some of its partners to improve process efficiency during the clinical phase of development. The company intends to focus more on the supply of key starting materials and intermediates for new chemical entities as the molecules move to Phase III and to a commercial stage, which would result in significant revenue. The company is also in the process of setting up Unit 5 as a dedicated manufacturing block to manufacture and supply products exclusively to the Aspen Group. Strengthen its Ingredients Business: The Company currently develops and manufactures specialty ingredients for use in nutraceutical, dietary supplements and cosmeceutical products. The nutraceutical and cosmeceutical sectors are undergoing consolidation globally and implementing quality standards similar to that of the pharmaceutical industry. The company intends to leverage its strong process chemistry skills to strengthen its presence in the nutraceutical and cosmeceuticals sectors in the manufacture of nature identical substances. The company is also developing capabilities for botanical extraction and purification, to capture the growing market of natural ingredients. The company is currently in the process of setting up a separate manufacturing facility to add to its existing capacity for botanical extraction and chemical synthesis. Risk factor Risk from manufacturing or quality control: The Company currently operates three manufacturing facilities and a kilo lab facility at its R&D center in Hyderabad, which have received one or more approvals from WHO, US FDA, PMDA, KFDA or BfArM. It has also set up an R&D center in Greater Boston, United States in 2015. Any manufacturing or quality control problems may subject the company to regulatory action, damage its reputation and have an adverse effect on its business, results of operations, financial condition and cash flows. Significant portion of its revenue from the sale of products: The Company derives a significant portion of its revenue from the sale of products in certain therapeutic areas and any reduction in demand for these products could have an adverse effect on its business, results of operations, financial condition and cash flows. 3
If its products become obsolete: In the event of a breakthrough in the development or invention of alternate drugs or formulations, the company may be exposed to the risk of its products becoming obsolete or being substituted, to a greater extent, by these alternatives. Concentration on few customers: The company derives a significant portion of its revenue from a few customers, most of whom it does not have long term contractual arrangements with, and the loss of one or more such customers, the deterioration of their financial condition or prospects, or a reduction in their demand for its products could adversely affect its business, results of operations, financial condition and cash flows. Industry Overview The global pharmaceutical industry is in a state of flux, working towards win-win transformations across all value chains from manufacturers, providers, payers, and patients. The global pharmaceutical market was estimated to be around US$ 894.2 billion in 2015 and is expected to grow at a CAGR (2015 2020) of 9.8% annually to reach US$ 1427.1 billion by 2020. The Indian pharmaceutical has been one of the success stories in the manufacturing sector, due to Indian manufacturers expertise in chemistry, low cost arbitrage and their ability to align their processes with the most stringent regulations of the world, i.e. USFDA and MHRA. The Indian pharmaceuticals industry has been growing between 12%-14% over the past of couple of years and on a broad level the industry is well geared to cater to the domestic needs of the country. The size of the pharmaceutical industry in India was estimated to be US$22 billion of which formulations contributed US$14 billion and the rest being accounted for by bulk drugs. The Indian pharmaceutical industry is comprised of 70-75% generic drugs and rest being contributed by patented and innovative molecules and OTC products Peer group Co_Name Total Operating Income PAT EPS P/E P/BV BV FV CMP Mcap Divis Laboratories 1498.59 1111.85 39.85 24.72 6.10 161.51 2.00 1149.00 30502.34 Aurobindo Pharma 3273.81 1982.00 33.93 22.33 6.18 120.59 1.00 743.50 43507.36 Laurus Labs Limited 372.18 132.65 12.19 35.11 4.69 91.29 10.00 428.00 4657.63 Valuation Considering the P/E valuation on the upper end of the price band of Rs. 428, the stock is priced at pre issue P/E of 31.82x on its FY16 EPS of Rs. 13.45. Post issue, the stock is priced at a P/E of 35.11x on its EPS of Rs. 12.19. Looking at the P/B ratio at Rs. 428 the stock is priced at P/B ratio of 4.96x on the pre issue book value of Rs.86.37 and on the post i s s u e b o o k v a l u e o f R s. 1 0 5. 8 4 t h e P / B c o m e s o u t t o 4. 0 4 x. On the lower end of the price band of Rs.426 the stock is priced at pre issue P/E of 31.67x on its FY16 EPS of Rs. 13.45.Post issue, the stock is priced at a P/E of 34.95x on its EPS of Rs. 12.19. Looking at the P/B ratio at Rs. 426, the stock is priced at P/B ratio of 4.93x on the pre issue book value of Rs. 86.37 and on the post issue book value of Rs. 105.84, the P/B comes out to 4.02x. 4
Outlook The Company enjoys leadership position in APIs and generics. The company believes research-first approach has been critical to its success and a differentiating factor from its competitors. The company is focused on undertaking dedicated R&D in its existing products and in areas where it believes there is significant growth potential. With regards to this, the company is spending higher for Research and development (R & D). It is expected that the investments that the company made towards R&D would improve the revenues and profits from FY 18 onwards. The long term growth story of the company is intact. Investors with long term view may apply the issue. 5
Annexure Profit & Loss Rs. in Cr. Particulars 31-Mar-16 31-Mar-16 Total Operating Income 1,783.77 1,326.59 Total expenditure 1,411.59 1,126.41 Operating Profit 372.18 200.18 OPM% 20.86 15.09 Other Income 7.59 34.07 PBDIT 379.78 234.25 Depreciation 92.19 61.526 PBIT 287.59 172.73 Interest 120.03 106.16 PBT 167.56 66.57 Tax 34.51-1.55 Share of results of associate -0.40 0.25 PAT 132.65 68.37 Balance Sheet Particulars 31-Mar-16 31-Mar-16 Non-current assets Fixed Assets Tangible assets 1079.26 794.90 Intangible assets 6.39 6.12 Capital Work in Progress 69.60 109.67 Non-current investments 7.05 7.45 Long-term loans and advances 128.63 93.94 Other non-current assets 9.06 13.97 Total Non- Current Assets 1299.98 1026.05 Current assets Current Investment Inventories 487.09 475.50 Trade receivable 444.86 285.07 Cash & Cash Equivalents 27.74 58.89 Short Term Loan and Advances 30.16 31.18 Other current assets 13.23 11.64 Total current assets 1003.07 862.27 Total Assets 2303.05 1888.32 Non-current liabilities Long-term Borrowings 460.63 303.68 Deferred Tax Liabilities (Net) 44.78 10.27 Other long-term liabilities 44.16 44.66 Long-term provisions 6.77 5.13 Total 556.33 363.73 Current liabilities Short-term borrowings 481.42 431.64 Trade payables 249.34 230.81 Other current liabilities 144.54 133.34 Short-term provisions 19.60 6.70 Total current liabilities 894.90 802.49 Total 1451.23 1166.22 NET Worth 851.82 722.10 Net worth represented by: Share capital 82.38 82.13 Reserves and surplus 769.44 639.98 Net Worth 851.82 722.10 5
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