Suven Life Sciences Limited — Q3 FY19 earnings call

Call held 6 Feb 2019

Management summary

Suven Life Sciences reported a challenging Q3 FY19 with flat top-line and a 15% decline in bottom-line, attributed to postponed commercial CRAMS orders and raw material delays. Despite a downward revision for FY19, management projects a robust FY20 with significant top-line and bottom-line growth. A key strategic move is the demerger of the CRAMS business to unlock value and attract specialized investors, with the parent company retaining substantial cash for its discovery pipeline, including the anticipated SUVN-502 data readout in July.

Highlights

  • Q3 FY19 top-line was flat YoY, while bottom-line declined by 15% YoY.

  • FY19 guidance revised: top-line expected to be 5% less and bottom-line 10% less than last year.

  • FY20 outlook is strong with projected 15% top-line growth and 20-25% bottom-line growth.

  • Demerger of CRAMS business into Suven Pharmaceuticals Limited (SPL) announced, expected to complete in 6-9 months.

  • Suven Life Sciences (SLSL) will retain Rs. 300 crore cash to fund R&D for the next 3 years.

  • SUVN-502 Phase-2 top-line data is targeted for release by July 2019.

  • Commercial CRAMS sales for 9M FY19 stood at Rs. 38 crore, with an expectation to reach Rs. 70 crore for FY19, a shortfall from the original Rs. 80-90 crore target.

  • Post-demerger, CRAMS R&D (SPL) will account for 30% of total R&D (~Rs. 18 crore), while Discovery R&D (SLSL) will be 70% (~Rs. 42 crore).

Concerns

  • Postponement of Commercial CRAMS Orders

  • SUVN-502 Clinical Trial Outcome

Key financials

  1. Top-line Growth 0% 0%YoY
  2. Bottom-line Growth -15% -15%YoY
  3. Commercial CRAMS Revenue ₹38 Cr
  4. SUVN-502 R&D Spend $4.85 Mn
  5. R&D Written Off ₹42.4 Cr
  6. Post R&D EBITDA ₹180 Cr
  7. Taro Royalties ₹5.68 Cr

What they filed

Q1 FY27: revenue up 100.0%, net profit down 6.7% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue3 2 1 2 1 −67%3 +50%2 +100%4 +100%
EBITDA-14 -13 -15 -14 -18 −29%-15 −15%-16 −7%-21 −50%
Net profit-11 -13 -15 -15 -15 −36%-13 +0%-11 +27%-16 −7%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Guidance & targets

Revenue

  • Top-line Revenue Revenue · FY19 · Medium confidence 5% less than last year
    this year, more or less, may be 5% less on the top-line

    — Venkat Jasti, Chairman and CEO

  • Top-line Revenue Growth Revenue · FY20 · High confidence 0.15
    Based on visibility, we see about 15% growth on the top-line

    — Venkat Jasti, Chairman and CEO

Profitability

  • Bottom-line Profit Profitability · FY19 · Medium confidence 10% less than last year
    and 10% less on the bottom-line

    — Venkat Jasti, Chairman and CEO

  • Bottom-line Profit Growth Profitability · FY20 · High confidence 0.20-0.25
    and the bottom-line compared to this year, it will be about 20 to 25% growth.

    — Venkat Jasti, Chairman and CEO

Margin

  • Standalone Margins Margin · FY20 and FY21 · High confidence 32-35%
    No, it will certainly come to 32 to 35% in the '19 and '20

    — Venkat Jasti, Chairman and CEO

  • CRAMS Margins (Post-Demerger) Margin · Ongoing basis · High confidence 35%
    I am telling you an average 35% is what I mentioned for good and that will be maintained.

    — Venkat Jasti, Chairman and CEO

Other

  • SUVN-502 Top-line Data Release Other · July 2019 · Medium confidence July
    The top-line data as we have mentioned, we hope to get it by July

    — Venkat Jasti, Chairman and CEO

  • SUVN-G3031 Phase-2 Clinical Trial Start Other · April · High confidence April
    would like to start the Phase-2 clinical trial involving about 150 patients for 2 years.

    — Venkat Jasti, Chairman and CEO

  • New Molecule to Phase I Other · Next 3-4 months · High confidence 1 molecule
    one more molecule also will move into phase I within the next 3 to 4 months.

    — Venkat Jasti, Chairman and CEO

  • Demerger Completion Other · Within 6-9 months · High confidence 6-9 months
    this process will take 6 to 9 months in total for approval

    — Venkat Jasti, Chairman and CEO

R&D

  • R&D Funding (SLSL) R&D · Next 3 years · High confidence 300 crores
    about Rs. 300 crore of cash which will be left in the Suven Life Sciences that will be used for funding the R&D for the next 3 years.

    — Venkat Jasti, Chairman and CEO

Capex

  • CRAMS Capacity Expansion Investment Capex · Next 18 months, operational after 2020 · High confidence 250 crores
    we are spending Rs. 250 crore within next 18 months, I mean putting more resources and more in infrastructure... operational after 2020.

    — Venkat Jasti, Chairman and CEO

Risks & concerns

  • Postponement of Commercial CRAMS Orders

    high

    Rs. 80-90 crore of commercial CRAMS orders were postponed from FY19 to Q1 next year, impacting current year's top-line and bottom-line.

    Management acknowledged

  • SUVN-502 Clinical Trial Outcome

    high

    Management stated, 'nothing is guaranteed until we get the data in our hands' for SUVN-502, despite positive safety profile.

    Management acknowledged

  • Raw Material Supply Delays

    medium

    Raw material situation delayed delivery of products, contributing to the current year's underperformance.

    Management acknowledged

  • Lumpy Nature of CRAMS Business

    medium

    The CRAMS business is inherently lumpy, leading to fluctuations in revenue and margins depending on product mix and order flow.

    Management acknowledged

Q&A highlights

3 direct
Funding for NCE molecules post-demerger Direct
It is in the process what we have done in distribution of the assets, the cash is kept in the Suven Life Sciences itself, whereas all the receivables and all those things including a lot of assets belongs to the CRAMS side of the business. That is why we have about Rs. 300 crore of cash which will be left in the Suven Life Sciences that will be used for funding the R&D for the next 3 years.

This clarifies how the discovery business (SLSL) will be financially supported after the separation from the cash-generating CRAMS business.

Asked by Rashmi Sancheti

Implication of Roche's Alzheimer's Phase-3 discontinuance on SUVN-502 Direct
You need to know that the Roche molecule is not a symptomatic treatment, it is a disease modifying treatment. None of the disease modifying treatment has come to the floor... so we are in the symptomatic treatment, so it is a completely different ball game... the safety is very well established. There is not even a single Serious Adverse Event (SAE) related to the drug.

Management differentiates SUVN-502's symptomatic approach from Roche's disease-modifying one, mitigating concerns about the broader Alzheimer's drug development landscape and highlighting SUVN-502's safety profile.

Asked by Rohan Advant

CRAMS business sustainability and margins post-demerger Direct
If you see when you are taking out the expenses out of your CRAMS which we are writing off, your value goes up and you are unlocking the value also and in addition to that as I was telling you in my initiation that next year looks very good in terms of the repeat orders and also the new business that is coming in the CRAMS. CRAMS is the one that is giving us the bread all these years and there are no guarantees on the innovation.

Management explains the strategic rationale for the demerger to unlock value for the CRAMS business and provides a positive outlook for its future performance and margins, addressing concerns about its standalone viability.

Asked by Satish Bhatt

3 min read 8 chapters

Detailed narrative

Q3 FY19 Performance and Revised FY19 Outlook

Suven Life Sciences reported a flat top-line and a 15% decline in bottom-line year-on-year for Q3 FY19. This underperformance was primarily due to the postponement of Rs. 80-90 crore of commercial CRAMS orders to Q1 next year and delays in raw material supplies. Consequently, the company revised its FY19 guidance, expecting top-line to be 5% less and bottom-line 10% less than the previous year.

Strong FY20 Growth Projections

Despite the current year's challenges, management expressed strong confidence in FY20, projecting a 15% growth in top-line revenue and an even more robust 20-25% growth in bottom-line. This optimistic outlook is driven by anticipated improvements in delivery schedules, stable raw material supplies from China, and new commercial CRAMS forecasts from customers.

Strategic Demerger of CRAMS Business

The board approved the demerger of the CRAMS business into Suven Pharmaceuticals Limited (SPL), a wholly-owned subsidiary. This process is expected to take 6-9 months for NCLT approval, after which SPL will be automatically listed. The primary goal of this mirror demerger is to unlock value for shareholders and attract strategic partners interested in either the CRAMS or Discovery segments independently.

Funding for Discovery R&D (SLSL)

Post-demerger, Suven Life Sciences Limited (SLSL) will retain approximately Rs. 300 crore in cash. This capital is earmarked to fund the company's R&D pipeline for the next three years. This strategic allocation ensures financial stability for the discovery business, which will focus on innovative New Chemical Entities (NCEs) without relying on the cash flows from the CRAMS business.

SUVN-502 Clinical Trial Update and Pipeline Progress

The Phase-2 clinical trial for SUVN-502 is progressing well, with top-line data targeted for release by July 2019, to be presented at the Alzheimer's Association Conference. Management highlighted the molecule's established safety profile, with no Serious Adverse Events reported. Additionally, SUVN-G3031's Phase-2 trial for narcolepsy is expected to start in April, and another molecule is slated to enter Phase I within the next 3-4 months.

CRAMS Business Outlook and Margins Post-Demerger

The CRAMS business, which generated Rs. 38 crore in commercial sales for 9M FY19 (expected to reach Rs. 70 crore for FY19), is projected to see significant improvement in FY20, with sales potentially reaching Rs. 120-150 crore. Post-demerger, the CRAMS segment (SPL) is expected to maintain an average margin of 35%, benefiting from the removal of discovery R&D expenses from its balance sheet, leading to improved EPS accretion.

Asset and R&D Cost Allocation Post-Demerger

Following the demerger, all fixed assets (except a small portion), immovable properties, and receivables will be transferred to SPL. SLSL will retain intellectual property, some equipment, and the Rs. 300 crore cash. R&D expenses will be split, with 70% (approximately Rs. 42 crore based on FY18) allocated to SLSL for discovery and 30% (approximately Rs. 18 crore) to SPL, primarily covering human resource costs related to CRAMS R&D.

CRAMS Capacity Expansion and Strategic Intent

Suven Life Sciences is investing approximately Rs. 250 crore over the next 18 months to expand infrastructure and capacities for the CRAMS business, with these facilities expected to be operational after 2020. This expansion is strategically aligned with the success of innovator molecules in clinical trials, rather than aiming for generic API volumes, reinforcing the company's focus on specialized contract manufacturing.

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