Suven Life Sciences Limited — Q3 FY20 earnings call

Call held 14 Feb 2020

Management summary

The Q3 FY20 earnings call for Suven Life Sciences and Suven Pharmaceuticals highlighted the strategic demerger and future direction of both entities. Suven Life Sciences is focusing on advancing its drug pipeline, with SUVN-502 showing potential for new indications despite a primary endpoint miss, and SUVN-G3031 progressing in Phase II. Suven Pharmaceuticals is expanding its CRAMS business into API and formulations, projecting 20-22% revenue growth for FY20 and a significant CAPEX of Rs. 320 crore. Management also addressed concerns regarding raw material sourcing from China and the funding strategy for the R&D-focused Suven Life Sciences.

Highlights

  • Suven Life Sciences (SLS) SUVN-502 failed primary endpoint but secondary data promising for new indications, targeting new clinical trial.

  • SLS SUVN-G3031 Phase II trial is 20% enrolled, expected to complete by March 2021.

  • Suven Pharmaceuticals (SPL) is expanding beyond CRAMS intermediates to API and formulations, with no more segmental reporting.

  • SPL expects 20-22% revenue growth for FY20, with Q4 similar to Q3 (5-10% growth).

  • SPL's total CAPEX is Rs. 320 crore, with Rs. 160 crore already spent and the balance to be spent by FY20 end.

  • SPL holds Rs. 213 crore cash, while SLS holds Rs. 150 crore cash.

  • SPL has filed 11 ANDAs (3 Suven, 6 customer, 2 ANADA) and has 10 more in developmental stage.

Concerns

  • Failure of SUVN-502 to meet primary endpoint.

  • China raw material supply disruption due to Coronavirus.

Key financials

6 periods

Headline

  • SLS Book Value
    ₹390 Cr
  • SPL Book Value
    ₹806 Cr
  • SLS Cash
    ₹150 Cr
  • SPL Cash
    ₹213 Cr
  • SPL Working Capital Debt
    ₹32 Cr
  • SLS Debt (from DST)
    ₹2.5 Cr
  • SPL CAPEX (Total)
    ₹320 Cr

Q3 FY20

  • SPL Interest Expense
    ₹7.6 Cr

Rising Pharma, Q1 FY20

  • Income from Associates
    ₹17 Cr

Rising Pharma, Q2 FY20

  • Income from Associates
    ₹4 Cr

Rising Pharma, Q3 FY20

  • Income from Associates
    ₹6 Cr

Spent as of Q3 FY20

  • SPL CAPEX
    ₹160 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

  • Suven Pharmaceuticals Revenue Growth Revenue · FY20 · Medium confidence 20-22%
    So overall we will be giving a 20% to 22% growth compared to last year.

    — Venkat Jasti

  • Suven Pharmaceuticals Q4 Revenue Growth (vs Q3) Revenue · Q4 FY20 · Medium confidence 5-10%
    It will be in the same range as third quarter. It is 5% to 10% this way or that way as of now.

    — Venkat Jasti

  • Suven Pharmaceuticals Revenue Growth Revenue · FY21 · Medium confidence 15-20%
    Right now, it is a 15%-20% growth, but the activities in the ANDA and given our infrastructure coming into picture, I think FY21 onwards it will be better growth. Right now, for the next year it will be 15%-20% growth.

    — Venkat Jasti

Profitability

  • Suven Pharmaceuticals EBITDA Margin Profitability · Next year (FY21) · Medium confidence ~40%
    Yes, margins as you know, we are saying EBITDA margins of around 40%. There will be outlier like this quarter or last quarter, there will be up and down but on average that is around 40% EBITDA margins, we are still maintaining them.

    — Venkat Jasti

Capex

  • Suven Pharmaceuticals CAPEX Capex · FY20 · High confidence Rs. 320 crores
    The capital expenditure total is about Rs. 320 crore, of which we already spent about Rs.160 crore and the balance of Rs. 160 crore will be spent most likely by this year.

    — Sunder Venkatraman

  • Suven Pharmaceuticals Replacement CAPEX Capex · FY21 · High confidence Rs. 50 crores
    As of now, other than the replacement CAPEX of Rs. 50 crore, nothing is planned.

    — Venkat Jasti

Tax Rate

  • Suven Pharmaceuticals Tax Rate Tax Rate · Next year (FY21) · High confidence 25%
    The new tax rate i.e. 25%.

    — Sunder Venkatraman

Pipeline

  • Suven Life Sciences SUVN-G3031 Phase II Trial Completion Pipeline · March 2021 · Medium confidence March 2021
    Originally, we expected the trial will end before the end of this fiscal year but looks like it will now go on and may end in FY21 March time frame of next year.

    — Venkat Jasti

  • Suven Life Sciences SUVN-D4010 Indication Finalization Pipeline · Within 2 months · High confidence 2 months
    With respect to the third compound which is SUVN-D4010, we are now in the final stages of finalizing the indications for which we need to go for a clinical trial and that should be within another two months' time.

    — Venkat Jasti

  • Suven Life Sciences Monetization Opportunity Pipeline · Q2/Q3 2021 · Low confidence Q2/Q3 2021
    So the possibility of monetizing can happen, the earliest will be in the second or third quarter of 2021 based on the outcome of the SUVN-G3031.

    — Venkat Jasti

  • Suven Pharmaceuticals ANDA Filings (Developmental Stage) Pipeline · Eventually · High confidence ~10 more
    In addition to that, we have about 10 more in the developmental stage for now and we will increase that number to another 10 eventually. Slowly, we are building up.

    — Venkat Jasti

  • Suven Pharmaceuticals ANDA Approvals Pipeline · Q3 Calendar Year (2020), 2021 · Medium confidence Something in Q3 calendar year, bulk in 2021
    As of now, we have filed 11 ANDAs and most of them are under review and we don't know when we will get these exactly and we expect something to come in the third quarter of this year itself, the earnings calendar year and then the bulk will be approved sometime in 2021 and after that, another 10 are under development and 10 more are under evaluation.

    — Venkat Jasti

Funding

  • Suven Life Sciences Cash Runway Funding · Next 18 months · High confidence 18 months
    Until now, Suven CRAMS business is funding this, as you know we have some cash with us that will take us forward for the next 18 months.

    — Venkat Jasti

  • Suven Life Sciences New Income Sources Funding · Within one year · High confidence Within one year
    Yes, you are right. We will do it within one year from now we need to have new sources of income either from the salient partner coming in the monetization and the IPO or whatever it is.

    — Venkat Jasti

Headcount

  • Suven Pharmaceuticals COO Appointment Headcount · Within 3-4 months · Medium confidence 3-4 months
    With respect to the broad banding the management team, yes, so we are looking for a senior executive, at the COO level and this will be made hopefully within the next 3 to 4 months, it can happen.

    — Venkat Jasti

Risks & concerns

  • Failure of SUVN-502 to meet primary endpoint.

    high

    SUVN-502 did not make the final end point for the desired protocol, leading to a big disappointment, though secondary endpoints show positive implications.

    Management acknowledged

  • China raw material supply disruption due to Coronavirus.

    high

    Some purchase orders and raw materials are not being shifted out of China, causing potential disturbances, with uncertainty for the next quarter.

    Management acknowledged

  • Funding for Suven Life Sciences beyond 18 months.

    medium

    Suven Life Sciences has cash for 18 months but needs new income sources (strategic partners, monetization, IPO) within one year to sustain R&D activities.

    Management acknowledged

  • Variability in gross margins for Suven Pharmaceuticals.

    low

    Gross margins vary widely (66-79%) quarter-to-quarter due to mix-and-match business model, product nature, stage, complexity, and pricing.

    Analyst acknowledged

  • Slow enrollment in SUVN-G3031 Phase II trial.

    low

    The SUVN-G3031 trial is progressing slower than expected, with only 20% of patients enrolled, pushing completion to March 2021.

    Management acknowledged

Areas of evasion (4)

  • Segmental revenue breakup for Suven Pharma
  • Detailed project numbers for CRAMS
  • Specific revenue/profitability for Rising Pharma
  • Valuation of Suven Life Sciences

Q&A highlights

3 direct
Suven Life Sciences funding and potential US IPO. Direct
Yes, you are right. We will do it within one year from now we need to have new sources of income either from the salient partner coming in the monetization and the IPO or whatever it is.

This question directly addresses the long-term viability of the R&D-focused SLS, confirming the need for external funding within a year and outlining potential avenues including an IPO.

Asked by S. Viswanathan

Impact of China raw material supply disruptions on Suven Pharma. Direct
Volume dependence <10% from China, but 1% critical raw material can halt project. ... Right now, we are OK. As I said in the early conversation that it is likely not only for our company, but for all the companies, it is depending on the severity because raw materials are waiting at the port and has not yet left, that is our problem.

This highlights a significant near-term operational risk for SPL, acknowledging potential disruptions and the critical nature of even small-volume raw materials from China, impacting the entire industry.

Asked by Purvi Shah

Suven Pharma's shift to generics and potential conflict with CRAMS customers. Direct
There is nothing like that, we are not going and competing with their own product or anything of that sort. As I said, niche ANDAs is what we are going to do which is at the far end of the things. Our ANDAs is what we are doing and is working on with the innovators.

This addresses a common concern in the pharma sector when CRAMS players enter generics, with management clarifying their strategy to focus on niche ANDAs and collaborate with innovators to avoid direct conflict.

Asked by Ashish Kacholia

3 min read 7 chapters

Detailed narrative

Strategic Demerger and Future Focus

The company has demerged into Suven Life Sciences (SLS) and Suven Pharmaceuticals (SPL) to cater to different investor risk appetites. SLS is now a pure-play drug discovery and development entity, focusing on its pipeline of 14 molecules. SPL is expanding its Contract Research and Manufacturing Services (CRAMS) business to become a full-fledged pharmaceutical solutions provider, including API manufacturing, formulations, and specialty chemicals. Management stated that SPL will no longer provide segmental reporting, moving to an overall pharmaceutical performance metric.

Suven Life Sciences Pipeline Update

SUVN-502, a key drug candidate, failed its primary endpoint in Phase III trials, which was a 'big disappointment.' However, secondary endpoints show 'positive implication' for other indications, and the company plans to pursue a separate clinical trial for these, with a decision expected within 45-60 days. The SUVN-G3031 narcolepsy trial is in Phase II, with approximately 20% patient enrollment, and is now expected to conclude by March 2021, later than initially anticipated. SUVN-D4010 is in the final stages of indication finalization, expected within two months.

Suven Pharmaceuticals Growth and Expansion

Suven Pharmaceuticals projects a 20-22% revenue growth for FY20 compared to the previous year, with Q4 FY20 revenue expected to be similar to Q3, showing a 5-10% quarter-on-quarter growth. For FY21, the company anticipates 15-20% growth, driven by new ANDA activities and expanded infrastructure. The total capital expenditure for FY20 is Rs. 320 crore, with Rs. 160 crore already spent and the remaining Rs. 160 crore to be utilized by year-end. An additional Rs. 50 crore is planned for replacement CAPEX in FY21.

Funding and Financials for Demerged Entities

Suven Life Sciences currently has sufficient cash to fund its operations for the next 18 months. However, management acknowledges the need for new income sources within one year, exploring options like strategic partners, monetization of assets, or a potential US IPO for its wholly-owned subsidiary, Suven Neurosciences, in 2.5 years. Suven Pharmaceuticals holds Rs. 213 crore in cash and has working capital debt of Rs. 32-35 crore. The Rs. 7.6 crore interest expense in SPL's Q3 was due to interest paid on cash held for SLS, at an 8% rate.

ANDA Pipeline and Profitability

Suven Pharmaceuticals has 11 ANDAs currently filed (3 Suven-owned, 6 with customers, 2 ANADAs), with most under review. The company expects some approvals in Q3 calendar year 2020, with the bulk in 2021. An additional 10 ANDAs are in the developmental stage, and another 10 are under evaluation. Management estimates the volume of business for each ANDA to be $2-3 million, which represents the profitability. The company aims to maintain an average EBITDA margin of around 40% for the next year, despite the introduction of generics.

Raw Material Sourcing and China Risk

Management highlighted a potential risk from raw material sourcing, particularly from China, due to the Coronavirus outbreak. While volume dependence from China is less than 10%, even a 1% critical raw material can halt a project. The company is actively working with customers to find alternative sources and is backward integrating some critical commercial and specialty chemicals. While Q4 FY20 is expected to be okay, the outlook for the next quarter is uncertain, with a '50-50 chance of problems' depending on the severity of the situation.

Related Party Transactions and Listing Status

Post-demerger, significant related-party transactions (RPTs) exist between SLS and SPL, primarily involving lease agreements for facilities (effective January 9, 2020) and services based on equipment availability, all conducted on an arm's length basis. Suven Pharma's 25% stake in Rising Pharma Holdings will also lead to RPTs for ANDA development and marketing. The listing of Suven Pharmaceuticals is awaiting clearance from SEBI and stock exchanges, with management stating it is not in their hands to provide a specific timeline.

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