Suven Life Sciences Limited — Q4 FY19 earnings call

Call held 27 May 2019

Management summary

Suven Life Sciences reported strong sequential growth in Q4 FY19 with revenue up 90% and PAT up 170%, though full-year FY19 saw a 6% top-line growth and a 5% bottom-line decline due to product mix and raw material costs. The company provided optimistic guidance for FY20, expecting 10-15% growth in Core CRAMS and a 20% increase in standalone bottom-line. A significant highlight was the completion of the SUVN-502 Phase 2 trial, with results anticipated by July, and a strategic USD 35 million investment in Shore Pharma to bolster its ANDA pipeline and market presence.

Highlights

  • Q4 FY19 Revenue up 90% QoQ and PAT up 170% QoQ.

  • FY19 Top-line grew 6% YoY, while Bottom-line declined 5% YoY.

  • FY20 guidance for Commercial CRAMS is Rs. 130 crore, up from Rs. 80 crore in FY19.

  • FY20 Core CRAMS (including commercial) expected to grow 10%-15%.

  • FY20 Specialty Chemicals revenue expected to remain flat at Rs. 200-215 crore.

  • SUVN-502 Phase 2 trial completed, with top-line data anticipated by July 2019.

  • Strategic investment of USD 35 million for a 25% minority stake in Shore Pharma (Rising Pharma) to enhance market access and backward integration.

  • FY20 standalone bottom-line growth guided at 20%.

Concerns

  • SUVN-502 Phase 2 trial data outcome (positive or negative).

Key financials

  1. Revenue ₹645 Cr +5.2%YoY
  2. PAT Growth — -5%YoY
  3. EBITDA Margin (Suven Pharma) 36%

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.

Segment breakdown

Share of Revenue
₹646 Cr Total
  • Core CRAMS (Full Year FY19) ₹300 Cr 46.4%
  • Specialty Chemicals (Full Year FY19) ₹216 Cr 33.4%
  • Commercial CRAMS (Full Year FY19) ₹80 Cr 12.4%
  • Contract Technical Services (Full Year FY19) ₹50 Cr 7.7%

Guidance & targets

Commercial CRAMS Revenue

  • Commercial CRAMS Revenue Commercial CRAMS Revenue · FY20 · High confidence Rs. 130 crore
    the commercial CRAMS will go up to Rs. 130 crore next year.

    — Venkat Jasti

Core CRAMS Revenue Growth

  • Core CRAMS Revenue Growth Core CRAMS Revenue Growth · FY20 · Medium confidence 10%-15%

    Previously 15%-20% → 10%-15%

    Yes, 10%-15% growth.

    — Venkat Jasti

Specialty Chemical Revenue

  • Specialty Chemical Revenue Specialty Chemical Revenue · FY20 · Medium confidence Rs. 200-215 crore
    Yes. 200-215, yes, same range.

    — Venkat Jasti

R&D Spend

  • Clinical Trials (Standalone) R&D Spend · FY20 · High confidence $10 million
    If it goes to the clinical trial we are talking about $10 million on the standalone.

    — Venkat Jasti

  • SUVN-502 R&D Spend · FY20 · Medium confidence $4-$5 million
    SUVN-502 will take another $4-$5 million

    — Venkat Jasti

  • SUVN-G3031 R&D Spend · FY19-20 · Medium confidence $6-$7 million
    this G3031 will take about $6-$7 million during the fiscal years 19-20.

    — Venkat Jasti

  • Neuroscience (USA) R&D Spend · Next year (FY20) · High confidence $10 million
    That is G3031, $6-$7 million. $10 million in Neuroscience and $10 million in India, so $20 million R&D budget.

    — Venkat Jasti

  • India R&D Spend · Next year (FY20) · High confidence $10 million

    — Venkat Jasti

Capex

  • Total CAPEX Capex · FY20 (12-15 months) · High confidence Rs. 200 crore
    CAPEX as you know will be around Rs. 200 crore for the spreading around 12-15 months

    — Venkat Jasti

Tax Rate

  • Tax Rate Tax Rate · Next year (FY20) · High confidence 33%-35%
    Tax rate is about 33%-35%. We are in a full tax regime.

    — Venkatraman Sunder

Profitability

  • PAT Growth (Standalone) Profitability · FY20 · High confidence 20%
    20% on the bottom-line growth.

    — Venkat Jasti

Rising Pharma Revenue

  • Revenue Rising Pharma Revenue · In a couple of years · Medium confidence $200 million (start), growing to $340-$360 million
    It will start at 200 million and slowly going up to $360-$340 million in a couple of years.

    — Venkat Jasti

Rising Pharma Product Additions

  • Products added/maintained Rising Pharma Product Additions · Every year · High confidence 10-12 added, 10-12 go down, maintaining 100-120 products
    Every year 10 to 12 will be added, 10 to 12 will go down. So, it will remain around 100-120.

    — Venkat Jasti

Demerger

  • Completion Demerger · FY20 · Medium confidence Q3
    I think hopefully in third quarter we should have this.

    — Venkat Jasti

  • Listing Date Demerger · FY20 · Medium confidence Before December
    Yes, before December, approximately.

    — Venkat Jasti

Risks & concerns

  • SUVN-502 Phase 2 trial data outcome (positive or negative).

    high

    The outcome is 'black and white'; positive data will attract customers for further development, negative data means the compound goes to the shelf.

    Management acknowledged

  • Raw material price volatility and supply dependence on China.

    medium

    A slight fast increase in raw materials from Chinese sources impacted FY19 bottom line by 5%, and volatility could impact 5%-10% in the future.

    Management acknowledged

  • Rising Pharma's current loss-making status and time to profitability.

    medium

    Rising Pharma was a bankrupt company; profits are expected to be flat in the first year post-acquisition, then grow, but Suven's P&L is not consolidated.

    Analyst acknowledged

Areas of evasion (3)

  • Precise book value post-demerger
  • Exact SUVN-502 valuation before data release
  • Detailed inter-company cash flow post-demerger

Q&A highlights

1 direct
Impact of Rising Pharma investment on P&L and cash position post-demerger. Partial
No, it is not a loan. It is a liability of Suven Pharma because it is supposed to go to Rs. 300 crore the day #1 to Suven Life Sciences, since we don't have the cash that will be a liability which we need to pay back, a year or a year and half from now when you accrue.

This question probes the financial implications of a significant investment and the complex inter-company cash flow post-demerger, crucial for understanding the financial health of the separated entities.

Asked by Rohan Advant

Conservative nature of FY20 bottom-line growth guidance (20%) given expected CRAMS and commercial order growth. Direct
See, it is not an excel sheet where we calculate the profits here because suppose suddenly some raw material prices goes up, how do I account for it? I mean we cannot give you a rosy picture and not able to meet, you are saying conservative, I said that is a realistic way to doing it.

This highlights management's cautious approach to guidance, which can be seen as a positive for reliability but also suggests potential headwinds or a lack of aggressive growth targets.

Asked by Rashmi Sancheti

Valuation expectations for SUVN-502 out-licensing deal. Partial
See, we do not have, see until the data comes out because there is no new molecule that has come. So, people are not coming forward to you until they see the proof of concept data... But as per the previous valuations are concerned for similar molecules, 100 to 150 million upfront and 500-800 million to milestones and the double digit royalty during the commercial supply.

This question addresses a major potential value driver for the company, and management's response provides a realistic, albeit cautious, perspective on the potential financial upside, emphasizing the critical role of the upcoming data.

Asked by Yash Nathani

3 min read 7 chapters

Detailed narrative

Q4 FY19 Performance and Full Year Overview

Suven Life Sciences reported a strong sequential performance in Q4 FY19, with revenue increasing by 90% quarter-on-quarter and Profit After Tax (PAT) surging by 170% quarter-on-quarter. For the full fiscal year FY19, the company achieved a top-line growth of 6% year-on-year, reaching Rs. 645 crore. However, the bottom-line for FY19 declined by 5% year-on-year, primarily attributed to changes in product mix and a slight increase in raw material costs, particularly from Chinese sources.

CRAMS and Specialty Chemicals Business Outlook

The company provided optimistic guidance for its core businesses for FY20. Commercial CRAMS revenue is projected to increase significantly to Rs. 130 crore, up from Rs. 80 crore in FY19. Overall Core CRAMS, including commercial CRAMS, is expected to achieve a growth rate of 10%-15% next year. The Specialty Chemicals segment, which saw a 40% growth in FY19 to Rs. 216 crore (including a new commercial molecule), is anticipated to maintain its revenue at the Rs. 200-215 crore level in FY20.

SUVN-502 Clinical Trial Update

A major highlight was the completion of the Phase 2 clinical trial for SUVN-502 (Masupirdine), with the last patient visit concluded. The company is currently in the process of database lock and data cleaning, with top-line results expected to be presented at the International Alzheimer's conference in Los Angeles in July 2019, or potentially by the end of June. Management emphasized the 'black and white' nature of the data, which will determine future development and potential out-licensing deals, with historical valuations for similar molecules ranging from $100-150 million upfront and $500-800 million in milestones.

Strategic Investment in Shore Pharma (Rising Pharma)

Suven Life Sciences has made a strategic investment of USD 35 million for a 25% minority stake in Shore Pharma, a virtual pharma company that was previously bankrupt but holds 85-90 commercialized ANDAs. This investment is aimed at gaining access to a marketing channel for Suven's own ANDAs and facilitating backward integration for development and supply. While no immediate revenue accretion is expected, the human health division of Rising Pharma is projected to start at $200 million in revenue and grow to $340-$360 million within a couple of years.

R&D and CAPEX Plans for FY20

The company outlined substantial R&D investments for FY20. Standalone R&D for clinical trials is budgeted at $10 million, with specific allocations of $4-$5 million for SUVN-502 and $6-$7 million for SUVN-G3041. Additionally, $10 million each is earmarked for Neuroscience R&D in the USA and India, totaling a $20 million R&D budget. CAPEX for FY20 is projected at Rs. 200 crore, spread over 12-15 months, primarily for a new formulation development center and an additional block in Vizag, with maintenance CAPEX estimated at Rs. 30-40 crore.

Demerger Progress and Financial Outlook

The demerger process is progressing, with No-Objection Certificates (NOCs) received from regulatory bodies. The company is in the process of filing with the NCLT and anticipates the demerger to be completed by Q3 FY20, with listing expected before December. For FY20, Suven Life Sciences guided for a 20% growth in its standalone bottom-line. The tax rate is expected to remain in the 33%-35% range, operating under a full tax regime.

Pipeline Beyond SUVN-502

Beyond SUVN-502, SUVN-G3041 is in the final stages of FDA protocol filing, with patient enrollment for narcolepsy trials expected to begin next quarter, a process that will take 12-15 months. Other compounds, SUVN-911 and SUVN-D4010, are undergoing long-term safety studies and are targeted for proof-of-concept by 2020. The company continues to work on a diverse pipeline of molecules across various therapeutic areas.

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