SME ( Small & Medium Enterprises) in Pharmaceuticals too are Research Driven
We look at 2 such research driven pharmaceutical companies (both having a market capitalization of less than 400crs) and present our key findings:
· SUVEN ( CMP: 31; FV: 1; BUY)
Suven Life Sciences is a 200cr drug discovery company with a distinctive business model – CRAMS – Drug Discovery – Collaborative Research Partnership and has 4 fully functional collaborations with Eli Lilly, J&J, BMS & Astra Zeneca. It derives 20% of its revenues from drug discovery and the R&D effort is funded by its CRAMS business which accounts for 80% of its Rs2bn revenues.
Suven is partnering the development of under patent molecules by leveraging its relationship with more than 25 global life science companies worldwide and spends 16% of its revenues on drug discovery (fully charged to the P&L account – a prudent policy of optimizing R&D expenses as and when it happens to ensure that the burden of molecules is not carried on to the balance sheet).
Its most promising compound – SUVN – 502 for treating Alzheimer’s disease is progressing well in a space with an addressable business opportunity of $20bn in cognitive neuro de-generative disorders - an unmet medical need. Alzheimer’s does not have any cure and is a devastating neurological disorder impacting more than 37 million people worldwide. Suven is taking SUVN – 502 on its own into Proof of Concept which requires funding and capital raising. Once the POC is established we believe that the value of the potential licensing opportunity increases manifold.
With close to 550 product patents and 18 inventions to its credit – Suven we believe can advance at least one molecule from its existing pipeline of 11 molecules into the IND stage every year besides expanding its therapeutic coverage within its focus area – CNS having an addressable market opportunity of $100bn. Promoter – Venkat Jasti holds 63% in Suven Life Science and none of the promoter holding is pledged. Suven has a market capitalization of 360crs and at 10xFY’13E earnings of Rs3 offers value and we recommend a BUY with an 18 month target of 65
· VENUS ( CMP: 290; FV:10; NOT RATED)
Venus Remedies promoted by Pawan & Manu Chaudhary is a research driven pharmaceutical company with a clear focus on Antibiotics & Oncology. It is double the size of Suven and has revenues of more than Rs4bn and trades at Rs290 with a market capitalization of Rs280crs. Its star antibiotic – Vancoplus has secured more than 7 international patents and forms close to 15% of its revenues. Venus has a clear focus on Oncology and has got the DCGI approval to conduct Phase-3 clinical trials on its NCE-VRP 1620 – a cancer molecule.
Similar to Suven, Venus too spends 20% of its revenues on R&D and during FY’11 & FY’12 spent 68crs and 82crs on R&D of which only 13crs and 14crs were charged to the P&L account while the rest was capitalized, a practice which we do not like. Hence what seems to be attractively valued at 5PE in effect ends up making losses if the entire R&D spend is charged to P&L. Although the promoter holding is 34%, both the promoters together hold only 22% in Venus of which almost 90% is pledged. We do not have any rating on Venus Remedies at present.
Thanks and Regards
LKP Advisory
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