ValuePickr Forum

Laurus Labs - Can Business Transform to Next Level?

A 2016 article (which may have been already shared in this thread) when the company was not known to many and there was no noise around. Something interesting to note -

As Laurus expands manufacturing, Chava and Chereddi say its chemistry expertise and commitment to quality are registering in the market. Bruno agrees, pointing to a flagship project.

"To deal with Gilead, they must be doing something right,” Bruno says. “The Gilead drugs are not trivial chemistry. Gilead doesn’t make products that every person in the world can do easily. But Laurus seems to be able to do it.”

https://cen.acs.org/articles/94/i15/CEN-profiles-Laurus-Labs-upping.html

“Our ability to attract NCE work comes from our ability to transform medicinal chemistry processes in early discovery to robust processes when the candidate is moved to later stages of development,” Chava says. Intellectual property generated in process development at Laurus is transferred back to the project sponsor, he says. “One of the key decisions we took is that we will not infringe on patents. Not even for generics.”

This stand of the company seems to give lot of comfort to the innovators, as one of the main concern today is about IP infringement

Majority stake in Laurus Labs was acquired by Aptuit Inc, USA, a pharma service provider during 2007 and thereafter the company was named as Aptuit Laurus Private Limited.

When Laurus Labs was came up with IPO in 2016, Aptuit Inc exited

Later it seems that Aptuit Inc, USA was acquired by German Pharma Company, Evotec somewhere during 2017

Interestingly, Swizz pharma company Lonza had eyed a majority stake in Laurus Aptuit

PS: just tracing a bit of history. Many of you would have already known. May be deleted, if found not adding any value

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“To deal with Gilead, they must be doing something right,” Bruno says. “The Gilead drugs are not trivial chemistry. Gilead doesn’t make products that every person in the world can do easily. But Laurus seems to be able to do it.”

I have seen the similar setup in many of the research driven pharma companies, build the expertise and then do a tech transfer to offshore to scale it up, it is a proven and successful cost effective setup.

Similar question was raised by Mr Sajal Kapoor during Q4FY21 concall on how to asset return by using offshore capabilities (Dishman has their R&D in Swiss ) Link

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I have done some google and found that the below are the only companies that are producing Recombinant proteins. This market is expected to grow to 1.7 billion by 2026 from 1.1 billion in 2021. There is a report for subscribed members of marketandmarkets website. In this report, I could see RICHCORE is the only company from India manufacturing Recombinant proteins.

https://www.marketsandmarkets.com/Market-Reports/recombinant-proteins-market-70095015.html#:~:text=[175%20Pages%20Report]%20The%20global,9.8%%20during%20the%20forecast%20period.&text=In%20contrast%2C%20the%20declining%20cost,growth%20to%20a%20certain%20extent.

List of companies for Recombinant proteins in the world:

Thermo Fisher Scientific Inc. (US)
Miltenyi Biotech (Germany)
Sino Biological Inc. (China)
Merck KGaA (Germany)
Abcam plc (UK)
Biolegend (US)
Bio-Rad Laboratories Inc. (US)
GenScript Biotech Corporation (China)
Enzo Life Sciences Inc. (US)
BPS Bioscience Inc. (US)
PeproTech Inc. (US)
Proteintech Group Inc. (US)
Abnova Corporation (Taiwan)
R&D Systems (US)
STEMCELL Technologies Inc (Canada)
RayBiotech Inc (US)
CellGenix GmbH (Germany)
ACROBiosystems (US)
ProSpec-TechnoGene Ltd. (Israel)
Neuromics (US)
RICHCORE LIFESCIENCES PVT LTD (India)
Icosagen AS (US)
ProteoGenix (France)
United States Biological (US)
StressMarq Biosciences Inc (Canada)
and Aviva Systems Biology Corporation (US)

Disclosure:
Invested in Laurus before split and would be adding more on declines. May be biased.

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What is a Protein ?

The Making of Protein Therapies

What is Recombinant Protein ?

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Hi, I was trying to understand valuation of the company on basis of their announcement that their FY23 revenue will be around 1 billon dollar(7800 cr rs). With 30% margin(conservative), their profit will be around 2340 cr. On basis of this revenue, I am expecting their FY 23 PE to be around 14. But I am not sure if I did right calculation. I just wanted to understand if company is still cheap at this valuation or not.

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Valuations lie in the eyes of the beholder and are the most difficult part of any investment thesis for me personally. I have seen so many amazing businesses but given them a skip or decided to sell out because the valuations seemed stretched/not enough margin of safety. Everyone has a different way to value a company. There is no single “valuation” to speak of. Each investor must make their own decision on what is cheap, what is expensive. I can give you some guidance on how I think though note that this is not investment advice.

I personally think valuations are completely driven by (narratives around growth & unit economics) and and opportunity cost. If the collective market thinks a company will grow topline at 10-12% for 10-20 years with high and stable or improving unit economics and with some operating leverage higher bottomline growth, then valuations would remain elevated. P/E of 100 is elevated. P/E of 50 is also elevated (to most investors). Why I add opportunity cost is that some growth hungry investors (count me in this bucket) would decide to sell off their 12-15% Asian paints compounder and rather go after economy facing stocks like X,Y,Z. As long as the narrative around growth and unit economics remains, valuations would remain elevated as price discounts decades of growing stable profits.

So we must ask ourselves about laurus labs. Are laurus earnings as predictable as some of the other companies? Does market believe so? I would say no. Thus, since you are looking at FY23 earnings whether 14 P/E is expensive or cheap would depend on Laurus’s growth prospects and unit economics in FY23 and beyond. Now investor can do their own homework (by reading this VP thread, and other laurus labs material like the collaborators laurus thread: Laurus Labs: A much bigger journey ahead?) and try and understand what laurus labs would look like in FY23 and beyond. What would the growth prospects be? What would the unit economics be? Are both trending down or trending up. How stable or sustainable are they versus lumpy or one-off. Are there going to be far superior opportunities to Pharma/Laurus in FY23 which cause opportunistic investors to jump ship depressing valuations. Answers to these questions and experience based on studying evolution of valuations of multiple companies over market cycles can help an investor answer whether a P/E of 14 based on FY23 profits is cheap, or not.

PS: Since valuation is an art, all of these are just my opinions. I could be entirely wrong about everything. Also, invested in Laurus.

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Thanks Sahil for your response. I agree that valuation lies in the eyes of the beholder. But I want to know how one should do a valuation analysis of such type of company with some assumption about growth. e.g. I was watching one video of SOIC where Ish Mohit mentioned about calculating Bear and Bull scenarios in order to come up with a range. So my question is mainly how should one come up with a range for Laurus Lab?

Also about growth prospects of Laurus lab after FY23 onwards, I am bullish on revenue kicking from Anti ARV API(e.g. Onco, Diabetic etc) and revenue coming from their Richcore acquisition. But I dont know how much. So if one has to think about adding to existing investment, how should we go forward? I always have this question in my mind about valuation and hence I am not able to add good quantity at a particular price. So I am seeking suggestion from the group with example in case of Laurus Lab.
Disc - Invested with largest position(around 10%) of my portfolio.

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this is why valuation can only be done after developing a deep understanding of the business. And since a business is like a movie, we need to keep repeating this exercise every few months/years. Some places to start would be

  1. sajal sir’s biotech seminar to understand the industry structure, growth prospects.
  2. In this BQ interview Dr chava gives some soft guidance on what richcore/laurus bio could look like in K years. I am sure there is much more of this in concalls and IPs too.
  3. Sajal sir’s alpha series IIC talk on CRAMS space.

In short we have to consume all publically available direct evidence/sources (interviews, concalls, ARs) as well as read industry reports and understand broader trends to figure out the quantum of the growth we can expect. Also, we can track product mix change from same management commentary to understand the way unit economics and margins are headed.

There is another interesting aspect to valuations. One does not need a weighing scale to tell whether someone is fat or not. Similarly we do not need exact estimates of FY23 beyond growth and product mix changes to tell whether a P/E of 14 is expensive or cheap. We only need to evaluate whether there are enough growth and unit economics triggers to sustain or improve current valuations. Then, as a corollary, P/E of 14 on FY23 earnings would be cheap. :slight_smile:

Good advice, I do this too.

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Recombinant protein production is not difficult. Biocon produced Insulin even back in 2004 itself using Pichia Pastoris. So that alone can’t be a scale to value Laurus.

Discl: Invested at lower levels.

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Yes. It is a good observation. I have no knowledge of biologics or proteins. Most probably recombinant protein is only a platform from which Laurus bio intends to take off. By acquiring Richcore they have got the entrepreneurs, qualified, experienced staff, ready customers waiting to absorb ten times the existing production. This should give Laurus Bio sufficient resources and a stable platform to branch out into a more complex and rewarding area without any financial support from parent. Here I am presuming that recombinant protein may not be highly rewarding. Considering past performance of the promoter Dr Chava, it has a good chance of success. Picture should be clear by end of FY 22.

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Going back to your question about 14 P/E - so considering company keeps on growing at the same rate with the same margins, and considering 14 PE, as per the above chart, it means price already includes growth for the next couple of years FY23. However considering the track record of management and how they have been executing, they can come up with something better, then the stock price and valuations will keep on increasing. Ultimately it will be your call if you can forecast basis all the information which is available :slight_smile: …if you are good to buy at the current level or let go this to find something with little more conviction.
I just started following this thread and don’t understand Phama industry - but this is a great company with the great story
Disc: I am not invested

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Promoters sold shares in the market. Red flag?

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See this in the context proportionate to their holding. Its a very small percentage. In the case of employees, they seem to have got the shares in ESOPs which they have held for several years now. If you see that way, the company has created enormous wealth for its mid level employees. Nothing wrong in liquidating some parts when the stock has made such highs.

Also the company is not run by any family as promoters. All are ex-matrix lab employees, who had come together pooled in money to setup the company. Also many funds had invested initially, who exited during IPO.

After going through so many things since their setup viz. putting their own money, JV with Aptuit, raising money from anchor investors and now when they are doing so well, it is not as if they will shut shop and run away. Of course, this is the impression one will get if one is active on twitter.

Assume a situation where one gets chickened out and sells. The company may come up next month with blockbuster results, some new funds may enter and the price will go further up. No one will then remember this selling. But if one feels, its a red flag, its better to exit. After all its ones own hard earned money.

Ps: Promoter selling is generally considered as a red flag. But then I see Manpasand Beverage, which during its heydays in 2018 when both sales (which eventually was jacked up by circular trading) and stock price was making highs, the promoters increased their stake for 4 consecutive quarters. May be most of the retail need these kind of candy floss :smiley:

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Emailed them and here’s their response.

Another thing to note is that the promoters in question still hold close to 2 Crore shares in the company, which is sizeable in relation to the 8 Lac shares they’ve sold.

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https://www.bseindia.com/corporates/sastpledge_new.html?scripcd=540222

17 lakh shares of Chunduru Venkata Lakshmana Rao is pledged. seems like entire 17 lakhs will be released by selling 4 lakhs.

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pledged shares released by promoter.

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Leaving out the obvious performance metrics for the year, these are my notes from the annual report:

  • Filed 27 ANDAs in FY21, nine final approvals, eight tentative approvals. 16% of total employee strength is in R&D.
  • Expanding generics capacities by 1000 KL, around 25% more capacity due to increase in demand from third-party API sales.
  • Formulations expanding to 10 billion units / year (known for a few quarters now). Expecting it to be operational in a phased manner from August 2021-22.
  • Commenced marketing of in-licensed products in the US by leveraging front-end, launched TLE400 in low to middle income countries, entered a long term partnership with a leading generics player in the EU for contract manufacturing.
  • 50 active projects in the CDMO division, added two big pharma companies (overlap with EU generics player?)
  • Other APIs (anti-diabetic, CNS and PPI) are expected to be key growth drivers due to a robust orderbook and large capacity addition by the end of next year.
  • Acquired Aspen’s South African subsidiary to get a foothold in the
    world’s largest generic-accessible ARV market.
  • Great place to work certified from Feb 2021-2022.
  • Raw materials consumed decreased to 44.8% in 2020-21,
    against 49.9% in 2019-20, due to better product mix, backward
    integration for some of key starting materials and better yields.
  • Trade receivables are up by 64%, but is considered good by the management and are due within 30-120 days.

On Laurus Bio’s plans:

Aimed at diversifying and entering high-growth areas of recombinant animal origin free products, enzymes as well as building biologics to CDMO at scale. In the future, CDMO will be the largest segment.

We are on course of commissioning large scale fermentation capability and are also planning to acquire additional land for further expansion by creating close to million litres fermentation capacity.

(It’s quite interesting to see what direction Laurus Bio takes by 2023 when we know the biologics/biosimilars market is expected to see huge tailwinds.)

  • Laurus’ client base + Laurus Bio’s expertise in fermentation likely to have synergies.

On future capex:

On compliance, here’s how they’re staying ahead of the curve:

  • Increased the level of digitisation of operations;
  • Facilitated real-time data monitoring and data management for environmental conditions;
  • Trained our team in advanced quality management with specific programmes to identify quality issues, report and rectify them.

The management commentary from page 46 onwards is a great read. It explores the various segments Laurus is in, and places its comparative advantage within context, and the different opportunities it wishes to capitalise on.


Disclosure: invested.

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Laurus Labs promoter, Dr. Satyanaryana Chava latest interview.

https://www.bloomberg.com/news/videos/2021-06-23/laurus-labs-founder-and-ceo-on-india-s-pharma-sector-video

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Credit Rating Report:

Takeaways:

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Laurus labs new CDMO and Biologicals websites

https://www.laurussynthesis.com

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