LAURUS LABS : BUSINESS ANALYSIS AND SIZE OF OPPORTUNITY

Overview of Business

Laurus Labs is a fully integrated pharmaceutical and biotechnology company, with a leadership position in generic Active Pharmaceutical Ingredients (APIs) and major focus on anti-retroviral, Hepatitis C, and oncology drugs. 

Laurus Labs operate under four business units covering a wide range of therapeutic applications as mentioned below. 

Laurus Generics - API - Development, manufacture and sale of APIs and advanced intermediates. 

As per concall report Q3FY22, Overall demand declined due to inventory stocking at various channels, and management says that they are witnessing a normal trend from Q4 onwards.

Laurus Generics - Finished Dosage Form (FDF) - Company develops and manufactures oral solid formulations for low and middle-income countries (LMIC), North America and European Union (EU) markets. Backed by in-house API strengths. 

As per concall report Q3FY22, The formulation division reported revenues of ₹ 1,389 crores for nine months with 13% growth. Whereas ₹ 373 crores for the quarter with a decline of 13%. The contribution from the formulation segment has improved during the nine months to 30% from 36% in the previous year. 

Laurus Synthesis - Company provides Contract Research and Manufacturing Services (CRAMS) and Contract Development and Manufacturing Organization (CDMO) to global pharmaceutical companies and several late-stage projects. Steroids and hormone manufacturing capability. 

Management says that, Concall Q3FY22, it was a very strong quarter for us and delivered robust growth of 63% year-on-year at INR 207 crores. For nine months FY ‘22 CDMO business also grew over 60%.

Laurus Bio - Recombinant products - animal origin free products for safer and viral free bio manufacturing. 

As per concall report Q3FY22, this segment achieved a sale of INR 25 crores, taking to INR 65 crores from the nine months FY ‘22. During the quarter, Laurus Bio commissioned two more fermenters of 45KL each, taking the total capacity of 180KL. 

The company also has a dedicated R&D team for developing processes and products to create a diverse range of medicines. Company has six manufacturing facilities and Laurus synthesis private limited  in Visakhapatnam and a kilo lab facility in Hyderabad, which have received approvals from WHO, US FDA, PMDA, NIP Hungary, KFDA, ANVISA, JAZMP – Slovenia, EU (Germany), COFEPRIS and BfArM. 

I have my own frame of analysis, learnt from my mentors, which covers the following important analysis points as mentioned below. 

Financial Analysis 

Operating Efficiency Analysis 

Margin of safety i.e. Self sustainability in the Business 

Business Analysis 

Size of opportunity 

Fund flow analysis 

Management Analysis 

Financial Analysis, Operating Efficiency Analysis have been covered already and now it's time to go ahead with the Business analysis and size of opportunity for Laurus Labs Limited. 

Business Analysis 

Let us first find out the various key highlights in the business of Laurus Labs Limited during the FY20-21. 

Completed acquisition of Richcore Lifesciences Pvt. Ltd, renamed as Laurus Bio, which is now a subsidiary of Laurus Labs. 

Incorporated Laurus Ingredients Pvt. Ltd., a wholly owned step-down subsidiary of Laurus Synthesis Pvt. Ltd. 

Completed four drug product validations, apart from the filing of 27 ANDAs and NDAs 

Created additional formulation capacity by debottlenecking operations 

Began construction of large formulation manufacturing block which will be available for commercial use starting Q3 2021 

Started three new manufacturing blocks for commercial manufacturing of intermediates and APIs 

Above highlights are for FY 2020-21, it indicates that Laurus Labs is focused on continuous growth. 

Laurus has charted a definite growth trajectory that involves strengthening its presence in the non-ARV space, fortifying its position in the formulations and synthesis segments and tapping the new area of biologics (through Laurus Bio). The Company is looking to build new capacities/facilities that would propel its growth in the coming years. 

Comparison of Laurus labs growth with its peers 

Laurus Labs is showing outperformance with its peers in terms of sales and profit growth. Following table is self explanatory. 

Size of opportunity 

According to Grand View Research, the global pharmaceutical manufacturing market size was valued at US$ 324.42 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 13.74% from 2020-27. 

Active Pharmaceutical Ingredients (API) industry 

The global Active Pharmaceutical Ingredient market is expected to grow at a high single digit CAGR from 2020 to 2027 to reach US$ 364.17 billion by 2027. 

Increased healthcare expenditure by the urban population and an increase in the geriatric population are influencing the market growth of APIs. 

Let us see the opportunity for Laurus Labs in API space

The rising accessibility to affordable healthcare services has increased the demand for low-cost and high quality medicines, particularly in the developing world. Consequently, the need for low-cost and high-quality APIs are increasing for manufacturing finished drugs. Some of the key factors that are driving the market include the increasing prevalence of infectious diseases, cardiovascular conditions, and other chronic disorders. 

Laurus currently supplies APIs to nine of the 10 largest generic pharmaceutical companies and has an advantage in backward integration. It also has a leadership position in APIs like antiretroviral drugs (ARVs), cardiovascular (CVS) and oncology. It is a major supplier for ARV APIs to other ARV manufacturers and finished drugs in several LMIC markets. 

Generics market 

According to Precedence Research, the generic drugs market size is projected to be worth around US$ 675.20 billion by the end of 2030. The global generic drugs market is expected to grow at a CAGR of 5.7% over 2021-30; the market is valued at US$ 387.92 billion in 2020. 

In 2020, North America commanded a market share of more than 30%, with the US being the highest shareholding country in the region, mainly due to its advanced healthcare infrastructure, increasing occurrence of chronic diseases, and presence of leading players in the region. 

The Asia-Pacific generics market had total revenue of US$ 129.90 billion in 2019, China accounted for 53.7% of the value of the Asia-Pacific market, followed by Japan and India with 21.1% and 12.7%, respectively. The China generic drugs industry market is anticipated to continue dominating the market in terms of revenue share. 

Let us see the opportunity for Laurus Labs in the Generics market 

Laurus has filed 27 Abbreviated New Drug Applications (ANDAs) with United States Food and Drug Administration (FDA) and has nine final approvals and eight tentative approvals. In addition, completed four products validation at commercial scale. 

Antiretroviral (ARV) market 

Antiretroviral therapy (ART) is a crucial step in reducing HIV-related deaths. The year 2020 was already a significant year with regard to HIV before the COVID-19 pandemic swept across the globe. 

There was a sharp drop in HIV testing and viral load volumes as clients avoided clinics. In a survey  conducted by the World Health Organization (WHO) in June 2020, 38 countries reported disruption in HIV testing services (HTS). ARV supply chains and HIV prevention outreach were disrupted due to lockdowns across the globe. 

According to the Clinton Health Access Initiative – HIV Market Report, the number of patients (re-) initiating ART continues to increase, with over two million adult patients added between 2018 and 2019. In GA Low Medium Income Countries (LMICs), adult ART coverage increased from 64% in 2018 to 70% in 2019. 

Let us see the opportunity for Laurus Labs in the Generics market 

Being the cost leader in many ARV APIs, Laurus is best placed to garner attractive market share in ARV APIs and the Finished Dosage Form (FDF) tender market. The ARV portfolio consists of ~12 APIs, covering both 1st line and 2nd line treatment regimens. 

Large-scale, improved manufacturing processes have been the key factors in making Laurus the preferred API supplier in the ARV segment. At present, Laurus is supplying 80% of the players who participate in ARV tenders. Being a fully integrated player, Laurus has a natural advantage and a superior margin profile compared to non-integrated players. 

CRAMS industry 

The global market for Contract Research and Manufacturing Services (CRAMS) is expected to grow at 7% CAGR in 2019-25 on the back of increasing costs of R&D, coupled with significant revenue loss due to impending patent cliff that has forced major pharmaceutical companies worldwide to outsource part of their research and manufacturing activities to low-cost countries like India. 

CRAMS is one of the fastest-growing sectors in the pharmaceutical and biotechnology industry. The pharmaceutical market uses outsourcing services from providers in the form of contract research organizations (CROs) and contract manufacturing organizations (CMOs). 

India offers significant cost advantages over matured manufacturing hubs in Europe and North America and has already emerged as one of the leading cost-competitive and quality manufacturing hubs for many global players including big pharma companies. The domestic CRAMS market is expected to reach US$ 40 billion by 2030. 

Let us see the opportunity for Laurus Labs in the CRAMS industry 

Laurus is uniquely positioned to address customer needs at any stage of the product life cycle. With over 150 scientists to provide process chemistry services to global clients, our contract development and manufacturing organization (CDMO) division is well positioned to offer development and manufacturing services across the value chain from preclinical to lifecycle management. Laurus has created a wholly-owned subsidiary – Laurus Synthesis Pvt Ltd – to increase its focus and dedicated R&D. 

Nutraceutical industry 

According to Mordor Intelligence, the global nutraceutical ingredients market size is projected to reach US$ 167.30 million by 2026, from US$ 127 million in 2019, at a CAGR of 4.0% during 2021-26.

Due to the increasing frequency of lifestyle diseases consumers across the globe are becoming health conscious. There is also a growing geriatric population with their own health preferences and conditions. 

In consequence, consumer choice is shifting from chemically-derived products to protective healthcare items such as nutraceuticals that contain safer, natural and healthier ingredients. 

Health consciousness, leading to healthy eating habits and consumption of nutrient rich food is increasing the adoption of fortified foods. These growing choices are expected to drive the growth of the nutraceutical market size. A positive outlook towards medical nutrition owing to increasing weight management programmes, along with the management of cardiovascular diseases, is anticipated to propel the demand for nutraceuticals. 

Let us see the opportunity for Laurus Labs in the Nutraceutical industry 

Laurus Labs has been at the forefront of the development and manufacture of pure, well-characterized specialty ingredients in the nutraceutical/dietary supplements and cosmeceutical segments. Its key strength lies in the development of alternative low-cost synthetic routes for naturally derived nutraceutical products. Patented combinations of nutraceuticals and pharmaceuticals may create rewarding business opportunities, going forward. 

Overview of Indian Pharma Industry 

The Indian pharma industry is poised for a big leap forward in this decade. Health, science and innovation have come into sharp focus as never before. The developments over the past year have emphasized the importance of an innovation ecosystem, a robust infrastructure for production of drugs and pharmaceuticals and the need to constantly build a huge talent pool of scientists, researchers and technologists who can be the arrowheads for the future. 

India has emerged as a pharmacy to the world, supplying critical drugs and vaccines in the course of this pandemic. As per the report on the Indian Pharmaceutical Industry 2021 by FICCI and EY, during 2020-30, Indian pharma industry is expected to grow at a CAGR of ~12% to reach US$ 130 billion by 2030 from US$ 41.7 billion in 2020. 

Strength in the business 

CARE Rating has compiled, in its credit report of March-21, the strength and weakness in the Laurus Labs business very beautifully. Let us see some strength and weakness points from CARE Rating credit report.

Healthy Growth 

During FY20, the company at consolidated level has achieved around 23.5% growth in its total operating income which stood at Rs.2,836.59 crore during FY20. The total operating income of the company improved on account of foray into formulations segment on large scale and healthy growth in synthesis and other API segments. The growth in the revenue is primarily attributable to Finished Dosages Form segments which increased to Rs.825.3 crore in FY20 from Rs.54.6 crore in FY19. The other segment which contributed to the growth in the topline is the Synthesis segment which increased by 30.71% to Rs.385.1 crore in FY20 from Rs.294.6 crore in FY19.  

The PBILDT margin has improved from 15.74% during FY19 to 20.10% during FY20. The profitability has increased due to change in composition of revenue from API to formulations, i.e., 75.25% and 2.38% during FY19 to 49.82% and 29.15% during FY20, respectively. 

Completion of strategic acquisition to augment growth in turnover 

Laurus, as per its press release date February 10, 2021, has acquired a majority stake (74.37%) in Richcore Life Sciences Private Limited (Richcore). The cost of acquisition of 74.37% was Rs.260.24 crore and was funded through internal accruals. 

Richcore is a research-driven biology company having fermentation capabilities and ability in animal origin free recombinant products. These products help vaccine, insulin, stem cell-based regenerative medicine and other biopharma customers, eliminate dependency on animal and human blood derived products and in turn produce safer medicines. 

Laurus through this acquisition is projecting to penetrate into established enzyme segments, vaccines and become a dominant player in CDMO space in Mid- Term. Apart from this, Laurus had also acquired bulk drug manufacturing unit from Phalanx Labs Private Limited, located at Visakhapatnam, Andhra Pradesh on a slump sale basis and it would be reflected in its subsidiary, Laurus Synthesis Private Limited (LSPL) which is incorporated in May 2020.  

Growth opportunities in Formulations and Synthesis division 

During FY20, Laurus commenced its formulations segment from unit 2 on a large scale which has the capacity of manufacturing 5 billion tablets per year. The formulations segment typically has higher asset turnover and better margins as compared to the generic API business which is reflected in the current year profitability. The company is targeting both developed markets (USA, Europe and Canada) and emerging markets (Global fund tenders, WHO Tender, PEPFAR Tender, and various African In-Country Tenders). 

The company has cumulatively filed 26 ANDAs, 2 Para IV and 7 FTFs for North America and filed 9 dossiers in EU markets, 12 dossiers in Canada. During FY20, Laurus has launched 6 new FDF products under various therapeutic segments and are targeted to be supplied primarily to Low Middle Income Countries (LMIC) like Kenya, Tanzania, Malawi, etc. Laurus is focusing on synthesis division and revenue contribution has been increasing from this segment year on year for the last 4 years. 

Strong product portfolio catering to therapeutic segments like ARV and Oncology 

Laurus has a portfolio with more than 60 commercialized APIs with strong presence in ARV, Oncology, anti-diabetic and Hepatitis C therapeutic segments. Furthermore, the company has forayed into formulation on a large scale from Unit II in FY20 resulting in major revenue being contributed from that segment, i.e., about 29% in FY20 as against about 2% during FY19. 

During February 2019, the company received approval for few of its products which caters to ARV segment and consequently the commercial sales took place during FY20. 

Reputed and geographically diversified customer base with strong flow of repeat business mitigating revenue concentration risk  

The top 10 clients of the company accounted for 62.05% of the total revenue in FY20 against 65.73% during FY19 reducing the risk of revenue concentration from clients y-o-y. Laurus added new customers in the Low Middle Income Countries market due to significant developments in formulations segment during FY20. 

Existing customers in anti-retroviral and oncology such as Mylan Laboratories Ltd, Aurobindo Pharma Ltd and Natco Pharma Limited continue to contribute to significant revenue. During the year, the revenue from the domestic market has declined from 53% in FY19 to 35% in FY20. The decline is due to lower offtake of Efavirenz in South Africa eventually resulting in lesser requirements from domestic players who in turn supply to African markets. 

Further, the revenue from the export market has increased from 47% during FY19 to 65% during FY20. Major portion of export sales is streamed from Africa and European markets. Exports to Japan, China and USA have increased in FY20 compared with FY19. Exports to Africa and USA are primarily finished dosages and exports to other parts of the world primarily constitute APIs. 

Weakness in the business of Laurus Labs 

Moderate operating cycle:  

Laurus has moderate operating cycle period which has improved to 146 days during FY20 as against 161 days during FY19. The improvement in operating cycle is attributable to reduction in collection period from 110 days to 104 days in FY20 and increase in creditor days from 68 to 88 days in FY20. The inventory holding period was 130 days in FY20 as against 120 days in FY19. 

Laurus has a high inventory holding period as the company has to maintain buffer stock for validation of new products and R & D process apart from regular inventory requirement for production of drugs. Average utilization of fund-based limits including CP (Rs.200 crore outstanding as on June 22, 2020) for the past 12 months ending December 2020 stood moderate at 63.99%. 

Foreign exchange fluctuation risk 

Laurus is exposed to foreign exchange fluctuation risk in view of large volume and high value transactions of export and import, a phenomenon common to the players in the industry. 

However, for Laurus, the risk is mitigated to a certain extent as the contracts have clauses embedded for the exchange rate fluctuation and there is natural hedging through netting off the imports and exports to a large extent. 

Exposure to regulatory risk 

The company is exposed to regulatory risk  as the pharmaceutical industry is highly regulated in many other countries and requires various approvals, licenses, registrations and permissions for business activities. The approval process for a new product registration is complex, lengthy and expensive. 

In continuation with the Fundamental Analysis of Laurus Labs Limited, I have analyzed here the business and industry analysis, comparison of growth of Laurus labs with its peers and size of opportunity in detail. I want to read and analyze the businesses in depth with my own framework, learnt from my mentors, step by step for better understanding and recording of data. 

Financial Analysis, Operating efficiency Analysis of Laurus Labs are already covered previously. I will read and analyze the fund flow analysis of Laurus Labs Limited  in my next post. 

Reference :

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Annual Report

Credit Report