Laurus Labs Initiating Coverage Research Report By Motilal Oswal

Angling for growth

Cost efficient + Strong Chemistry skills + Forward integration

Laurus Lab (LAURUS) is a young, R&D led, pharma company. LAURUS is one of the leading API manufacturers for ARV (Antiretrovirals) and Hep-C (Hepatitis C). LAURUS has leveraged chemistry skills towards synthesis services and manufacture specialty ingredients. LAURUS is also forward integrating to formulations for regulated markets.

 We expect LAURUS to deliver 16.7% CAGR in sales to INR30b and 28% CAGR in PAT to INR4b by FY20, led by addition of formulations and healthy momentum in base API business.

 LAURUS is targeting 30 ANDA filings (six filed till date) over the next 2-3 years and accordingly expanding capacity from 1b units/year to 5b units/year. We expect its US sales to multiply from INR20m in FY17 to INR1.3b by FY20. It is also forward integrating in ARVs for further improvement in profitability.

 Consolidation of distributors in US has lowered scope of negotiation on product prices and regulatory hurdles have affected ongoing and/or future business of various pharma companies. We believe LAURUS is in a sweet spot to get the business in regulated market due to its cost efficiency and consistent compliance.

 LAURUS is on a strong footing in the API business, primarily led by cost efficiency. We expect 12% revenue CAGR in this base business to INR24b by FY20, led by new molecules and higher off-take by global procurement agencies.

 We value LAURUS at 18x (20% premium to midcap average multiple of 15x) 12M forward earnings to arrive at price target of INR651. We are positive on LAURUS’ forward integration to formulation in regulated markets and superior margins in API business. Initiate with Buy.

Formulations business in take-off mode

LAURUS has developed and filed 42 DMFs and eight ANDAs till date with USFDA. It intends to file 8-10 ANDAs annually, taking its cumulative filings to 30 in the next three years. Specifically, it has tentative approval for g-Viread. Given that facility compliance is in place and all USFDA queries have been resolved, final approval would kick-start revenue from the US market. In addition, LAURUS would incur total capex of INR3b (INR2b spent till date) to facilitate manufacturing. Also, it is in the process of filing products to participate in global tenders for ARV formulations. We expect strong growth in LAURUS’ formulations business over the next 2-3 years.

Steady API base business

LAURUS’ API sales have grown at a CAGR of 17% over FY14-17, led by increased off-take of ARV and Hep C APIs, higher synthesis and oncology API business. The company is adding new molecules in ARV/Oncology/Other APIs and traction from the Aspen contract has increased. Post strong growth in Hep C business over the last two years, we expect growth to taper due to sharp price erosion on intensifying competition. Nevertheless, we expect LAURUS’ API sales to grow from INR17.2b in FY17 to INR24.5b by FY20.

Good compliance track record augurs well for business in regulated markets

LAURUS’ facilities have been inspected multiple times in the last 8 years. The company has cleared these inspections with minimal observations – Unit 1 and Unit 3 had two observations in Form 483 issued in August 2017. Recently, it received EIR for the inspection conducted at Unit 2 in May 2017. This implies minimal regulatory hurdles for LAURUS in the medium term.

Valuation and view

LAURUS’ earnings have grown at a CAGR of 21% over FY13-17. We expect 28% earnings CAGR over FY17-20, led by product launches in the US, additional business from tender awards in the ARV formulations/API space, new customer addition, as well as new product additions in the synthesis and oncology space. With increasing share of higher value products, we expect EBITDA margin to expand ~200bp over FY17-20. We value LAURUS at 18x 12-month forward earnings to arrive at a price target of INR651, implying 22% upside. We value the stock at 20% premium to the midcap average multiple of 15x to factor in relatively higher EBITDA margins in the API business and forward integration to formulations in regulated markets. We initiate coverage with a Buy rating.