WHAT IS THE FUTURE OF LAURUS LABS ? DETAILED ANALYSIS.

Hello investors, in this article, we are going to talk about Laurus labs. As always, we will focus on 5 points  and at the end, I will explain if the company is cheap or expensive 

ABOUT LAURUS LABS LTD.

Laurus Labs Ltd. was incorporated in the year 2005. Dr Chava is the CEO and founder of this company he started as a researcher at Ranbaxy labs and there he understood the importance of research but he felt like he should also understand other divisions and that´s why he took another job at Matrix labs and he became the CEO in some years after working in the marketing, finance and accounts division and in 2007 he started Laurus labs with 60 crores and part of this was his own money, as his expertise was in research, he wanted to focus on that but he realised that he can´t scale this business.

He still admits that it´s important and you can see that even today, they spend a lot on research. So, in 2008, they started manufacturing API (Active Pharmaceutical Ingredient). Let´s imagine you take a pill for a headache. The ingredient that actually helps you with your pain is known as active ingredient but he noticed that at that time, the treatment for retroviruses was booming and that´s why they started with that and their most famous product is Efavirenz. They have more than 50 % market share here and for several years, their entire business model was around this drug. 

MANAGEMENT OF  THE COMPANY

As I mentioned earlier, Dr Chava is the founder and CEO of this company he has more than 100 patents under his name. The promoter (people who run the business ) holding in this company is 32 %( promotor holdings) but 16%. is pledged. The management expects this pledge to decrease very soon. 

The company has three main segments. 50 % of their revenue comes from Generic API. Generic FDF contributes 40 % to their revenue. Synthesis contributes 10 % to their revenue. 

Let´s start with generic API 3 - 4 years before, this was their biggest segment but now, they are diversifying their business.

In generic API, you already know the meaning of API, in this category, they have 3 sub-segments. Anti- Viral, Oncology & other API. Don´t worry, I will explain each segment.  

In antiviral, they have Hepatitis C and ARV ( Antiretroviral ) treatment. As I mentioned before, they started with ARV and there is one more reason behind it.

In ARV, the cost of API is nearly 70 % of the drug, unlike other drugs, where it´s only 35 % of the cost. Please remember that we are mainly talking about HIV treatment here.

This treatment is divided into first and second-line treatment. 

1. Doctors always start with first-line treatment. As we speak, more than 70 % of the patients are under first-line treatment.
2. Second-line therapies are provided to the patients who have developed resistance to the first-line therapies and special situations. And second-line treatment is more expensive.

Initially, the company used to focus on first-line treatment but now the company has various products of second-line treatment & this treatment is normally given in combinations. This is one example. 

Their market share in Tenofovir is more than 25 % but their most famous product is Efavirenz and their market share is more than 50 % but when patients weren´t reacting well to EFV, doctors started prescribing DTG. Doctors realised that DTG was giving similar results & HIV patients also have TB normally and you could use DTG for TB  and after several studies, WHO revised it´s guideline and made DTG part of the preferred first-line treatment.

As I mentioned before, EFV was one of their main products many people think that EFV, went from 100 to 0 in one day but that´s far from true. Management has mentioned that in certain areas like Thailand, India and Brazil, EFV is still being used. So around 25 % of the market is Efavirenz and 75 % is DTG, as the market went from 100 to 25 % in EFV, of course, it affected them but not as much as you think this is because they kept gaining market share as several players exited this market. The company does have DTG as well and their market share is around 30 %. 

Here you can see their financials of the last 4 years. Let me explain the dip in the last year. The first reason is the change from EFV to DTG. As I mentioned before, the company makes API and then sells it to manufacturers that make the end product.

You need to understand how this HIV business works. This business is basically tender based as the majority of the funding comes from organisations.

Here is the list of organisations. 

• PEPFAR
• THE GLOBAL HEALTH
• THE CLINTON HEALTH
• UNITED NATION PROGRAM

In the API segment, this company doesn´t deal with them. They make API for other companies that have to deal with these organisations. 

So why am I telling this? This year, there wasn´t clarity from some organisations and that´s why you saw a dip in the last year performance, please remember the tender business because I will mention this later.

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In antivirals, they also have treatment for Hepatitis C, here they have an agreement (exclusive supplier)  with NATCO for 10 years. In Hepatitis C, we have acute and chronic stage. There have been cases in the acute stage, where people recovered without treatment. We are talking about a pharma company, so if you don´t need treatment, this doesn´t help them but more than 70 % of the cases will fall into the chronic category.

Usually, the treatment lasts 12 weeks, unlike ARV, where the treatment is life long but this is also a very competitive business, unlike ARV where there are less than 10 players.

Here you can see the financials from the last 4 years how it´s decreasing, international companies are also suffering because the amount of patients has been decreasing unlike ARV 

let´s talk about their second segment in generic API, oncology.

They have the largest capacity in India and they have 2 main products (Gemcitabine & Imatinib) and they don´t plan to launch new products here. They only want to increase their business with existing customers & the API prices in this segment fluctuates a lot. Some of them are in hundreds of dollars, while others are in thousands.

Here you can see the Oncology of last 4 years and they have been pretty consistent and in API we also have other API and they make this for other generic companies. They operate in three main segments. 

1. CARDIO VASCULAR
2. ANTI DIABETIC
3. ANTI ASTHMATIC

Here you can see the Other API of the last 4 years.

They have 25% market share in seven APIs that we make, and they want to expand that number to 15 APIs  

The next segment is generic FDF and it contributes 40 %to their revenue. This has been their growth engine.

FDF stands for finished dosage forms. As they were already making the API, so this was a logical move, that´s why they only make finished dosage of APIs they already make and as I mentioned before, in ARV, the cost of API is around 70 % of the drug & they operate in two segments here: LMIC (66 %) and Europe and USA (33% - higher margins )

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Let´s start with LMIC (Low and Middle-Income Countries). Here they participate in tenders. Now you know why I was explaining the tender business before and they already have an agreement with Global fund for more than 3 years. 

South Africa is the biggest market and the company recently acquired Aspen´s South African division, now they can participate more in tenders in South Africa. These tenders are usually long term and they can be agreements of several years. A big part of this business is DTG based or combinations of DTG and 33 % of their business comes from Europe and USA. This segment has higher margins. They are increasing their capacity by more than 80 % and that´s for this segment & they already have agreements with Rising and Dr Reddy for USA and they are supplying 1 billion units to one customer but they expect this to double in the next 18 months.

Here you can see, they went from 5 crores to more than 800 crores in 2 years.

Remember this because I will show this in the income statement. 10 % of their revenue comes from Synthesis business. This is basically Contract Development and Manufacturing when a company innovates and brings a drug to the market, they go through 3 phases research, clinical phase and commercial. Laurus can help you during this entire process. 

The advantage here is that you don´t take any risk as they are only helping other companies, if things go south, it won´t affect them but of course, that business will go away & there is no price pressure in this segment and if the drug is approved, then the company wins big time but it takes several years to go through these 3 phases I just mentioned.

AGREEMENTS 

Laurus already works with 4 of the top 10 companies and several small companies, they have around 50 projects and 4 of them are in commercial stage and here the company has an agreement with Aspen. This is 50 % of their business.  

This is 10-year agreement and they make hormonal intermediates for them, when they set up a unit for them, Aspen covered the cost and they get a certain percentage as well but the management mentioned that the Aspen business will peak out soon because the majority are in commercial phase in the same segment, they also have ingredient business.

Here they make speciality ingredients for nutraceuticals. Nutraceuticals are food with medical benefits like vitamins. They have mainly three products in their portfolio.

• ANTIOXIDANTS
• SKIN BRIGHTNESS
• UV PROTECTION AGENTS 

Here you can see the Synthesis financials of the last 4 years. Together with FDF, this will drive their future growth as always.

COMPANY FINANCIALS

We will start with the balance sheet. Here you can see their debt levels, it has been increasing,  they mentioned that if they can invest and get a good return, they won´t decrease their debt. I don´t do this usually but I have also included cash level, even though their debt level is high, they barely have cash. They do have a cash credit facility of more than 800 crores.

I like to see these metrics. On the right side, we have debtor days. This tells us how fast they can collect the money, once they send the invoice to their customer as the FDF business is tender based.

so it has increased in the last years and on the left side, you see the return on capital, so when they invest money in the business, How much return can they get, as they were investing in the FDF business for a long time, the ROCE decreased. As the earnings started coming in ROCE increased dramatically.

Here you can see that their revenue has been increasing consistently but the profit has fluctuated, mainly in 2019. 

Before the company was importing intermediates from China, as many Chinese plants shut down, the prices of intermediates increased dramatically but now the company makes their own intermediate and they only import key material. That´s why you see a huge jump in margins next year together with good FDF business.

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As always, we will start with their free cash flows that help us understand their "real earnings" and I talk about free cash flows in my course and I teach how to value companies with them. 

Free Cash Flows

Here you can see that free cash flows have been fluctuating a lot, as they were investing in several segments like FDF, their Capex was always very high so it affected their free cash flows. Even now they are investing in Capex, so this affects free cash flows but they have mentioned that free cash flows will improve dramatically next year and the investments they have right now, will give high returns in a very short amount of time and that´s why I´m tracking this company because I like to see good free cash flows.

Strengths

• Company’s PEG ratio is 0.15.
• The company has a good cash flow management; CFO/PAT stands at 1.89.

Limitations

• The company has shown a poor revenue growth of 13.92% for the past 3 years.
• Promoter pledging has increased from 32.04% to 45.22% in 1 quarter.
• Tax rate is low at 12.29.
• Promoter pledging is high as 16%.

But what happens if the stock price goes up? 

The management is investing in the business because right now they have visibility for some quarters, if you look at the tender business, the funding hasn´t stopped even now so it´s a consistent business. So even if I invest later, I should be fine plus hopefully, the balance sheet and free cash flows will improve.

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