Management Speak: Laurus Labs (Unrated) - Gearing up for next leg

Laurus Labs (Laurus) has organically scaled up its business in a short span since inception in 2005. The company has developed a niche in select high-growth antiretroviral (ARV) and Hepatitis C (Hep C) therapies, posting 28% revenue CAGR over FY13-17. A strong and focussed management team, strong R&D capabilities and process chemistry skills are core to Laurus’ success. In addition, a compliant and well-established manufacturing setup gives Laurus economies of scale, making it cost competitive in the global API space.

Growth challenges in ARV/HIV segments: In ARV segment, Laurus offers an entire range and has a dominant market share in key products like Efavirenz (60%), Tenofovir (35%) and Emtricitabine (25%). But, Laurus currently faces issues in its key product, Efavirenz (~75% of FY17 API revenues), due to changes in the line of treatment recommended by world health organisation (WHO). Laurus expects to mitigate these challenges by capitalising on increasing patient pool, new product introductions and launching own formulations. In HepC, Laurus has a dominant market share in Sofosbuvir (40%), but with rising competition in the domestic market, it is enhancing focus on exports.

Future growth platforms: Laurus continues to expand its oncology API portfolio and is targeting new therapeutic segments like anti-diabetics, where it sees significant growth opportunities. Further, leveraging on its API strengths, Laurus is forward-integrating into formulations and has filed 8 ANDAs (100% backward integrated) in the US. It has expanded its formulations capacity from 1bn to 5bn tablets/year. Laurus recently received approval for its first ANDA Tenofovir and plans to file 10 ANDAs/year to build its product portfolio. Despite the growing competitive intensity in US generics space, management remains optimistic on the growth potential of this market. Also, Laurus has invested significantly in synthesis (CRAMS) business over the last few years. These investments are expected to start delivering with commencement of revenues from the Aspen synthesis contract.

Business in transition phase: Laurus has a fairly scalable business model, given its deep manufacturing-cum-R&D capabilities. But, uncertainties from competitive challenges in its core ARV/HIV API segments cloud its near-term outlook. Laurus continues to aggressively invest in multiple new growth engines across newer APIs, formulations and custom synthesis, which should pay-off in the coming years. Till these investments deliver, RoE/RoCE would remain suppressed. At Rs519, Laurus trades at 27.5x FY17 EPS.