As we move towards the end of the year, Visakhapatnam-based drug ingredients manufacturer Laurus Labs is set to enter primary market with its IPO on 6 December. The IPO, priced in the range of INR426 – 428 per share, will put the company’s market capitalization at nearly INR4,526 crore at the upper price band. An analysis of red herring prospectus filed by Laurus Labs offers insights into the strategy of this fast-growing and specialized pharma player. Here are the important points to know about the company.
Focus on high-growth niche – Laurus Labs is a relatively new player and was incorporated in September 2005. Laurus Labs is a leading player in developing generic Active Pharmaceutical Ingredients (APIs). There are several players in the API space and Laurus differentiates by focusing on high-growth therapeutic areas of Anti-Retrovirals (ARVs), Hepatitis C and Oncology. The company also operates in large volume APIs for cardiovascular, anti-diabetic, antiasthmatic, gastroenterology therapeutic areas.
Apart from Generic API, the coampny has three other business lines Generic FDF (Finished Dosage Form), Synthesis and Ingredients.
Modern and compliant manufacturing facilities – Laurus Labs’ manufacturing setup includes three facilities in Visakhapatnam and a kilo lab facility in Hyderabad, which have received approvals from leading regulators including World Health Organisation (WHO), US Food and Drug Administration (FDA), PMDA, NIP Hungary, KFDA or BfArM. The manufacturing facilities are capable of large scale commercial production of APIs enabling it to position itself favorably among pharmaceutical companies seeking to leverage its technical expertise, cost effective manufacturing and capacities. The company is further building on its API strengths to forward integrate into FDFs.
Industry experts as promoters – Despite its short operating history, the company has made great inroads in the market and the credit for this success goes to the company’s promoters. Laurus is led by experienced promoters and qualified operational personnel. The organization is headed by Satyanarayana Chava who has over two decades of experience and has served several pharma companies including Ranbaxy and Matrix Laboratories in leadership positions. Chava also has 103 patents granted or patent applications under his belt.
Other senior professionals in Laurus Labs also have similar credentials. The company has a “Research first” approach and has a pool of 617 scientists which form 24.4% of its total employee strength. Out of these, 605 scientists work at the R&D center in Hyderabad while 12 scientists operates from the company’s R&D centre in Greater Boston. In FY2016, Laurus Labs spent 5.1% of its revenues in R&D function.
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Strong Business Growth – Thanks to the strong and experienced leadership, Laurus has been able to avoid several pitfalls generally associated in the pharma business. This has resulted in the business taking off quite spectacularly. According to the red herring prospectus (RHP), the company’s standalone revenue grew from INR452.3 crore in FY 2012 to INR1,788.4 crore in FY 2016. While unconsolidated revenues expanded to nearly four times in these four years, consolidated revenues also grew impressively. For more details, visit this page.
During the FY 2016, Laurus Labs sold its APIs in 32 countries.
Growing client base – Laurus Labs existing client base comprises 9 out of the 10 largest global generic pharma companies. It supplies APIs to most big names in the trade including Aspen Pharmacare, Aurobindo Pharma, Cipla, Hospira, Mylan Laboratories, Nato Pharma and Strides Shasun. As a result of growing business, the contribution of these important clients has reduced in Laurus Labs’ operations. The company’s top five clients accounted for 76.5% of Laurus Lab’s revenues in FY 2014 but this figure reduced to 58.7% in the six months ended 30 September 2016.
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PE investors – Thriving businesses usually attract the attention of private investors much before tapping the IPO market and accordingly, Laurus Labs counts Bluewater (30.37% equity stake), FIL Capital Management (18.5%) and Aptuit (9.15%) among biggest shareholders. Bluewater is a Warburg Pincus group entity while FIL Capital Management and Aptuit are group companies of Eight Roads Ventures and Welsh Carson Anderson & Stowe, respectively. Apart from offering money, private equity investors are known to be tremendously helpful in securing new contracts and establishing partnerships.
Profitability – As the company’s business has grown in the recent years, Laurus Labs has also expanded its profits. The company’s profit stood at INR132.7 crore in FY 2016, up sharply from just INR21.6 crore in FY 2012, according to the prospectus. Clearly, the 57.5% CAGR in profits has outpaced the 41.1% CAGR in revenues in these years and thus, it comes as no surprise that its net profit margin got a boost to 7.4% in FY 2012 and further to 8% in the six months of FY 2017.
Similarly, Laurus Labs’ EBITDA or operating margins have increased from 17.6% in FY 2012 to 21.2% in FY 2016.
IPO Size and use of proceeds – The IPO will involve an offer for sale (OFS) of 24,107,440 shares amounting to INR1,031.79 crore at upper price band by existing investors Aptuit, Bluewater, FIL Capital Management and FIP. In addition, fresh shares up to INR300 crore, will also be issued. In total, the IPO will mobilize INR1,331.79 crore through the combination of OFS and fresh issue.
While the company will not get any proceeds from the OFS, proceeds from issuing fresh shares will be used for pre-payment of term loans and general corporate purposes.
Valuation – For FY 2016, Laurus Labs had basic earnings per share (EPS) of INR20.86 while diluted EPS stood at INR13.48 on a consolidated basis. The price band of INR426 – 428 per share values the company at a PE ratio of 31.6 – 31.75. These are rich valuations considering sub-30 figures for listed peers like Aurobindo Pharma and Divis Laboratories. Laurus Labs’ Return on Net Worth (RONW) for the latest year stood at 15.57%. Laurus Labs IPO will value the company at nearly INR4,500 crore.
