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Detailed analysis on Suven Pharma!!
CMP - ₹496
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1. Company Overview:
-Suven Pharma is a Contract Development and Manufacturing Organization (CDMO).
-They provide innovative process research and development, supplies to clinical trials and commercial manufacturing services to innovative companies in the Pharmaceutical and

Specialty Chemical industries.
-Their services include custom synthesis, process R&D, scale-up and contract manufacturing of intermediates, APIs and formulations

2. Demerger
-Suven Pharma was originally incorporated in 1989 as Suven Life Sciences. Prior to 2019, Suven Life Sciences was involved in the development of innovative medicine, CDMO and Formulation manufacturing

-In 2018, Suven Life Sciences was demerged into 2 listed entities - Suven Life Sciences and Suven Pharma. The Drug Discovery business stayed in Suven Life Sciences and the CDMO and Formulations business went to Suven Pharma.
-The effects of the demerger were immediately visible

as Suven Pharma’s margins increased by 15-20%.
-This was mainly due to a significant drop in the R&D expense. The R&D expense of the combined entity was very high with about 90% of the R&D being spent on New Drug Discovery.
-Post the demerger, the R&D expense in the CDMO was

1/10th of the combined entity as the R&D for the CDMO business is mostly centered around process development which is not as capital intensive as New Drug Development

3. Business Segments
-Suven Pharma’s business comprises 3 segments - Pharma CDMO, Specialty Chemicals and Formulations

4. Pharma CDMO
-This is the company’s main vertical and contributes about 60% of the company’s revenues. This vertical includes the development of intermediates, small batch manufacturing for clinical trials and commercial supply of patented molecules.

-The success of this business depends on a molecule moving from one phase of the clinical trials to the next and eventual commercialization. This is a high margin business as the molecules that the company manufactures are under patent.

-In 2014, 3 molecules in their pipeline were commercialized which caused a big step up in revenues. They commercialized 2 more molecules in 2018 and 2022.

The revenues from this segment are very lumpy and cannot be looked at on a quarter on quarter basis. This is because orders for 1 product are received only once a year or once every 18 months.
-This is a high value and high margin business and Suven has the highest margins in

the industry. Their Pharma CRAMS business has EBITDA margins of 40-50%.
5. Specialty Chemicals CDMO
-In the specialty chemicals CDMO business, Suven manufactures intermediates for innovative agrochemicals.
-They got into this business because the capabilities required in this

business were very similar to the ones that they had in the Pharma business.
-The time to commercialization in this business is lower than the Pharma business as the molecule doesn’t go through clinical trials.
-Another major difference between these 2 businesses is in Pharma

they do not know the quantities to be supplied until the product is commercialized. Even when it is commercialized, they do not know if it will be an annual, 18 month or 24 month cycle. In Specialty Chemicals, the customer usually gives them an indication of what kind of

quantities they will need. So the company has a little more visibility on this side of the business.
-They have about 25-30% EBITDA margins in this business

6. Formulations
-Formulations is the company’s smallest vertical but is expected to grow substantially over the next few years.
-Currently, the company earns revenues in this vertical in 3 ways - providing some technical services to other pharma companies, royalty income and

manufacturing of niche formulations
-Suven had filed an ANDA for Malathion lotion which is a very niche product for head lice. They have licensed this ANDA to Taro Pharmaceuticals who pays them royalties based on the sales of the product.
-In the Generic ANDAs, the company

manufactures formulations which are then sold by other pharmaceutical companies who are their marketing partners.
-The strategy that the company follows for formulations is that they enter molecules which have a very small market and therefore very limited competition.

-They hope to make 2-4 million dollars in net profit per product. This small opportunity size is the reason that other generic companies are not interested in these products which helps them maintain margins.
-Suven does the development work on the ANDAs and either files them in

their own name or their partner does the ANDA filing. Suven does the manufacturing of the product and the partner handles the marketing.
-Suven follows a profit sharing model which enables them to have better margins than directly selling in the US

7. Casper Pharma
-Suven acquired a 25% stake in Rising Pharmaceuticals in 2019 for 35 million dollars. Rising Pharmaceuticals is a generic formulation marketing company and they had a partnership agreement with Suven Pharma for 3 ANDAs.
-Rising filed for bankruptcy in 2019 and

Suven purchased a 25% share in the business for 35 million. Their rationale at the time was that they would use Rising Pharmaceuticals as a marketing partner for their formulation business.
-Then in December 2021, HIG Capital - a private equity firm acquired the company. Suven

received 40.5 million dollars in cash and 15 million dollars in shares for their stake.
-Towards the end of FY22, Suven acquired a manufacturing facility from Casper Pharmaceuticals

-When HIG Capital acquired Rising, they acquired Casper Pharma as well and merged both the companies. This facility in India was not part of the deal.
-This is a brand new facility which has a capacity of 1.2 billion tablets or capsules. They have already filed 2 ANDAs from

there and have just completed the USFDA inspection for this facility.
-They already have a marketing partnership with Rising Pharma in place and plan to file another 15 ANDAs under this partnership in FY23.

8. Manufacturing Facilities
-Currently, Suven has 4 manufacturing facilities, apart from the one they just acquired from Casper Pharma.
-They have an R&D Center and Kilo Lab in Jeedimetla. They have a facility in Suryapet where they manufacture their intermediates

-They have a formulation facility and API facility in Pashamylaram and another facility in Visakhapatnam where they manufacture APIs and advanced intermediates
9. Capex
-Suven completed 320 crores of capex at the end of FY21. They spent 120 crores for setting up a multi purpose

plant in Vizag which will be used to manufacture intermediates and APIs.
-They also spent 110 crores for setting up the OEL4 facility for high potency compounds and 90 crores for a formulation facility in Pashamylaram.
-Management has indicated that due to Covid, clients were

unable to audit these facilities which is causing a delay in getting new projects.
-Before they finished the 320 crores capex, they had already announced another round of capex for 600 crores which was started in FY22.
-Most of this money will not be spent on capacity addition

but investing in modernizing their facilities.
-Their Suryapet plant is 32 years old with outdated technology. They will be spending 200 crores to replace the facility block by block. This will add a lot of new capabilities which will not increase the capacity by much, but will

allow them to manufacture much more advanced products
-They have been in talks with innovators about what kind of technologies they would need in the future and will be incorporating them into the new facility. They have finalized continuous flow chemistry to be incorporated in

the new blocks.
-They will be spending about 150 crores to move their R&D center in Jeedimetla. There is a government order that any facility located in the outer ring road may have to move out. They don’t know when they might have to move so they are proactively shifting their

R&D center. They also recently had a fire at the R & D center and they lost some of their equipment. So they are taking this opportunity to modernize their lab equipment as well.
-And they will be spending about 200 crores from this for increasing the capacity for intermediates

10. Future Opportunities
-The company has also been investing in new capabilities to take advantage of future opportunities

-They are getting into the manufacturing of high potency APIs and intermediates. These are high value products which are complex to manufacture and have higher margins.
-They have set up an OEL4 facility which is used to manufacture highly toxic compounds. OEL stands for

occupational exposure level.
-The facility has to have a high level of automation and care has to be taken to ensure that the workers are not exposed to the drug compound. All handling of the drug must be done in a dedicated enclosure through glove ports.

-The company is also entering into drug life cycle management. In this business, Suven would offer to manufacture the drugs for innovators after their drug has gone off patent. The drug doesn’t necessarily have to be one that Suven was involved in when it was patented.

-When a drug goes off patent, the innovator reduces the price of the drug and sells it as an authorized generic. Suven will manufacture these drugs for the innovator to be sold under their brand name
-This would be a cost effective solution for the innovators as it would be

cheaper than manufacturing it themselves and innovators become price sensitive when a drug becomes generic
-Apart from this, Suven is also looking to forward integrate in their CDMO business where they are trying to get the business of manufacturing the APIs for the intermediates

they are already manufacturing for innovators
11. Financials