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Tuesday, February 27, 2007

ICICIDirect - Suven Life Sciences - Initiating coverage (Price: Rs 153, HOLD)


Suven Life Sciences (SUVPHA)

Current Price: Rs 153 HOLD

Suven Life Sciences, a pioneer in Contract Research and Manufacturing
Services (CRAMS), has successfully leveraged its R&D expertise and
relationships with top MNC pharmaceutical firms by venturing into drug
discovery and development support (DDDSS) and collaborative research partner
(CRP) services. It also has its own drug discovery research program and is
expected to file an application for an investigational new drug (IND) for
its lead molecule in the therapeutic area of central nervous system (CNS) in
Q1FY08. We initiate coverage on the company with HOLD rating.

Steady growth in base businesses: Suven's main businesses are CRAMS, DDDSS
and clinical research. We expect these businesses to grow at a CAGR of 22%
over FY06-08E to Rs 133.89 crore. The CRAMS model will continue to be the
mainstay of the company. The company will leverage its business
relationships with global life science majors. It is also forging new
alliances with other players in the life sciences industry across the globe.

Big break expected from out-licensing of lead molecule: The company's
focused R&D is in the therapeutic area of central nervous system (CNS). It
has developed tremendous in-house R&D competencies and has in-house drug
discovery research pipeline of 30 molecules. It is likely to file an
investigational new drug (IND) application for its lead candidate for
Alzheimer's disease in Q1FY08, which would trigger clinical trials. The
company can be in for windfall gains if the molecule shows encouraging
results in the clinical trials.

Robust clinical research order book: The company is sitting on an order book
position of Rs 14 crore from CRO services. It expects to realize Rs 5 crore
in FY07E, Rs 8 crore in FY08E and rest in FY09E. We expect further traction
in the business going forward as the company leverages its competencies and
infrastructure.

Valuations: We expect that the company would report an EPS of Rs 4.01 in
FY07E and Rs 5.34 in FY08E from its base businesses. However, in FY08E we
expect significant gain in the form of a milestone payment from
out-licensing deal for its lead molecule for Alzheimer's. We believe the
company would be able to strike a deal between US$50-250 million. On the
basis of the few out-licensing deals in the Indian pharma industry, we have
simulated various deal sizes and the pay-offs. On a minimum deal size of
US$50 million, the estimated EPS would flare up by around 54% to Rs 8.23. At
the upper end of the deal size, the EPS would spike by 555% to Rs 35. The
FY08E P/E would be in the range of 4.43x to 18.83x depending on the actual
deal size.

Thanks Manish

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