Laurus Labs reported consolidated revenues of Rs 1,545 crore in Q3FY23 against Rs 1,029 crore in the same period previous year. While the company reported revenue growth of 50% YoY, sequential revenue and net profit growth fell 2% and 13% respectively in Q3FY23. Operating margins at 26.1% too witnessed 160 basis points (bps) fall in Q3FY23, due to change in product mix. Muted sequential revenue and net profit growth, fall in operating margins and consistent decrease in formulations (FDF) revenue for a third straight quarter did not go down well with the street. Laurus Labs stock price lost 5% after December Quarter 2022 result announcement.
High competitive intensity, adverse pricing impact FDF business
Hyderabad based, Laurus Labs is a leading research-driven pharmaceutical and biotechnology company. From 2010, with just one product, efavirenz, (antiretroviral medication for HIV prevention), Laurus Labs has come a long way. From being a major antiretroviral (ARV) active pharmaceutical ingredient (API) manufacturer, the company’s revenue basket is currently diversified into formulations (FDF), synthesis-CDMO and biotechnology.
Formulation business revenues (Rs 249 crore) fell 33% YoY due to soft ARV demand and weak pricing. FDF YoY revenue growth has been weak over the past 6-8 quarters, a major concern area for the investors. The company is facing high competition in ARV formulations business, leading to adverse pricing. As there is not much growth in the number of HIV patients, demand for ARV formulations is low globally. FDF revenues which were 33% of total revenue basket in Q3FY21 has now dropped to 16% in Q3FY23. But the management expects strong recovery in the near future. Laurus Labs has entered into a supply agreement with Global Fund for ARV drugs for 2023-2025 period. The management also said that the developed market growth remains stable with higher FDF generic volumes for Laurus Labs.
API Business Stable, Synthesis CDMO business drives growth
Active Pharmaceutical Ingredient (API) business comprises antiviral, oncology and other APIs (anti-diabetic, CNS etc) segments. API business revenues (Rs 632 crore) were 49% YoY in Q3FY23 despite a fall in oncology revenues (down 13% YoY). Other API and anti-viral segments were up 86% and 33% YoY in Q3FY23. Higher revenues were driven by increased volumes in the API segment despite weak pricing. According to the management, API pricing has reached its bottom and should stabilize in the near future. Five years back, ARV APIs dominated Laurus Labs revenue basket. API business contributed 90% of total revenues and its subsegment, antiretroviral APIs constituted 70% of total revenues in Q3FY17. API business contribution is now down to 41% with a major shift towards synthesis-CDMO business (non-ARV) currently constituting 42% of revenue basket in December Quarter 2022.
Major growth driver, synthesis business revenues (Rs 642 crore) were up 210% YoY aided by lower base (Rs 207 crore) in corresponding Q3FY22 quarter last year. Investors are concerned about the expiration of the Paxlovid contract by the end of FY23. Covid drugs have been a strong driving force for the synthesis segment. Laurus Labs received license to manufacture oral Covid drugs, Paxlovid and Molnupiravir in March 2022. But according to the management, the synthesis business pipeline looks very encouraging and expansion in synthesis CDMO capabilities are on track to capture new business opportunities. Synthesis business has over 60 active projects at different stages (Phase I, II and III + CMO). The company has further enhanced its end-to-end capabilities to handle steroids, hormones, and high potent molecules apart from other large-volume products.
Three manufacturing units dedicated to synthesis-CDMO business are expected to be completed in FY24/25 providing further impetus to revenue growth. The company has incurred capex of Rs 612 crore in 9MFY23. The management guided capex of around Rs 2,000 crore for over two-year time period mainly catering to synthesis-CDMO and non ARV formulation capacities. And lastly, the smallest segment, biotechnology business revenues (Rs 22 crore) fell 12% YoY in Q3FY23. According to the management, demand outlook remains strong for this segment and the company is ramping up capacities and expanding offerings. Speaking on Q3FY23 results, V V Ravi Kumar, Executive Director and CFO at Laurus Labs said, “We believe our capital allocation framework including commitment towards diversification and strengthening non-ARV portfolio, building niche capabilities, and improving operational efficiency will continue to be in force in creating long term value”.
