Laurus Labs CEO Says Richcore Lifesciences’ Acquisition Will Fast-Track Biotech Ambitions
Pharmaceutical ingredients maker Laurus Labs Ltd. has found its “fourth lever of growth” in the biotech space, according to its Chief Executive Satyanarayana Chava, and its most recent acquisition will fast-track this ambition.
“The gestation period to enter the biotech space is a 6-7-year period,” he told BloombergQuint’s Menaka Doshi in an interview. “Our idea is to cut down this gestation period significantly by making an acquisition.”
Laurus Labs, on Nov. 26, closed a Rs 250-crore deal to acquire a majority stake in Richcore Lifesciences, marking its entry into the biotech space and adding to its existing three divisions - active pharmaceutical ingredients, formulations and synthesis. The startup’s promoters and management will continue to run the business while Laurus Labs—having acquired just over 72% stake—will allow the company to scale its manufacturing.
The acquisition marks Laurus Labs’ entry into the broader biologics and biotechnology segments, providing the company access to its high growth areas, globally and in India. Following the successful closure of the transaction, Richcore will be renamed as Laurus Bio Pvt.
Chava expects a significant return from the investment to come from Richcore’s contract manufacturing of recombinant proteins. The startup’s first large-scale facility —with a 2,50,000 litre capacity—will be ready by March 2021.
“That’s where the quantum jump in revenues will come from.” Richcore clocked Rs 30 crore revenue in its first six months of this financial year.
Another such facility is slated to be built by the end of 2021.
Shares of Laurus Labs gained as much as 4.8% in today's trade to Rs 298.8 apiece. The stock is the third best performer on the BSE 500 index on a year-to-date basis, with gains of over 300%.
Watch the full conversation here.
Here are the edited excerpts of the conversation:
Let me just get started by asking you to lay out all you can on this Biotech acquisition. It is a small acquisition in terms of the acquisition price of Rs 250 crore, but it adds a fourth revenue stream to your business and I’m hoping you will tell us about the potential.
If you look at our strategy from the beginning, we used to identify one area, start putting resources into development, create large scale manufacturing, then grow that business and identify new growth levers for us.
First, we did so in API, then we focused on custom synthesis and in 2014-2015, we did focus on formulations. That’s where we set up large scale facility for formulations from the new revenues in 2016-2017. When we have three revenue streams- API’s formulations and custom synthesis, we were looking for what could be our next growth driver. We thought the next growth driver will be biotechnology. If you look at a gestation period for us to do greenfield biotechnology, build team, build capacity and develop products—it is a six to seven-year gestation period. Our idea is to cut down this gestation period significantly by doing an acquisition which is like a start-up.
So, we identified Richcore which had all the qualities what we were looking for, for our foray into biotechnology and we did close the deal yesterday for a majority acquisition. Interestingly, what we acquired, the stake is only from Private Equity Partners, Eight Roads and Ventures. The current founders and the promoters and the senior management will continue to drive business, and we will only help them to grow faster.
Can you talk us through specifically what opportunities in the biotech space this acquisition gives you and what is the potential market size of this? And as you would have planned this acquisition you would have sort of tried to also project what it might add to your revenue streams over the course of the next one to three years.
Currently, Richcore makes animal origin-free ingredients for cell culture. Their unique proposition is what they make animal origin-free. That’s their unique selling point. What they make currently is cell culture ingredients, they make enzymes for health and nutrition and they just started doing proteins’ contract manufacturing from their R&D and large-scale facility. They started building large scale facilities and which we expect to be ready between October and March next year. That’s where the quantum jump in revenues will come from. Not only that, but we will also help them to put up even more big facilities to capture contract manufacturing opportunities in recombinant protein space.
What is the size of the business right now in terms of the revenue at a Richcore and what do you hope you might be able to increase it to in the next year or two or three?
We’re not doing any guidance even for our Laurus labs, so it is not fair on our part to give guidance for Richcore. For the first six months, they’ve done about Rs 30 crore and we expect them to do better than the first six months in the second half.
The major flip will come once their large scale facilities comes on stream, which will be March 2021 and the integration benefits that Laurus Labs has are in the space of biocatalysts and in the space of fermentation of some steroidal intermediaries where we are very strong. So, we will utilise their expertise in enzymes’ design and manufacturing while we help them to build large scale facility to produce ingredients, to produce enzymes for health and nutrition and enzymes for industrial use. Also, the big opportunity where we are focusing as I mentioned, is where we are doing contract development manufacturing of recombinant proteins—that’s where we expect they will generate significant revenue in the medium to long term and where we are willing to help them to put up large capital expenditure.
So, your significant revenue opportunity in a business like this you’re saying comes from being able to invest in additional large capacity and therefore being able to grow the business. That’s where you see the big boost coming, in the let’s say next two to five years, even if you won’t give us any numbers, is that correct?
The major revenue boost will come from the new facility which will come live in March next year and that will be very significant growth for them and the next growth driver will be, that they have to set up one more facility for which they have already acquired land and that will come on stream by the end of the next year. So, they will have to continuously invest to grow their business and we don’t expect to invest any further equity into the company. Whatever cash they generate internally and partly through debt, they can meet their capital obligations.
So how much is their capacity now and how much does it increase by, thanks to these capacity additions, over the course of the next year or two, can you give us some numbers on that?
Currently, they have about 70,000 litres of fermentation capacity whereas they’re building 1,80,000 litres fermentation capacity in the next building and then they have already acquired land to build one more plant. That plant will be double that of the plant which will come live in March 2021.
So, we’re talking about 2,50,000 liters capacity by the end of April, 2021 and then another plant of the same size in the year after that, is that correct?
You don’t own all of this company? The current promoters of Richcore are staying on, right? Also, what’s the management situation and how does it work? They continue to run the business, and this will be a subsidiary of Laurus Labs?
Yes, we are acquiring a little more than 72% of the equity and the rest is held by the current co-founders and promoters. They continue to run the operations and will only help them to grow. So, that is very important here.
So, what do you bring to the business? Because you said there are some small synergies. If I was just to contrast this with the way you’ve built out your formulations business, your formulations business was built on the back of immense synergy between API and formulations, right because the bulk of your formulations business is also in ARV which is an antiretroviral business but in this case this is a completely different market and whilst there’s some synergy in some of the products that you have, it’s not necessarily going to be the same kind of leverage that you can put in, right?
So, you’re absolutely right. Our formulation strategy is based on backward integration into APIs, a similar thing we wanted to do in Richcore which is why this is possible. They make ingredients, they make enzymes and they know how to make recombinant proteins. So, that will become a fully integrated biotech company like what we have done in a fully integrated pharmaceutical company. Richcore has all the ingredients to become a fully integrated biotech company. So, we wanted to get there and we didn’t have capabilities earlier but with this acquisition we believe we will have the capabilities in the form of Richcore to realise our dreams as well.
Forgive me, I’m a layperson, I don’t necessarily understand where the medical synergies lie or the pharmacological synergies lie. There is nothing from this biotech business which of course in itself might have been a growth opportunity that actually lends any synergy to your current API or formulations business or custom synthesis business, have I understood that correctly?
It will not help with anything in our pharmaceutical business as you mentioned but we have synergies in our chemical business, we can make our processes more clean and more green by utilising biocatalysts, where Richcore has tremendous experience. We can also do fermentation off some of steroidal for some of the steroidal backbones using their expertise. So, there are synergies, but these synergies will help Laurus Labs. These synergies will not help Richcore to grow. So we’ll help them to grow in their core business which is going to be recombinant proteins and while they continue to help the parent company by redesigning enzymes for our biocatalysts and also helping us to set up fermentation facilities to do backward integrating those steroids.
So, this is a completely new growth area. It has very little to do, marginal assistance as you pointed out but very little to do with being able to add any leverage to your existing API or formulations or custom synthesis business. Marginal improvements in your existing businesses but it’s a completely new growth area, right?
You’re absolutely right.