Macquarie Research: Strides Arcolab (STR IN, Rs434, Not rated)

Strides Arcolab
(STR IN, Rs434, Not rated)
Key takeaways
􀂃 Management is focusing on Sterile injectables segment. Management believes that the company
is fundamentally very robust because of the following: end-to-end integrated sterile facilities focus
on R&D resulting in industry-leading formulation expertise, strong track record of filings and
approvals, significant investments in specialties space already made and partnerships with Pfizer
and GSK.
􀂃 STR has two major licensing arrangements with Pfizer (PFE US, US$14.64, Not rated) and
GlaxoSmithkline (GSK LN, £11.45, Neutral, TP: £13.90, Carri Duncan). PFE will commercialize
45 off-patent products (to be licensed/supplied by Strides), primarily injectable oncology
medications, in the US, European Union, Australia, Japan, Korea and Canada. GSK will source
products for emerging markets (95 countries). Contracts with big pharma are structured on a
pick‐or‐pay mechanism, guaranteeing minimum revenues to STR and significant share in end
profits.
􀂃 Management believes that margins will improve from here given low capacity utilization currently
which should increase significantly after the USFDA approval of some of its key facilities. Of the
428m sterile dose unit capacity currently, just 167m is FDA approved. STR expects
commercialization of products for the big pharma deal to begin in 2H CY10, with major ramp-up in
CY11 and CY12.
􀂃 Strides raised US$100m through a qualified institutional placement (QIP) recently at Rs423 per
share, leading to equity dilution of 22 % (10.74m shares). With this the balance sheet is now in a
much better shape. STR believes that the significant capex cycle (Rs8bn from CY06 to CY09) is
now behind it. According to the company, the upcoming remaining payment commitment of
US$125m for buying from Aspen Brazil facility (US$45m) at Campos and its stake in the two Onco
JVs (US$80m) can now be easily met without any major leverage.
Valuation
􀂃 Management is guiding to a top line of ~US$400m (up ~37%) in CY10 and EBITDA margin of
~20%. Given US$380m in debt, the stock is trading at ~8.5x CY10E EV/EBITDA and ~1.8x
CY10E EV/sales, based on company estimates. Recent M&A transactions in the sterile injectable
space have garnered rich valuations (avg EV/sales ~4.5x), given the limited available injectable
capacity globally.