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Focus on specialities…
We met the management of Strides Arcolab (SAL) to understand their
business model and growth plans. SAL is a mid-sized pharmaceutical
company with a strong presence in oral branded generics, sterile
products (injectables) and soft gelatine capsules. The company markets
its products in 75 countries. SAL’s business is broadly classified into the
pharmaceuticals and speciality business. The company has entered into
collaboration agreements with leading MNCs such as Pfizer and GSK.
SAL operates through 14 manufacturing facilities, of which 12 are own
manufacturing facilities. Till date, the company has filed 140 ANDAs
with the USFDA and received approvals for 52.
Business model
Pharma business
The pharma business comprises nearly 64% of total sales. It is further
divided into branded generics, generic generics, soft gels and global
disease initiative business.
Branded generics
SAL markets branded generics in Australia, Africa and the domestic
market. It also markets branded generics in West Africa, French Africa and
other parts of Africa. Over 300 products are registered across the African
markets.
In the Australian market, the company operates through its subsidiary
Ascent Pharmahealth (60% owned), a listed company. SAL is in
discussion with Ascent Pharma to acquire the remaining stake. Ascent
Pharma markets generic drugs, OTCs, skincare products and a few
consumer products in the Australian market. These are manufactured at
its facility in Jurong, Singapore. More than 60 generic products are
registered in Australia. Ascent signed an agreement with Pfizer to sell offpatented
products in Australia.
In the domestic market, SAL sells products through two divisions -
Grandix and Ray of Life. The drugs in diabetes, cardiovascular, neurology
and female healthcare are being marketed under the Grandix brand while
the drugs in oncology, nephrology and high-end anti-biologics are being
marketed under the Ray of Life brand.
Global disease initiatives
SAL supplies drugs in the anti-retroviral, tuberculosis & malaria segment
to UNITAID, President's Emergency Plan for AIDS Relief (PEPFAR), Clinton
Foundation etc. This business is mostly tender-based in nature. It has
received approval for 16 ANDAs under the PEPFAR programme.
Soft gels
SAL owns the largest manufacturing capacity for soft gelatines capsules
in India. The company manufactures products across all major therapies.
SAL has also received USFDA approval for first soft gel product in August
2010.
Speciality business
This division comprises injectables in the therapeutic areas of antiinfective,
oncology, analgesic, anti-thrombotic, central nervous system
and gastroenterology. Sales from the speciality business account for
nearly 34% of total sales. For the US markets, it is mainly concentrating
on the development of those products that are in the shortage list or
complex products, to attain critical mass. Of the 140 ANDAs filed, 104
belong to the speciality business. Till date, it has launched only three
products Vancomycin, Rifampicin and Azithromycin in the US markets
and achieved market share of 15%, 52% and 18%, respectively. All the
three products are in the shortage list. The company was unable to
increase the commercialisation of approved products due to capacity
constraints. It is waiting for USFDA approval for its new manufacturing
facility (which is nearly 10x current capacity). The USFDA inspection,
which has already been triggered, is expected to take place in Q1CY11.
SAL recently announced the re-branding of the speciality business under
the brand name of “Agila specialties”.
Pfizer deal
In January 2010, Strides and Pfizer entered into an agreement according
to which Strides will supply 40 off-patented oncology products and Pfizer
will market those in the US markets. Later, in May 2010, it also signed
another agreement with Pfizer for anti cancer products for EU, Australia,
Korea, Japan and Canadian markets. Beside these, it also expanded its
product basket in the US market to 45 by adding five more niche sterile
products (non-oncology). The first product under the deal is expected to
be launched in Q4CY10.
GSK deal
Onco Therapies (OTL), the JV between SAL and Aspen Pharmacare,
entered into a supply agreement with GlaxoSmithKline Pharmaceuticals.
GSK will market JV products in over 95 emerging countries. The first
batch of 10 products is expected to be launched in CY11.
QIP
In September, SAL raised | 455 crore via issue of shares under qualified
institutional placement (QIP). It issued ~1.07 crore shares at | 423.55 per
share. The company intends to use this money for debt repayment.
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We believe SAL has achieved the required capabilities to push into the
high-margin injectables business, especially in regulated markets. The
deals with GSK and Pfizer have vindicated its capabilities. The current
leverage seems high (D/E ratio - 2x) but the company expects to improve
its D/E ratio in the coming periods. The main trigger remains the positive
outcome of USFDA inspection. It also believes that greater focus on the
high margin speciality business will improve overall EBITDA margins. We
are positive on the future growth prospects of the company.
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