Strides Arcolab- FDA approval for injectable facility :: Macquarie Research,

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Strides Arcolab
FDA approval for injectable facility
Event
 STR received a USFDA approval of its new Sterile injectable (Non-Onco)
facility in Bangalore. Earlier STR had announced approval of two products
from this facility and this current approval is for the entire facility (ex-Onco
Block). This approval expands the overall injectable capacity for the US
market by additional 140m units. (Current Sterile capacity was 64m Units.)

Impact
 Facility approval to boost capacity utilization: The USFDA approval of the
new facilities should help capacity utilization go up significantly (from currently
~30%) thereby rationalizing fixed costs. STR has received approvals from the
USFDA for 35 sterile products (non-Onco), of which just 10 have been
commercialized (25 approvals yet to launch) due to capacity constraints. With
STR getting the maximum approvals for injectable ANDAs over the last three
years in the US (v/s any peer), there is some comfort that the focus on sterile
filings will now start paying rich dividends. Starting in 2H CY11, we
anticipate full commercialization of 35 FDA approved products (the LMV
(Local Market Value) of these products is ~US$1.4b) that till recently were
facing capacity constraints.
 Oncology block approval to be critical: The Oncology block in Bangalore,
with 25m unit capacity, has yet to be approved. Approval of this facility
is another major milestone going forward (as in the deal with Pfizer, the
majority of the products are for oncology indication). The 40 oncology drugs
out-licensed to Pfizer for the US market have an LMV of ~US$9b.
 Additional comfort to our CY11 estimates: Timely approval of this facility
provides comfort to our speciality business forecasts going forward for STR.
Our model assumes full approval of the facility (Oncology Block + ex-Onco
Sterile Block) by mid-2011. Earlier STR had received approval for
Vancomycin Injection and a Liquid sterile injection product from its new facility
in Bangalore. These approvals give us additional comfort that the USFDA
inspection went well and FDA approval of the Oncology block is also a
possibility soon.
Earnings and target price revision
 No Change.
Price catalyst
 12-month price target: Rs485.00 based on an EV/EBITDA methodology.
 Catalyst: USFDA approval of the Sterile Oncology block
Action and recommendation
 Valuations are attractive, in our view, with STR trading at a PER of 12.5x
CY11E earnings and at an EV/EBITDA of 7.6x CY11E, significant discounts to
its peers. We re-iterate our Outperform rating with a target price of Rs485.