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Specialty makes it special
Focus on specialty segment to drive 25% revenue CAGR
We met Mr Arun Kumar, Executive Vice Chariman and CEO of Strides Arcolab
(STR), who shared his views on the company's long term strategy, growth
prospects, and challenges among other things.
Specialty business to be the key long term growth driver
STR's business focus is on the specialty segment as its key long-term value
creator and growth driver. STR has developed one of the most competitive sterile
product franchises globally with eight manufacturing facilities.
The company is looking to divest the pharma business, (non-sterile business) if
it gets the right price. The pharma business comprises institutional business
related to antimalaria, anti-TB remedies and branded generic business in India,
Australasia and Africa, contributing ~INR12b to STR's annual revenue.
Partnership with MNCs leverages strong product pipeline
We feels that STR's partnership with Pfizer in various regulated markets and
with GSK for 95 emerging markets has enabled Strides to leverage strong and
best in class distribution of these MNCs across the globe.
Partnership with Pfizer, particularly the US, gives it a strong competitive advantage. STR expects to corner 15-25%
market share in the US, backed by Pfizer's strong marketing and distribution, and low competition.
STR slated to post revenue CAGR of 25% over the medium term
STR's has raised its CY11 revenue guidance to INR25b from INR22b and is slated to grow overall revenue by 25%
CAGR in the medium term. The product portfolio of the company targets USD11b market opportunity.
Further, given the strong product pipeline which includes High Potency drugs, Penems, Cephalosporins, Ophthalmic
and Peptides, the company is likely maintain robust licensing income of INR2.5b every year over the next few years.
Profitability to increase as capacity utilization ramps up
Specialty business to be the key long term growth driver
STR's business focus is on the specialty segment as its key long-term value creator and
growth driver. STR has developed one of the most competitive sterile product franchises
globally with eight manufacturing facilities. Although the company had tried to do various
things in the past, its sole focus in future would be on the specialty sector as STR had
developed strong capabilities in it.
The company is looking to divest its pharma business (Non sterile business) if it fetches
the right price. The pharma business comprises the institutional business, related to
anti-malaria, anti-TB and branded generic business in India, Australasia and Africa and
contributes ~INR12b in annual revenue. However, it is less profitable than the specialty
business.
Partnership with MNCs leverages strong product pipeline; STR to ramp
up US business, to have its own US marketing, distribution by 2014
We feels that STR's partnership with Pfizer in various regulated markets and with GSK
for 95 emerging markets has enabled Strides to leverage strong and best in class
distribution of these MNCs across the globe.
Partnership with Pfizer, particularly the US, gives it a strong competitive advantage.
STR expects to corner 15-25% market share in the US, backed by Pfizer's strong marketing
and distribution, and low competition.
Pfizer is a well established player in the oncology segment and has a strong relationship
with GPOs, which makes it easier for Pfizer to leverage STR's product pipeline.
The management indicated its US specialty business would ramp up due to US FDA
approval of STR's new facilities. STR is shifting manufacturing of approved injectable
products to the new facility, which would eliminate capacity constraints.
Strides currently has 48 product approvals in sterile segment in US, of which, it has
launched 25 products versus only 16 products launched till end of2QCY11 due to capacity
constraint. Strides plan to launch all approved products in the 4QCY11 which will boost
revenues from the specialty business significantly in the CY12.
STR expects to corner 15-25% market share in the products it has launched in the US
over time, backed by Pfizer's strong marketing and distribution set up and low competition.
The management indicated it would have its own marketing and distribution set-up in
the US by 2014 to market non-oncology injectable products.
STR slated to post revenue CAGR of 25% over the medium term;
Licensing income sustainable in the medium term
STR's has raised its CY11 revenue guidance to INR25b from INR22b earlier and is
slated to grow overall revenue by 25% CAGR from CY12 onwards, in the medium term.
The product portfolio of the company targets USD11b market opportunity.
Growth will be led mainly by the specialty segment, backed by a strong product pipeline,
best-in-class partnerships and US FDA-approved manufacturing capacities. STR expects
the specialty business to post 40% CAGR and the pharma business to post 10-15%
CAGR in the medium term
Further, given the strong product pipeline which includes High Potency drugs, Penems,
Cephalosporins, Biologics, Ophthalmic and Peptides, the company is likely maintain robust
licensing income of INR2.5b every year over the next few years.
Profitability to increase as capacity utilization ramps up
The management guidance is for significant improvement in profitability, led by a scaleup
in manufacturing from all US FDA-approved facilities.
STR's significant in manufacturing facilities for specialty business is completed. However,
STR is incurring fixed overheads related to new plants without commensurate revenue
from the facilities in the absence of products awaiting regulatory approval. STR recently
received USFDA approval of its new sterile injectable facility and oncology facility in
Bangalore
STR expects EBITDA margins, RoCE and RoE to improve substantially over the medium
term and believes profitability was depressed in the past due to large investments in
building the specialty business.
Regulatory compliance, better execution remain key challenges
The management believes regulatory compliance has emerged as a key challenge for
many pharma companies including STR. However, STR has never received a warning
letter from the US FDA and a recent US FDA inspection of one of its oral facilities did not
engender a Form 483 (Notice of Inspectional Observations) from the regulator.
With products, manufacturing facilities and good partnerships in place, best-in-class
execution is a key challenge for STR in the near future. However, the management is
confident of ramping up its specialty business over 2-3 years.
STR to benefit from executive order passed by US President to alleviate
drug shortages
US President, Mr. Barack Obama, has passed executive order to address the issue of
drug shortages in US. Most of these drugs belong to sterile injectable segment including
oncology drugs.
In recent years, shortages of pharmaceutical drugs have posed a serious and growing
threat to public health in US. The affected medicines include cancer treatments, anesthesia
drugs, and other drugs that are critical to the treatment and prevention of serious
diseases and life threatening conditions.
The executive order includes following provisions to address the issue:-
1) USFDA to take steps to prevent and reduce current and future supply disruptions,
2) Requires drug manufacturers to provide adequate advance notice of manufacturing
discontinuances that could lead to shortages of drugs,
3) USFDA to take steps to expand its current efforts to expedite its regulatory reviews,
including reviews of new drug suppliers, manufacturing sites, and manufacturing
changes to avoid or mitigate existing or potential drug shortages
4) USFDA to inform Department of Justice of any findings that shortages have led
market participants to stockpile the affected drugs or sell them at exorbitant prices.
We believe that the executive order will benefit the existing manufacturer with adequate
capacity to manufacture these drugs. The Indian generic drug makers like Strides
Arcolabs, Aurobindo, Orchid Chemicals etc. will benefit from the expedition in the product
approvals for the drugs which are in shortage.
Strides has 13 products filings in US which qualify under the drugs shortage list published
by US FDA. These drugs address the total market size of USD200m. We believe that,
with this order, the company will get the approvals for these 13 products earlier than
the average time of 24-30 months taken by USFDA to approve a new product for US.
Further, Strides has decided to immediately apply for USFDA approval for its sterile
injectable plant at Poland so that it can supply these drugs from the Poland facility.
However, we feel that this order can also increase the competition for Strides in the US
market as currently few of its major competitors have been facing USFDA issues at
their facilities which in turn helping Strides increasing its revenue rapidly in the US. We
believe that, in all probability, USFDA will expedite the process of clearing these
manufacturing plants hence increasing the supply and competition in the market place.
We think that Strides Arcolab is likely to benefit in the short term as there have been
few players globally in generic injectable space. Also the manufacturing facilities to
manufacture injectables are limited as it takes longer to set up regulatory-approved
manufacturing facilities for injectables.
Valuation and view
STR is set to emerge as a specialty company with revenue contribution from this segment
rising from 28% in CY09 to an expected 51% in CY12. STR has an impressive specialty
product pipeline.
Large manufacturing capacities are in place to support a revenue scale-up and best-inclass
marketing partners like Pfizer and GSK will lead to sustainable revenue growth.
We expect STR to post earnings CAGR of 36% over CY10-12, led by a revenue ramp-up
from the SI (sterile injectables) segment. Core EBITDA margin will expand in line with
a changing product mix and higher capacity utilization. Return ratios are set to improve
over CY10-12 and gearing will decline from 2x in CY10 to 1.8x in CY12.
At CMP of INR406, the stock trades at 10.8x CY11E and 10.4x CY12E earnings. Maintain
Buy with a target price of INR509 (13x CY12E EPS), an upside of 25%.
The management guidance is for significant improvement in profitability, led by a scale-up in manufacturing.
STR expects EBITDA margins, RoCE and RoE to improve substantially over the medium term and believes profitability
was depressed in the past due to large investments in building the specialty business.
Valuation and view
STR is set to emerge as a specialty company with revenue contribution from the segment rising from 28% in CY09
to 51% in CY12. STR has an impressive product pipeline in the specialty segment.
We expect STR to post earnings CAGR of 36% over CY10-12. At CMP of INR406, the stock trades at 10.8x CY11E and
10.4x CY12E earnings. Maintain Buy with a target price of INR509 (13x CY12E EPS), an upside of 25%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Specialty makes it special
Focus on specialty segment to drive 25% revenue CAGR
We met Mr Arun Kumar, Executive Vice Chariman and CEO of Strides Arcolab
(STR), who shared his views on the company's long term strategy, growth
prospects, and challenges among other things.
Specialty business to be the key long term growth driver
STR's business focus is on the specialty segment as its key long-term value
creator and growth driver. STR has developed one of the most competitive sterile
product franchises globally with eight manufacturing facilities.
The company is looking to divest the pharma business, (non-sterile business) if
it gets the right price. The pharma business comprises institutional business
related to antimalaria, anti-TB remedies and branded generic business in India,
Australasia and Africa, contributing ~INR12b to STR's annual revenue.
Partnership with MNCs leverages strong product pipeline
We feels that STR's partnership with Pfizer in various regulated markets and
with GSK for 95 emerging markets has enabled Strides to leverage strong and
best in class distribution of these MNCs across the globe.
Partnership with Pfizer, particularly the US, gives it a strong competitive advantage. STR expects to corner 15-25%
market share in the US, backed by Pfizer's strong marketing and distribution, and low competition.
STR slated to post revenue CAGR of 25% over the medium term
STR's has raised its CY11 revenue guidance to INR25b from INR22b and is slated to grow overall revenue by 25%
CAGR in the medium term. The product portfolio of the company targets USD11b market opportunity.
Further, given the strong product pipeline which includes High Potency drugs, Penems, Cephalosporins, Ophthalmic
and Peptides, the company is likely maintain robust licensing income of INR2.5b every year over the next few years.
Profitability to increase as capacity utilization ramps up
Specialty business to be the key long term growth driver
STR's business focus is on the specialty segment as its key long-term value creator and
growth driver. STR has developed one of the most competitive sterile product franchises
globally with eight manufacturing facilities. Although the company had tried to do various
things in the past, its sole focus in future would be on the specialty sector as STR had
developed strong capabilities in it.
The company is looking to divest its pharma business (Non sterile business) if it fetches
the right price. The pharma business comprises the institutional business, related to
anti-malaria, anti-TB and branded generic business in India, Australasia and Africa and
contributes ~INR12b in annual revenue. However, it is less profitable than the specialty
business.
Partnership with MNCs leverages strong product pipeline; STR to ramp
up US business, to have its own US marketing, distribution by 2014
We feels that STR's partnership with Pfizer in various regulated markets and with GSK
for 95 emerging markets has enabled Strides to leverage strong and best in class
distribution of these MNCs across the globe.
Partnership with Pfizer, particularly the US, gives it a strong competitive advantage.
STR expects to corner 15-25% market share in the US, backed by Pfizer's strong marketing
and distribution, and low competition.
Pfizer is a well established player in the oncology segment and has a strong relationship
with GPOs, which makes it easier for Pfizer to leverage STR's product pipeline.
The management indicated its US specialty business would ramp up due to US FDA
approval of STR's new facilities. STR is shifting manufacturing of approved injectable
products to the new facility, which would eliminate capacity constraints.
Strides currently has 48 product approvals in sterile segment in US, of which, it has
launched 25 products versus only 16 products launched till end of2QCY11 due to capacity
constraint. Strides plan to launch all approved products in the 4QCY11 which will boost
revenues from the specialty business significantly in the CY12.
STR expects to corner 15-25% market share in the products it has launched in the US
over time, backed by Pfizer's strong marketing and distribution set up and low competition.
The management indicated it would have its own marketing and distribution set-up in
the US by 2014 to market non-oncology injectable products.
STR slated to post revenue CAGR of 25% over the medium term;
Licensing income sustainable in the medium term
STR's has raised its CY11 revenue guidance to INR25b from INR22b earlier and is
slated to grow overall revenue by 25% CAGR from CY12 onwards, in the medium term.
The product portfolio of the company targets USD11b market opportunity.
Growth will be led mainly by the specialty segment, backed by a strong product pipeline,
best-in-class partnerships and US FDA-approved manufacturing capacities. STR expects
the specialty business to post 40% CAGR and the pharma business to post 10-15%
CAGR in the medium term
Further, given the strong product pipeline which includes High Potency drugs, Penems,
Cephalosporins, Biologics, Ophthalmic and Peptides, the company is likely maintain robust
licensing income of INR2.5b every year over the next few years.
Profitability to increase as capacity utilization ramps up
The management guidance is for significant improvement in profitability, led by a scaleup
in manufacturing from all US FDA-approved facilities.
STR's significant in manufacturing facilities for specialty business is completed. However,
STR is incurring fixed overheads related to new plants without commensurate revenue
from the facilities in the absence of products awaiting regulatory approval. STR recently
received USFDA approval of its new sterile injectable facility and oncology facility in
Bangalore
STR expects EBITDA margins, RoCE and RoE to improve substantially over the medium
term and believes profitability was depressed in the past due to large investments in
building the specialty business.
Regulatory compliance, better execution remain key challenges
The management believes regulatory compliance has emerged as a key challenge for
many pharma companies including STR. However, STR has never received a warning
letter from the US FDA and a recent US FDA inspection of one of its oral facilities did not
engender a Form 483 (Notice of Inspectional Observations) from the regulator.
With products, manufacturing facilities and good partnerships in place, best-in-class
execution is a key challenge for STR in the near future. However, the management is
confident of ramping up its specialty business over 2-3 years.
STR to benefit from executive order passed by US President to alleviate
drug shortages
US President, Mr. Barack Obama, has passed executive order to address the issue of
drug shortages in US. Most of these drugs belong to sterile injectable segment including
oncology drugs.
In recent years, shortages of pharmaceutical drugs have posed a serious and growing
threat to public health in US. The affected medicines include cancer treatments, anesthesia
drugs, and other drugs that are critical to the treatment and prevention of serious
diseases and life threatening conditions.
The executive order includes following provisions to address the issue:-
1) USFDA to take steps to prevent and reduce current and future supply disruptions,
2) Requires drug manufacturers to provide adequate advance notice of manufacturing
discontinuances that could lead to shortages of drugs,
3) USFDA to take steps to expand its current efforts to expedite its regulatory reviews,
including reviews of new drug suppliers, manufacturing sites, and manufacturing
changes to avoid or mitigate existing or potential drug shortages
4) USFDA to inform Department of Justice of any findings that shortages have led
market participants to stockpile the affected drugs or sell them at exorbitant prices.
We believe that the executive order will benefit the existing manufacturer with adequate
capacity to manufacture these drugs. The Indian generic drug makers like Strides
Arcolabs, Aurobindo, Orchid Chemicals etc. will benefit from the expedition in the product
approvals for the drugs which are in shortage.
Strides has 13 products filings in US which qualify under the drugs shortage list published
by US FDA. These drugs address the total market size of USD200m. We believe that,
with this order, the company will get the approvals for these 13 products earlier than
the average time of 24-30 months taken by USFDA to approve a new product for US.
Further, Strides has decided to immediately apply for USFDA approval for its sterile
injectable plant at Poland so that it can supply these drugs from the Poland facility.
However, we feel that this order can also increase the competition for Strides in the US
market as currently few of its major competitors have been facing USFDA issues at
their facilities which in turn helping Strides increasing its revenue rapidly in the US. We
believe that, in all probability, USFDA will expedite the process of clearing these
manufacturing plants hence increasing the supply and competition in the market place.
We think that Strides Arcolab is likely to benefit in the short term as there have been
few players globally in generic injectable space. Also the manufacturing facilities to
manufacture injectables are limited as it takes longer to set up regulatory-approved
manufacturing facilities for injectables.
Valuation and view
STR is set to emerge as a specialty company with revenue contribution from this segment
rising from 28% in CY09 to an expected 51% in CY12. STR has an impressive specialty
product pipeline.
Large manufacturing capacities are in place to support a revenue scale-up and best-inclass
marketing partners like Pfizer and GSK will lead to sustainable revenue growth.
We expect STR to post earnings CAGR of 36% over CY10-12, led by a revenue ramp-up
from the SI (sterile injectables) segment. Core EBITDA margin will expand in line with
a changing product mix and higher capacity utilization. Return ratios are set to improve
over CY10-12 and gearing will decline from 2x in CY10 to 1.8x in CY12.
At CMP of INR406, the stock trades at 10.8x CY11E and 10.4x CY12E earnings. Maintain
Buy with a target price of INR509 (13x CY12E EPS), an upside of 25%.
The management guidance is for significant improvement in profitability, led by a scale-up in manufacturing.
STR expects EBITDA margins, RoCE and RoE to improve substantially over the medium term and believes profitability
was depressed in the past due to large investments in building the specialty business.
Valuation and view
STR is set to emerge as a specialty company with revenue contribution from the segment rising from 28% in CY09
to 51% in CY12. STR has an impressive product pipeline in the specialty segment.
We expect STR to post earnings CAGR of 36% over CY10-12. At CMP of INR406, the stock trades at 10.8x CY11E and
10.4x CY12E earnings. Maintain Buy with a target price of INR509 (13x CY12E EPS), an upside of 25%.
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