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Nearing the Inflexion Point…!
Strides Arcolab (STAR) is setting its base to emerge as a credible injectable player from a generic pharmaceutical
company. The divestment of Ascent Pharma business to Watson further reinforces its focus on high margin
steriles segment. Till date, the company has garnered USD 230mn as upfront licensing income (through front
end partnerships forged with Pharma MNC’s), clearly reflecting the monetizable value of its pipeline. Six of its
sterile facilities are now FDA approved which permits it to accelerate products already approved (25 of 58 final
approvals in CY12E) into the commercialization phase and also leverage on prevailing drug shortages in US.
The divestment proceeds of Ascent Pharma business shall deleverage the balance sheet while also lower capital
investment leaves upside for higher return ratios going forward. We expect 33% adjusted earnings growth over
CY11-13E, leading to an uptick in return ratios.
Investment Rationale
Transformation into a leading specialty (injectables) player
STAR has emerged from being a generic pharmaceutical player (legacy business)
to a specialty player, with increased focus on steriles (injectables). Divestment
of Ascent Pharma is a reflection of its steady progression towards this
transformation. It has reorganized its business structure with emphasis on two
broad verticals — ‘Specialties’ and ‘Pharmaceuticals’. Strides has built a strong
manufacturing platform via both the organic and inorganic route, and has an
enriching pipeline of IP assets, which it leverages through the partnership modus
operandi.
Agila Specialty – At The tipping Point
The company follows a two-pronged growth strategy — supply to JV partner
Sagent and supply to front-end partners - Pfizer Plc and GSK Plc. Manufacturing
capacity constraints limited Stride’s ability to commercialize products (33 launches
of 58 final approvals). Six of its sterile facilities are now FDA approved which
permits it to launch 25 of 62 total approved products in CY12E. We expect more
launches from its Oncology product filings (YTD - 38 filings; only 3 launched)
during CY12E. The company also stands to benefit from the current drug shortage
in the US where global players themselves (like Hospira & Sandoz) are facing
manufacturing bottlenecks. We expect the specialty segment’s revenues to grow
29% over CY11-13E and contribute 62% of sales in CY13E.
Pharmaceuticals – Legacy Continues…
Post divestment of Ascent Pharma, the residual business comprises of domestic
branded generics, anti-malaria/TB tender sales and soft gels. New product
launches and increased penetration in Emerging Markets shall aid growth
momentum, which is mainly volume-driven.
Valuations
We expect 33% adjusted earnings growth over CY11-13E. Increased contribution
from sterile segment, turnaround in front-ended Brazilian operations will lead to
margin expansion. Timely product approvals remain key to growth. At CMP, the
stock trades at 13.1x CY12E and 11.1x CY13E earnings. We recommend
Accumulate on the stock with a target price of ` 636 (12x CY13E earnings).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Nearing the Inflexion Point…!
Strides Arcolab (STAR) is setting its base to emerge as a credible injectable player from a generic pharmaceutical
company. The divestment of Ascent Pharma business to Watson further reinforces its focus on high margin
steriles segment. Till date, the company has garnered USD 230mn as upfront licensing income (through front
end partnerships forged with Pharma MNC’s), clearly reflecting the monetizable value of its pipeline. Six of its
sterile facilities are now FDA approved which permits it to accelerate products already approved (25 of 58 final
approvals in CY12E) into the commercialization phase and also leverage on prevailing drug shortages in US.
The divestment proceeds of Ascent Pharma business shall deleverage the balance sheet while also lower capital
investment leaves upside for higher return ratios going forward. We expect 33% adjusted earnings growth over
CY11-13E, leading to an uptick in return ratios.
Investment Rationale
Transformation into a leading specialty (injectables) player
STAR has emerged from being a generic pharmaceutical player (legacy business)
to a specialty player, with increased focus on steriles (injectables). Divestment
of Ascent Pharma is a reflection of its steady progression towards this
transformation. It has reorganized its business structure with emphasis on two
broad verticals — ‘Specialties’ and ‘Pharmaceuticals’. Strides has built a strong
manufacturing platform via both the organic and inorganic route, and has an
enriching pipeline of IP assets, which it leverages through the partnership modus
operandi.
Agila Specialty – At The tipping Point
The company follows a two-pronged growth strategy — supply to JV partner
Sagent and supply to front-end partners - Pfizer Plc and GSK Plc. Manufacturing
capacity constraints limited Stride’s ability to commercialize products (33 launches
of 58 final approvals). Six of its sterile facilities are now FDA approved which
permits it to launch 25 of 62 total approved products in CY12E. We expect more
launches from its Oncology product filings (YTD - 38 filings; only 3 launched)
during CY12E. The company also stands to benefit from the current drug shortage
in the US where global players themselves (like Hospira & Sandoz) are facing
manufacturing bottlenecks. We expect the specialty segment’s revenues to grow
29% over CY11-13E and contribute 62% of sales in CY13E.
Pharmaceuticals – Legacy Continues…
Post divestment of Ascent Pharma, the residual business comprises of domestic
branded generics, anti-malaria/TB tender sales and soft gels. New product
launches and increased penetration in Emerging Markets shall aid growth
momentum, which is mainly volume-driven.
Valuations
We expect 33% adjusted earnings growth over CY11-13E. Increased contribution
from sterile segment, turnaround in front-ended Brazilian operations will lead to
margin expansion. Timely product approvals remain key to growth. At CMP, the
stock trades at 13.1x CY12E and 11.1x CY13E earnings. We recommend
Accumulate on the stock with a target price of ` 636 (12x CY13E earnings).
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