>STRIDES ACROLAB: Acquired a USFDA-approved sterile formulation facility from Star Drugs and Research

Acquires USFDA approved sterile formulation facility for INR1.25b
During the quarter, STR acquired a USFDA-approved sterile formulation facility from Star Drugs and Research. The facility is located at Hosur, near Banglore, and has a capacity to manufacture 97m units of liquid vials. The company paid INR1.25b for the facility, largely from internal cash accruals. The net block of the acquired facility stands at INR680m. Acquisition of this facility provides STR immediate incremental sterile manufacturing capacity; all the existing capacities are fully booked due to drug shortages of sterile injectables, worldwide. This acquisition will help STR accelerate the launch of its approved products in the US market and give additional leverage to secure GPO contracts. The facility is expected to contribute to revenue from 3QCY12, as product site transfers will take about three months.


Specialty business in US to see significant ramp-up led by new capacities, product approvals and low competition
Specialty business in the US is likely to see significant ramp-up on the back of USFDA approval for STR’s new sterile injectable and oncology facilities at Bangalore and Penems facility in Brazil. STR is in the process of shifting manufacturing of all approved injectable products to its new facility, thereby eliminating capacity constraints. It has already shifted few key products to the new facility. STR has 73 product approvals in the sterile segment in the US, of which it has launched 42 products as against just 33 products till the end of 4QCY11 due to capacity constraints. STR plans to launch all approved products in CY12, which will boost revenue from the specialty business, significantly.


The company expects strong product approvals in this market even in CY12. Further, the management also mentioned that 6 of the 8 major players in injectable segment have been facing production issues, which in turn is helping STR to increase its revenue rapidly in the US market. STR is entering into long-term contracts ranging from 2-5 years with GPOs to establish its strong credentials as reliable supplier of injectable products in the US market. It expects to garner 15-25% market share in the products it has launched in the US, backed by Pfizer’s strong marketing and distribution set-up and lower competition. The management also mentioned that for the first time it has started developing products for Para-IV filings in the US market and plans to file 14 Para-IV products in the US in CY12. Further, it plans to file 14 products in the ophthalmic segment in CY12.


Upgrading earnings estimates by 21% for CY12 and by 15% for CY13

• Based on 1QCY12 performance, we are upgrading our revenue estimates by 2% for each of CY12 and CY13.
• However, given the much higher EBITDA margin in 1QCY12 and strong management guidance for CY12, we are upgrading our earnings estimates by 21% for CY12 and by 15% for CY13.

Valuation and view
STR is set to emerge as a specialty products company with revenue contribution from this segment rising from 28% in CY09 to an estimated 75% in CY13. It has an impressive specialty product pipeline. Large manufacturing capacities are in place to support revenue scale-up, coupled with best-in-class marketing partners like Pfizer and GSK. We believe that the sale of Ascent Pharma at attractive valuations will lead to significant improvement in the company’s financials. STR may unlock further value from the sale of the remaining pharma business, as its focus remains on the specialty business. We expect STR to post 24% earnings CAGR over CY11-13, led by revenue ramp-up from the SI (sterile injectables) segment and substantial reduction in interest cost owning to debt repayment. Core EBITDA margin will expand in line with changing product mix and higher capacity utilization. Return ratios are set to improve over CY11-13 and debt-equity will decline from 1.9x in CY10 to 0.7x in CY13. The stock trades at 11.7x CY12E and 11x CY13E EPS. Buy with a revised target price of INR823 (14x CY13E EPS), an upside of 28%.


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