Strides Shasun is at an exciting phase of its long term growth story
Strides which has a strong history of execution and wealth creation has went through restructuring process in the last couple of years. Company has done value accretive acquisitions (backward Integration) and disposed off low margin businesses. It has now created a well diversified business model with multiple growth levers in place.
Company’s current business structure offers a fairly differentiated play within the Indian Pharma space. It has adopted different strategies based on its expertise as well as evolving competitive dynamics in the various geographies it operates in. In the US, the company has grown organically by focusing on niche and difficult-to-manufacture domains. In Australia, it is the third-largest generics player and is focused on tapping the under-penetrated generics market. In the UK and other European markets, Strides is focused on leveraging its US and Australian product portfolio for cross-selling opportunities. In emerging markets, its focus is on increasing penetration in the branded generics space.
Product approvals to drive growth in US market: Strides is focused on developing a pipeline of limited competition off-patent products in niche and difficult-to-manufacture domains (e.g., soft gels and modified release dosage formats). The company’s target of 20–25 ANDA filings every year is a significant top-line growth driver and is likely to drive scale, as far as US opportunities are concerned. Low base business contribution at the current stage in the US implies incremental product launches driving top-line growth, as opposed to mitigating price erosion—a challenge widespread in the space. This will drive operational leverage, resulting in improved returns profile.
JV with Vivimed to strengthens its US business:
The company announced a JV with Vivimed labs for its US formulation facility and ANDA filings. Vivimed has 4 ANDAs approved and filing capacity of 4-5 ANDA’s annually. Under the JV, Strides will own 50% stake in the integrated formulation plant (capacity of 1.5bn tables) and will exclusively market all ANDAs including the ones currently being done by third parties. Strides will pay Rs 750mn for the 50% stake. The JV in our view augments the US business for the company. Management indicated that it needs additional formulation capacity for its developed markets which this provides. Additionally, it also expands its US portfolio making it more competitive in the US.
Australia – Leading generic player: Australia is a highly consolidated $2bn market with top four generic players including Arrow (Strides) and wholesalers controlling 85% of market. Company currently ranks no.2 in terms of volume and no.3 in value terms and wants to achieve leadership position in 3 years. Spending cuts and new pricing methodology under Pharmaceutical Benefits Scheme (PBS) offers a huge opportunity to tap the under-penetrated generics market in Australia. Increased market reach initiatives such as partnerships with Sigma and Pharmacy Alliance should further help in expanding market share (from 20% to 25%).
Larger footprint in emerging markets to drive growth: While the growing sales force will drive growth in Africa, an enlarged brand portfolio (mainly via acquisitions) in fast-growing segments and a well-integrated field force will extend presence in India. Furthermore, expansion into newer markets such as Russia, the CIS and the South-East Asia could be additional growth drivers.
Backward integration to increase security and competitiveness: The focus on backward integration and shift towards using API capacities for captive consumption translates into increased supply chain control and cost-competitiveness. Furthermore, technology transfer of existing institutional products to the WHO-approved facility of Universal Corporation in Africa is expected to provide better visibility with donor agencies.
Expect huge improvement in operating metrics: We expect revenue and EBITDA to report a CAGR of 20% and 30%, respectively, over FY17-19 owing to good growth in its regulated and emerging markets businesses. Exit from low-margin businesses as well as operating leverage playing out in existing businesses will result in EBITDA improving from 21% in FY17 to 25% in FY19. The stock has price has corrected in the last few weeks and now trading at significant discount to its mid cap peers which have similar growth rate. The current valuations (17x FY17 P/E) offers attractive buy opportunity. Given the better earnings growth, lack of facility issues we believe that valuation gap will narrow in the near future.