Strides Pharma Science Ltd. share price target

New Blueprint for growth to bring back momentum Strides Shasun (SS) is a R&D; focussed, vertically integrated pharmaceutical company with an experienced management team and presence across multiple speciality therapeutic segments. Higher emphasis on direct business in US along with focus on B2C model and operating leverage generation to attract growth. Leadership position in Australia post Apotex merger to secure the business from competition due to high entry barriers....

8 August 2018 STRs revenue was stable YoY at INR6.6b (our estimate of INR6.3b). Growth was led by Australia (+18% YoY to INR2.3b) and the US (+13% YoY to INR1.7b) businesses, offset by de-growth in Institutional (-29% YoY) and Africa (-35% YoY) businesses. Gross margin expanded 200bp YoY to 48.7% on account of a better product mix and a favorable currency impact. Other operating expense rose 60bp YoY, restricting EBITDA margin expansion to 140bp YoY (to 12.2%). Though EBITDA was up 13% YoY, STR reported a loss of INR43m (our estimate of a profit of INR157m), largely due to lower other income, higher depreciation and a loss in JV/associates. STR on track to bring 50% of the partnered business in the US to own front-end by FY19. Due diligence in progress for the merger of Arrow and Australia business of Apotex. The transaction is under review by Australia Competition and Consumer Commission (ACCC).

Downgrade to NEUTRAL, with a TP of Rs 420 (15x FY20E + Rs 30 for Biopharma). Unexpected price cuts by competitors in two of the key products (Potassium citrate and gLovaza) sold by Strides Shasun (STR) in the US, led to a sharp drop in US revenues in 4QFY18, which halved from US$ 42mn in 3QFY18. Management admitted that they were caught unaware on unsold stocks with distribution partners, who did not liquidate as prices cracked. With this inventory still in stock, STR is likely to report similar bad US revenues for the next two quarters. This development is totally contrary to our expectation that these two products would scale up to US$ 3-5mn/qtr each in the absence of competition.

Maintain BUY rating with a TP of Rs 980 (16x FY20E + Rs 30/sh for biopharma). After the proposed merger of Apotexs Australia business, with almost 50% market share, STR will become the largest generic player in the region. It will also gain the priority access to 58% of Australian pharmacies. Till now, three large generic players have controlled more than 78% generic market and pharmacy reach had become the major barrier for any new entrant. With this merger, the market is likely to become more opaque.

STR recently received final approval for the generic version of Sustiva (Efavirenz) 600mg tablet, which hasa market size of ~USD115m. The only other company having final approval for this product is Mylan - it had received final approval in February 2016 (with 180-day exclusivity post approval) and the product was launched on 1 February 2018. Final approval and subsequent launch by STR implies that the delay in launch by Mylan has forfeited its exclusivity. 4-5 other companies have also filed for this product. Considering the competitive dynamics (currently only a two-player market for the product), we expect STR to garner USD7-8m from this product on an annualized basis. In our view, this is an interesting opportunity, given the low base of US sales for STR.

Maintain BUY with a TP of Rs 1,090 (18x Dec-19E+ Rs 100/sh for Solara + Rs 30/sh for biopharma). Our visit to Strides Shasuns (STR) Australian operations has re-enforced our confidence that the business is on strong footing in the region and has every ingredient in place to make it a sustainable cash generating business in the long run. From a robust pipeline and deep market access to now developing manufacturing capabilities, STR has put into place all the requisite business drivers. Our note describes dynamics of the Australian pharma market (APM) and STRs position within.

Regulated markets sales (78% of sales) grew 29% YoY/ 16% QoQ on strong growth in US (over 20% YoY) and steady growth in Australia (high single digit). However, Emerging markets sales (22% of sales) declined 39% YoY/ 38% QoQ due to API supply chain disruption, pricing issues in the ARV portfolio

Maintain BUY with a TP of Rs 1,090 (18x Dec-19E+ Rs 100/sh for Solara + Rs 30/sh for biopharma). After hiving off/divesting two businesses, API and India branded, Strides Shasun (STR) reported its 3QFY18 results focusing on the continuing businesses in the US, Australia and Africa (including Institutional business). The top-line grew ~3% YoY to Rs 7.5bn, EBITDA margin came in at 16.4% and reported PAT was Rs 852mn. The spend on consumer healthcare franchise in the US of Rs 120mn, steep decline in the institutional segment due to postponed orders in anti-malaria, top-line remained muted while margins shrunk 300bps YoY.

We reduce our sales estimates by 25%/29%/28% and PAT estimates by 61%/35%/28% for FY18/19/20 to factor (1) demerger of commodity API business, (2) lower than expected operating margin in3QFY18, and (3) delay in procurement with respect to institutional business.There is a risk of increased price erosion in recently-launched molecules;however pipeline remains robust for better growth, subject to approval. We value STR on sum-of-the-parts (SOTP), valuing the p harma business at 18x12M forward earnings (industry average P/E multiple for midcap pharma)and Solara at an EV of 8x (from 12x earlier to factor commodity nature of API business) FY19E EBITDA to arrive at a price target of INR989. Reiterate Buy

Re-iterate BUY with a TP of Rs 1,200 (18x Sep19E + Rs 100/sh for Solara + Rs 30/sh for Biopharma). In another business restructuring, Strides Shasun (STR) has sold its India-branded business to Eris Life Sciences, for a consideration of Rs 5bn. The business contributed only ~5% to the total topline in FY17, and would have required significant investment to scale it up further. This is the second such business rationalisation by STR in FY18, along with the hive-off of the commodity API business. We believe that these divestments would help narrow STRs focus on the high potential business segments, i.e. the US and Australia, where investments are now complete, and strong growth is expected to kick-in over FY18-20E.