With attractive products, new facilities and partnerships in place, the stock of Strides Arcolab, a speciality injectables player, makes for a good investment opportunity for the long term. At the current market price of Rs 660, the stock trades at about 14 times its expected CY12 per share earnings. This seems attractive, considering that Strides is well-placed to benefit from the ongoing capacity shortage in injectables segment in the US.
The easing concerns regarding its balance-sheet also underscore our optimism.
Injectables — driving growth
With several FDA-approved facilities and joint ventures/partnerships in place, Strides is in a sweet spot. This is especially so since most of the existing players in the US hospital market are grappling with regulatory issues in manufacturing.
Strides, with several USFDA approved facilities (six injectables and one oral) is in a strong position to benefit from the ongoing shortage in manufacturing capacities. It recently added to its capacity by acquiring a US compliant sterile drugs manufacturing plant for Rs 125 crore from Star Drugs and Research Labs.
This, in addition to a strong pipeline, which includes many drugs in the shortage list, should help Strides benefit from FDA's accelerated ANDA approvals to address shortages.
Strides has made over 183 ANDA filings so far, of which 144 are under its specialities segment — in this, it has 62 final approvals, of which only 33 have been commercialised due to capacity constraints. But with new approved capacities in place and petitions for site-transfers to new facilities, Strides should be in a position to launch most of these approved products in 2012.
Distribution pacts with Pfizer, Sagent, among others, are also expected to help Strides better exploit the growth opportunity in the injectables space. While the company has already earned a chunk through licensing income (more than $200 million in two years), the commercialisation of the products this year onwards would provide it an additional thrust. It is now focusing on securing long-term contracts with Group Purchasing Organisations in the US to gain market share.
In the last three years, Strides has grown its sales and profits at a compounded growth rate of 24.6 per cent and 27 per cent respectively. Its operating profit margins have expanded from 15.5 per cent in 2009 to 20 per cent now.
Debt to come down
To improve focus on its injectables business, it recently sold its Australasian generic business. Strides sold its subsidiary, Ascent Pharmahealth, to Watson Pharmaceuticals for AU$375 million (about Rs 1,979 crore), valuing it about 2.4 times its 2011 sales of about Rs 830 crore. Aside of impressive deal valuations, the sale is expected to help ease the balance-sheet concerns for the company.
As of September 2011, Strides had a debt of about Rs 1,367 crore (up from Rs 1,280 crore as of end 2010), while its debt-equity ratio stood at about 1.93. This is likely to improve as the company plans to use the proceeds to pay its debt down by $250 million by the end of current calendar year (this includes $120 million FCCB due in June). The debt-equity ratio is expected to come down to about 0.75 by then.