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Working on multiple fronts to enhance business prospects

We recently met with the management of Solara Active Pharma (SOLARA) to understand the business outlook in further detail. Here are the key takeaways:

* Backward integration in Ibuprofen manufacturing and the easing of supply-side pressure have come in handy for SOLARA, given the current situation of subdued demand for the product.

* SOLARA is progressing well on building a niche product pipeline and broadening its presence in the regulated and ROW markets.

* We continue to value SOLARA at 11x EV/EBITDA 12M forward earnings to arrive at Target Price of INR1,520. We remain positive on SOLARA on the back of a) portfolio expansion, with a good mix of limited-competition products, b) increasing reach, and c) further capability building in the CRAMS segment. Also, the recent correction provides adequate comfort on valuations. Reiterate BUY.

Ibuprofen pricing stable; backward integration to somewhat revive margins

* On account of reduced demand, Ibuprofen prices had corrected by 20–25% over the past 5–6M, affecting the operating margins from this product. However, prices at the API level are now stable.

* Additionally, SOLARA is progressing well on ramping up the production of Isobutyl Benzene, a key RM used in the manufacturing of Ibuprofen. This would offset the drop in profitability, to some extent, over the near-tomedium term. Only two companies globally are backward integrated on Ibuprofen; this puts SOLARA in a robust position to gain further traction, considering a) the consistency of supply as well as b) reduced vulnerability on account of KSM availability.

* Interestingly, regulatory constraints on the transportation of Propylene/ Toluene, a key RM used in manufacturing IBB, reduces the scope of availability, particularly from China. Also, BASF is reconsidering expanding the Germany Ibuprofen capacity, which provides some relief from supply-side pressure.

* While new capacities/suppliers have emerged for Ibuprofen in the recent past, a) reduced demand, b) slower ramp-up, and c) peers such as SOLARA (with backward integration) question the economic viability of the Ibuprofen business for new players.

Healthy WIP for new introductions comprising niche products

* SOLARA has enhanced efforts to expand its portfolio by adding products with complex development and/or manufacturing processes. As seen in the company’s DMF filings, certain products such as Tolvaptan and Marbofloxacin have a very limited number of filings.

* SOLARA has been ahead of peers in creating opportunities for and entering into tie-ups with license holders. Tie-ups with license holders are key in the Molnupiravir API business as the regulatory application requires details of the API supplier. Furthermore, it is a time-consuming exercise to replace an existing tie-up for a regulatory application.

* Particularly in COVID times, the urgency of products remains very high; this places SOLARA favorably for this business prospect. Among the existing products, the incremental business of Sevelamer (on account of customer additions) is offset, to some extent, by reduced demand for Oseltamivir Phosphate.

Funneling more products in Europe/China/Brazil; building US pipeline using Vizag site

* In addition to the base business in Europe, SOLARA has enhanced its cumulative filings to 42 (SOLARA and Aurore combined) till date. It has ~14 filings in China (SOLARA and Aurore combined). For the US market, the validation batches from the Vizag site would commence from Dec’21, and subsequent filings would begin from Mar’22.

* It has filed some products for the Brazil market as well. While it is time consuming to acquire approval from ANVISA, there is a window to reduce the timeline by paying fees for inspection.

Science-based differentiation – key to strengthening CRAMS prospects

* CRAMS – SOLARA has been building considerable chemistry skill sets by adding technological capabilities and positioning itself to solve tough chemistry challenges.

* With the Aurore-SOLARA combination, the customer profile has also diversified considerably. From only manufacturing generic products for the innovator, it has now added intermediates for products that are under clinical development – these could get commercialized post regulatory approval. Around 20–25% of the CRAMS business is driven by the Contract Research segment.

Considerable cost optimization measures underway

* SOLARA is also working on optimizing the cost base via measures to shift the manufacturing of some of its products to the multi-purpose, relatively low-cost Vizag facility. Consolidating SOLARA/Aurore’s R&D, savings on supply chain / procurement, and other overhead costs of synergizing operations (integrating SOLARA and Aurore) would cumulatively drive better operating leverage and, thus, profitability.

Valuation and view

* We expect a 30% revenue CAGR over FY21–23E, driven by a 24%/109% revenue CAGR for API/CRAMS. Growth would largely be driven by a) the merger of the Aurore business with SOLARA, b) new launches by SOLARA, and c) better traction in the CRAMS segment. With operating leverage and synergy benefits, we expect a 33% EBITDA CAGR over FY21–23E.

* We continue to value SOLARA at 11x EV/EBITDA 12M forward earnings to arrive at TP of INR1,520. We reiterate our Buy rating as SOLARA expands its portfolio with a good mix of limited-competition products, increasing reach and enhancing its capabilities in the CRAMS segment. Also, the recent correction provides adequate comfort on valuations.

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