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Strides Pharma Science

Strong recovery in US sales

Strides Pharma Science’s (Strides) Q2FY23 performance fell short of our estimates due to underperformance in regulated markets other than the US, which reported strong recovery with a 30% QoQ rise to US$60mn. Revenues grew 24.3% YoY to Rs9.0bn (I-Sec: Rs9.4bn) led by the strong US growth. Institutional business remained soft with closure of contracts (renewals are to begin in FY24). Higher US sales drove operating leverage, supporting the 400bps QoQ EBITDA margin improvement to 9.4%. Company has reiterated its target of achieving US sales exit run-rate of US$250mn in FY23, to be driven by new product launches and incremental sales from the Endo Pharma portfolio. Growth momentum in the US business and reasonable valuations make the stock attractive. Maintain BUY with a revised target price of Rs500/share (earlier: Rs402/share).

Business review: US revenues grew 30.4% QoQ to US$60mn led by new product launches and integration of the Endo Pharma (Endo) portfolio. Strides expects the quarterly revenue run-rate to gradually increase with new launches (guided for ~20 launches for the next three years) aided by the integration of Endo portfolio. In other (ex-US) regulated markets, Strides witnessed 14.5% decline due to its exit from lowmargin businesses. Africa reported decline of 10.9% YoY due to demand volatility. Institutional business fell 7.0% YoY (-49% QoQ) due to closure of contracts (renewals are to begin in FY24). EBITDA margin during the quarter expanded by 400bps QoQ to 9.4% driven by operating leverage with recovering revenues. We expect EBITDA to improve from current levels and gradually normalise to ~15% over the next three years

Concall highlights:

1) US: i) Company is confident of US$250mn exit run-rate in US revenues for FY23; ii) as guided in past calls, the company has exited many commoditized molecules and will focus on niche molecules and iii) target is to launch >20 products per year and >60 products over the next three years.

2) Institutional business will witness tepid revenues in the near term (company completed all its institutional obligations in H1FY23 itself).3) Headcount reduction in the US will yield US$11mn of savings.

Outlook: We expect FY23E to witness material improvement with benefit of Endo portfolio acquisition and new product launches in the US. We introduce FY25E estimates and expect revenue CAGR of 18.7% over FY22-FY25E with EBITDA and PAT turning positive and reaching ~15% and ~7% margins, respectively.

Valuations and risks: We raise our revenue estimates by 4-5% over FY23-FY24E to factor-in higher sales from the US business. Subsequently, our FY24E EPS increases by 5.0%, but FY23E EPS surges ~79% due to a very low PAT base. Maintain BUY with a revised target price of Rs500/share, based on 15x Sep’24E EPS (earlier: Rs402/share based on 15x FY24E EPS). Key downside risks: Slowdown in recovery of US sales, and regulatory hurdles.

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