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Disappointing Q2; outlook weakens

Strides Pharma Science (Strides) reported another quarter of disappointing performance in Q2FY22 with US sales declining 17.1% QoQ (-37.0% YoY) to US$34mn. Despite other segments reporting growth, high raw material and operational costs coupled with lower revenue have severely impacted EBITDA and margins. Company has delayed its US sales guidance of US$220-230mn by several quarters highlighting weakness in the business. Revenue declined 9.1% YoY to Rs7.2bn (I-Sec: Rs7.5bn) and reported a negative EBITDA and PAT. The company has completed the acquisition of manufacturing facility of Endo Pharma New York for ~US$24mn along with ~20 commercialised products across nasal sprays, controlled substances, hormones, etc. While we believe performance to improve hereon, expect growth to remain subdued. Maintained HOLD.

* Business review: US revenues dropped 17.1% QoQ and 37.0% YoY to US$34mn due to lower demand with higher price erosion for its acute portfolio, lack of new launches and inventory liquidations. We expect quarterly revenue run-rate to gradually increase with new launches and integration of Endo from H2FY22. Other regulated markets witnessed strong recovery with 26.6% QoQ growth driven by healthy traction across key frontend markets and partnership business. Africa and Institutional business also witnessed recovery with YoY growth of 10.0% and 58.5% respectively led by commercialisation of new products. Higher raw material prices and sharp jump in logistics cost (20% QoQ and 135% YoY) coupled with lower revenue resulted in negative EBITDA. We expect improvement from current levels and gradually normalise to ~16-17% over the next two years.

* Concall Highlights:1) US business guidance of US$220-230mn for FY22 has been delayed by several quarters 2) 60% of the Endo portfolio is chronic and full benefit from Chestnut Ridge plant will start to accrue from Q1FY23 3) Have commercialised the vaccine plant with ramp up expected Q3FY22 onwards 4) Stelis is expected to witness healthy growth from CDMO and biosimilars in the next few years.

* Outlook: We expect FY22 to be muted with revenue and earnings declining YoY due to very weak H1FY22. FY23E would witness material improvement with full benefit of Endo acquisition and recovery in US base business. We expect revenue to grow at a CAGR at 4.3% over FY21-23E with EBITDA and PAT marginally declining.

* Valuations and risks: We lower revenue and EBITDA estimates by 4-8 and 18-38% respectively to factor in delay of recovery in US base business, higher raw material and logistical expenses. We maintain HOLD with a revised target of Rs500/share based on 17xFY23E EPS including Rs117/share for Stelis investment (earlier: Rs720/share). Key upside risks: faster ramp-up in US sales and reversal in price erosion. Key downside risks: Regulatory hurdles, delay in new launches and pricing pressures in the US.

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