The PCER approval vindicates the company’s stand and would reduce investor concerns. G-Lovaza is another likely opportunity over the medium term for STR.
The approval for Potassium Citrate Extended Release (PCER) has triggered long-awaited approvals for niche molecules for STR, in our view. Though investors like STR for its niche ANDA pipeline, strong regulatory compliance, and credible management, they have been concerned over delay in approvals. In its Q1FY18 results concall, the company had pointed out that the delays were only procedural and that it had no regulatory issues pending. Yet, there was skepticism among investors, as STR was not getting approvals despite compliant manufacturing facilities. The PCER approval vindicates the company’s stand and would reduce investor concerns. G-Lovaza is another likely opportunity over the medium term for STR. We recently initiated coverage on STR with a Buy rating. We remain positive, given STR’s healthy ANDA pipeline for the US market, significant value accretion potential in API business, and strong growth trajectory in Australia business.
STR received final approval for Potassium Citrate Extended Release tablets (5mEq, 10mEq, and 15mEq). The market size for this product is ~$ 110 m. Only two firms have final approval for this product and only one sells this product in the US market. Since there are only two DMF filers for this product, competition would be limited for a considerable period. Based on 30% price discount and 55% market share, we expect STR to garner annual sales of $ 30m from this product. This molecule reflects STR’s strategy of developing complex products with limited competition. Its recent approvals are such that they provide considerable upside in terms of US revenue, though market size is in the range of $ 60m-200m. This is due to limited competition for those products; STR is well placed to seize the opportunity.
The other limited-competition product for STR over the medium term is g-Lovaza. The market size of this product is about $ 300m. Based on competition and price discounts, we expect STR to have annual sales of $ 30m from this product post final approval. We expect 43% CAGR in US sales over FY17-20 to $ 278m. We expect 20% CAGR in sales, 25% CAGR in EBITDA, and 44% CAGR in PAT over FY17-20. We value STR on sum-of-the-parts, valuing the pharma business at 18x FY19E earnings and Solara at an EV of 13x FY19E EBITDA to arrive at price target of Rs 1,300. Reiterate ‘buy’.