Strides Pharma Science

Sure, this is and was a known known. The glass half full version is that the cash burn for Stelis should end in a few quarters once the facilities ramp up and start delivering the existing order. And where it goes from there depends on how efficient and error / contamination free they can be in their manufacturing process. The demand for Bio-CDMO services is large enough for competition to not be a major constraint, at least in the near term.

Stelis will raise the cash that it needs from promotor warrants and other investors, so there won’t be any more burden on Strides.

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Wrote a brief twitter thread on the impending turnaround in Strides yesterday

https://twitter.com/vineetjain1101/status/1604437465078824960?t=V_hqPV24N9u9_r8bPmhYQQ&s=19

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Over 500cr received from Arrotex. Will be used for deleveraging. Explains the strength in the stock in this weak market.

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Note : Capacities don’t guarantee projects in CDMO , like Stelis Gland is burning 19 crores a quarter on Bio infra. Like Strides they also victims of Sputnik RDF project.

18/1/23

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@Rafi_Syed and @Vineetjain111 - How do you see the announcement - Is it significant (on positive/negative side) or it is just a formality of already widely known fact.

“IV. Fund Requirements at Stelis
Stelis is poised to build a robust business with high margins & promising returns, delivering significant
value for the shareholders of Strides. With the pick-up in revenues and operating profits (expected to
break even in FY24), Stelis would have generated sufficient cash from operations to meet its business
and financing requirements (free cashflow generation from FY25). However, given the unprecedented
challenges in vaccine sales due to the geo-political situation and accelerated repayments of its existing
loans, Stelis is seeking to refinance its current debt of up to Rs. 7,000 million from Banks/ Financial
Institutions/ Non-Banking Financial Companies to meet its near-term obligations.
Stelis’ total debt stood at ~Rs. 11,700 million and Rs. 9,098 million, respectively, as at the end of March
31, 2022, and December 31, 2022. Post the refinancing arrangement, Stelis’ Debt Book is expected to
be at ~ Rs. 9,098 million. Strides has provided Security and/ or Corporate Guarantee for Stelis’ existing
borrowings to the extent of ~Rs. 11,800 million as at December 31, 2022. Some of the Stelis’
borrowings are also backed by Promoters’ personal guarantees.
Further, Promoters and other Investors of Stelis are committed to investing up to Rs. 6,451 million in
Stelis to meet its debt obligations. Stelis has already received Rs. 4,738 million of capital until
December 2022.
Page 8 of 22
With the refinancing proposal, while in the interim there will be hike in the security/ corporate guarantee
provided by Strides, the same is expected to get stabilized by the end of the refinancing arrangement at
~Rs. 11,000 million.
As a leading shareholder of Stelis, and a security provider/ corporate guarantor for its existing facilities,
the Company would be required to support the proposed refinancing arrangement by providing Security
and/ or Corporate Guarantee, in addition to the security Stelis and its Promoters would provide for
availing the facilities.
Since Stelis is meeting its financial obligations, and the Board believes that it will continue to do so,
the total value of the securities/ guarantees post the refinancing arrangement which can be enforced
against the Company for the borrowings of Stelis would be at ~Rs. 11,000 million.”

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@manoopatil I don’t think it is significant. The corporate guarantees have been there and will be there as long as Stelis doesn’t start paying back.

Strides reported strong Q4FY23 results and lay the foundation for a promising FY24
image

PAT impacted by one-time impairment at Stelis mainly related to Sputnik

The US market, led by new product introductions and solid base performance, generated its highest-ever revenue of $232 million with significant margin expansion.

With the receipt of Arrotex proceeds and cash from operations, the total gross debt has reduced in FY23, and Net debt to Q4FY23 Annualized EBITDA was at 3.4x, nearing the targeted net debt to EBITDA of under 3x. From 8.3x net debt to EBITDA in Q1FY23, Net Debt to Q4FY23 Annualized EBITDA is 3.4x, closer to the targeted ratio of 3x. This was mainly due to the increase in EBITDA.

Received Establishment Inspection Reports (EIR) from the USFDA confirming the successful conclusion of inspections at four of their five USFDA-approved manufacturing sites (Bengaluru, Puducherry, Singapore, and Chestnut Ridge (US). Additionally, the USFDA has reclassified the compliance status at Puducherry after lifting the Warning Letter issued to the site in June 2019. Consequent to this reclassification by the USFDA, the filed ANDAs from this facility will now start receiving approvals.
“We are confident in continuing FY23’s growth momentum and are on track to continuously improve the quality of our earnings while strengthening our balance sheet in FY24.”

FY23 Revenues in the US hit a record $232 million, surpassing pre-Covid-19 performance levels
19 of 60 commercialized products have been positioned as #1 in the market

Strides and Stelis combined target debt reduction of INR 5,000m in FY24

image

USFDA issued Establishment Inspection Report (EIR) to the Stelis Flagship facility for GMP and drug-device combination products. EU-GMP also approved the facility during the year. The facility also cleared several customer inspections, including from large global companies.

Considering that the first partner product for Stelis received USFDA approval, the company will begin generating revenue from commercial supplies (CSAs) in the second half of FY24.

Stelis is in losses and eating the cash flow from strides, as and when this loss situation turns around to profits or even a breakeven. It will lead to better cash flows, thus faster debt repayment and lesser interest payments. This will elevate the net profits and lighten the balance sheet. Another thing is Stelis is a higher margin than Strides, but is lumpy in revenue generation.

confident of increasing their EBITDA from INR446 crores to about INR750 crores in the upper range and INR700 crores at the bottom of the range.
Planning on reducing the higher cost loans with lower cost loans

The first commercial sales for stelis will start in June as the partners have now received 2 product approvals from this site for the inspection.

Strides and Orbicular enter into a strategic partnership to jointly develop, manufacture and commercialize nasal sprays for the global markets.
The partnership will commercialize four nasal sprays with a combined Global IQVIA market size of over $400m.
it will take 3 years to launch the product.

The stock has run up 50% from its lowest point at INR 268. Maybe all the reversion is done, maybe not.

Beware, even if the facilities of strides have been cleared by the USFDA, it doesn’t mean they won’t come tomorrow to shut their plant down again.
The USFDA risk is too big to ignore.

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Stelis Unit 3 is divested to Syngene for about 700 Cr. Hopefully Stride will be using this money to repay the debt.

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Stride declared Q1 results.
Press Release

The investor conference call summary -

  • They are consolidating the CDMO business under Stelis; They have appointed big 4 for valuation along with a global banker to recommend the scheme of control under Stride for this division.

  • Very interesting part is - Combined CDMO business to have revenue of $100-150 Mn in first year. Revenue Visibility of $400 Mn for 2027. Company won contract of $25 Mn in CDMO space during Q1 which is more in terms of value than last 3 years CDMO order book. CDMO is catching the momentum and management want to focus on that opportunity. The EBITA for CDMO expected to be 28-30%. They aim to have CDMO platform which is differentiated and not the commodity in nature. The capex requirement for achieving $400/yr revenue in 2027 is about $30.

  • Post the Syngene transaction for Unit-3, Debt on Stelis which was 1,400 Cr (last year), 740 Cr(currently) will come below 300 Cr. releasing lot of guarantees signed by Stride. This is a huge de-risking step for stelis.

  • Other key updates -

  • FY24, US business guidance - $240 - 250 Mn revenue
  • Stride will strive for 57-60% gross margin which has been their band for gross margins.
  • Current year focus is to improve EBITA and improve free cash flow.

Given the current revenue is about 3,500 Cr, one thing is for sure Stride is going to double the revenue in next 3 yrs. with stable margins.

Disc- Invested.

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Some of the snippets from latest conference call while the demerger of CDMO business is detailed.

  • More confidence to re-affirm the EBITA guidance for FY24 at 700-750 CR (Market cap ~ 6 times)
  • Reconfirmed the debt reduction target of 3 times EBITA
  • Soft Gelatin business included in OneSource, they are amongst the top seven or eight Rx only soft gelatin players worldwide; complex injectables are erstwhile B2B business of Agila to be part of OneSource; Biologics and Drug Device combination also part of OneSource
  • “Ever since we announced our intentions to be at CDMO, we have started onboarding several
    customers in our business”
  • “post our FDA approval we now have 15 unique customers in our biologics business”
  • In the last five months, we have contracted more master services agreements than we did in four years; And we have now started commercial sales from FDA approved site
  • Strides shareholders will get 44% of the economics of OneSource; Roughly Rs. 364 per share of Strides where about 1,600 Crs. is invested.
  • For OneSource, Softgel and Injectable business have delivered about 30% EBITA
  • About 300 Cr. debt to be pushed to OneSource that will leave Strides at about 2.5 time debt to EBITA
  • For FY25, Demerged Strides to have 4,000 Cr revenue & 700-750 Cr EBITA
  • “I can also tell you that we have a very strong H2 across the company, including this platform”
  • I can also assure you that both the injectables business and the soft gelatin book is quite full for the next year. So, we don’t have to scramble for any new business to meet our guidance of USD180 to USD200 million (i.e.~1,500 - 1,600 Cr)
  • About CDMO, We have now about 14 customers in our GLP-1 programs, for many of the first to file in the U.S and various other markets, we are there preferred or sometimes sole supplier.
  • only two unique companies that offer soft gelatin capsules, biologics, injectables and drug device combinations are Thermo Fisher(trading at about 5 time revenue) and Catalent(trading at 8 times revenue)
  • Neeraj, CEO Designate OneSource - “I’m hugely excited to lead India’s first specialty pharma CDMO”
  • OneSource will have as its growth engine two of the fastest growing trailblazers, One is biologicals and the second as GLP-1. adding to these are complex injectables and high-tech soft-gels
  • The individual parts of proposed OneSource expected to deliver $140-150 Mn. revenue in current year FY24; Thanks to some of the recently signed contracts which we have, including actual customer forecasts and a very strong, large funnel we see this business growing anywhere between 20% to 25% year-on-year over the next many years.
  • We have a significant number of customers already in place for our GLPs with almost $350 million forecast of sales coming from them just for their first three years. EBITA margin range 25-35%.
  • We have no challenges in seeing this business doubling from the $200 million that we will do in FY ’25, when that scheme is completed in less than three to four years and all of that will come from or a lot of it will come from the growth on the biologics division and that’s why we also upped our EBITDA to 35% at that time because the opex leverage is significantly higher in the biologics business.
  • There will be INR200 crores, INR300 crores of capital even in its first phase of growth, when we think we will be able to double our revenues from $200m to $400m; Quite a good amount of capacity already exists for expansion without significant capex
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Strides - Demerger Analyst Call.pdf (437.5 KB)
Strides - Demerger Presentation.pdf (2.2 MB)

Presentation and Analyst Call Transcript for demerger attached.

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Q2 Conf. call brief summary - Press Release here

  • Singapore facility has been redundant, hence sold. 50 Cr. Ebita improvement each year.

  • Current Debt/Ebita 3.3 times, below 3 Debt/Ebita by year end. Debt reduction of 700 Cr. in H2 with Syngene transaction closing

  • Reduction in cash conversion cycle is in focus

  • Guidance for US revenue $250 Mn. for FY2024 will be achieved; In 2 next year, it should reach $400 Mn. with current margin profile. Avg. product size for future launch products to be about $15-20 Mn. vs $5-7 Mn. and new products launches expected in US. 3-4 products expected to be more than $20 Mn.

  • Focus on conversion from Ebita to free cash

  • Excited about second half of the year

  • $150-160 Mn, CDMO business next year FY25. CDMO revenue by FY27 expected to be $400 Mn.

  • Debt to Ebita next year to be much below 2; Focus on reduction of working capital days there by reducing working capital debt

  • Post US target revenue of $400 Mn achieved, the focus will be shifting to create similar revenue stream from other market (mirror US markets in terms of revenue and margin

Disc - Invested; Biased

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Q4’24 Conference call notes which I took

  1. Three consecutive quarter for gross margin close to 60%
  2. Significant improvement in free cash generation & debt reduction
  3. 2 Significant approvals are USFDA approved
  4. Revenue growth for first 9 month exceeding guidance of 15% has come at 17%
  5. Quarter ahead in debt reduction target
  6. Strategy to letting go products when challenged for price
  7. Other regulated markets - Won several new approvals in Europe
  8. Several new businesses are owned in south africa market
  9. Stelus revenue from 5 Cr. last year to 60 Cr. - Ebita negative during Q3.
  10. Stelus - Customers added on regular basis. 16 unique customers. MSA for 56 Mn dollars in first 9 months. All contracts 4 yrs. CDMO agreement
  11. Stelus - First commercial order received. Business for Stelus to be PAT positive from FY25.
  12. Corporate guarantee - is temporary and all corporate guarantees from Stride towards Stelis will be gone with listing of onesource
  13. 15 products to be launched per year on average. the timing will be determined by market condition and margins available. Target run-rate is 400 Mn dollars in US without margin erosion
  14. Getting to 21% EBITA is realistic
  15. Focus on launching $15-20 Mn products in US
  16. Biologics piece - 3-5 yrs. vision - A lot of growth going to be coming from Biologics for Stelis; Biologics component on Onesource to have ~50% EBITA margin, the rest ~30% EBITA margins.
  17. 750 Cr EBITA FY25 despite some EBITA going to one-source
  18. Expect OneSource to list in 12 months;
  19. Other regulated markets - Approx. $40 Mn business each quarter. Registration process will be causing delay in achieving higher revenue from ORM.
  20. Approx. debt reduction feasible to the extent of 300-400 Cr. each year with free cash flow.

Disc - Invested

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Detailed investor presentation by the company. Provides more specifics around. Strides and OneSoruce revenue and EBITA targets in next 3-5 years. Overall market opportunities.

Disc - Invested

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