Strong pipeline and forward integration to drive earnings
We recently met Shilpa Medicare’s (SLPA) management to get an update on its business segments. The company is progressing well on ANDA filings, with cumulative pending approvals of 26. With a low base in the US market, sales there are expected to ramp-up, led by its existing products and new approvals. We expect SLPA to deliver US revenue of INR4b in FY20, significantly higher than INR250m in FY17. The company is well positioned in the Europe market too, with marketing authorization in place and likely tie-ups with marketing agencies. In addition to injectables, SLPA has started R&D in transdermal patches. We continue to like SLPA, as the key positives are in place to drive 42% earnings CAGR over FY17-20E. We maintain our price target of INR805, based on 12M forward earnings, and reiterate Buy.
Key highlights of the meeting:
* With a focus largely for oncology molecules, SLPA has filed five ANDAs till date in this segment, taking cumulative filings to 28. With only two approvals till date, SLPA has a robust ANDA pipeline awaiting approvals.
* Of the 28 filings, 13 are own and 15 are partnered. SLPA intends to increase share of own filings – based on its R&D, SLPA plans to file 7-10 ANDAs and 6- 10 DMFs per year over the next 2-3 years. n From a pure API company, SLPA is in process of transforming itself and forward integrating toward formulations.
* SLPA has 17 marketing authorizations for the Europe market, and intends to file 7-10 per year for the next 2-3 years. SLPA is in the process of tying up with a marketing agency to launch products in Europe.
* With the PMDA-Japan approval in place for two products and the focused efforts toward the Japan market, SLPA has started supplying products to one of the top companies. This is commendable because the Japan market, where the gestation period is high, is difficult to enter.
* SLPA would be enhancing its R&D efforts by setting up one more lab in Bangalore. In addition, it would be setting up a transdermal patches manufacturing plant at Bangalore. SLPA would be spending INR1.5b toward this over the next two years.
* Capex over the next two years is expected to be INR4b. Of this, INR1.5b would be spent toward a constructing facility at Hubli for biosimilars. SLPA would be spending incremental INR1b toward expansion of the formulation facility at Jadcherla and INR500m toward expansion of the API facility at Raichur. In addition to powder filling, liquid filling and lyophilization capability, SLPA would be adding capacity for pre-filled syringes and liposomes at Jadcherla.
Valuation and view:
We remain positive on SLPA, given its healthy oncology product pipeline for the US/Europe, and forward integration toward formulation. In addition, SLPA has a successful compliance history, which is one of the critical factors to succeed in the US market. We expect SLPA to deliver 42% CAGR in PAT to INR3b in FY20. At CMP of INR585, SLPA is trading at 27.7x FY18E EPS of INR21.1 and 19.2x FY19E EPS of INR30.4. We reiterate Buy on SLPA with a price target of INR805, based on 25x 12M forward earnings.
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