Thread by @ValueEducator

Undervalued stock in Pharma Sector - Solara Active Pharma Sciences #Solara 💊🧪

A Thread 🧵 | CMP - 1075 ₹

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Topics Covered:
1. Company Overview
2. Promoters and Management
3. Business Segments
4. Products
5. Business Strategy
6. Aurore Merger

7. COVID related drugs
8. Backward Integration
9. Margin expansion
10. Technology platforms
11. Solara 2.0
12.Capex plans
13. Valuations
14. Risks

1. Company Overview:
Solara was formed as a result of the amalgamation of the Human API business of Sequent Scientific

and the commodity API business of Strides. It operates as a pure play API company and has 93 DMFs filed

2. Promoters and Management:
Solara is promoted by Arun Kumar, founder and former CEO of Strides. They have also recently appointed Aditya Puri, former MD of HDFC Bank as the

Chairman of the board. The day to day operations of the company are run by Bharath Sesha, MD and CEO. He has spent over two decades leading diverse businesses, especially pharmaceuticals. He has held CEO level positions in companies like Philips,

DSM Sinochem Pharmaceuticals and Royal DSM NV.

3. Business Segments:
Solara’s operations are split into two broad segments - APIs and CRAMS. Under the API segment, they supply Generic APIs and Complex APIs to formulation players.

Although their CRAMS segment currently accounts for a very small portion of their revenues, they have plans to grow it aggressively.

4. Products:
Solara’s key product is Ibuprofen. It currently has the capacity to produce 8400 MT of Ibuprofen and is the 2nd largest producer

of Ibuprofen globally. It contributes to about 33% of the company’s revenues. Apart from Ibuprofen, other key products for the company are Gabapentin, Praziquantel, Oseltamivir, Mycophenolate Mofetil. The top 10 products of the company together contribute to 77% of the revenues.

5. Business Strategy:
Although the key product of the company (Ibuprofen) is a commodity product, the company only sells to branded generic players on long term contracts. This way, their margins are protected when Ibuprofen prices drop.

The company also plans to increase the share of the CRAMS business to 30% of revenues in 4-5 years. They raised ₹460 Cr from the promoters for this purpose. The plan is to use a portion of these funds to make an acquisition in the CRAMS space.

6. Aurore Merger:
The company recently acquired Aurore Life Sciences, another company promoted by Arun Kumar in an all stock transaction. The MD of Aurore, Rajendar Rao Juvvadi joined Solara as Executive Director and Vice Chairman.

Aurore has more than 40 commercial products and 20+ DMFs filed. They have an expertise in manufacturing antiretroviral drugs. The merger will result in annual cost savings of ₹150-200 Cr annually.

7. COVID related drugs:
Since the demand for Ibuprofen currently is low, the company has temporarily converted it’s Ibuprofen capacity at Vizag facility to manufacture Favipiravir and an intermediate for Molnupiravir.

Both of these drugs are currently in high demand as they are used for the treatment of COVID-19.

8. Backward integration:
In Q1 FY22, the company announced that they are backward integrating to manufacture Isobutyl Benzene (IBB), the raw material to make Ibuprofen.

The facility will be able to cater to all of Solara’s needs and will also have enough capacity to be able to sell IBB to other players. Post this investment, there will be only 2 players in the market who have both scale and backward integration for Ibuprofen - IOL CP and Solara.

9.Margin expansion:
The company’s new facility in Vizag has not received US FDA approval yet. So the products produced there are sold in unregulated markets. The USFDA approval is expected in 2022. Post that, the Ibuprofen produced there can be sold in the US which will cause

margins to expand. The increase in share of CRAMS business will give further boost to the margins.

10. Technology platforms:
The company is looking to develop expertise in any one particular technology platform like biocatalysis, fermentation, flow chemistry, complex generics.

The management believes that having expertise in any one such platform will give them an edge over the competition and demand higher margins. The company is working on many such platforms and expects to have a proof of concept ready by the end of FY22.

11. Solara 2.0:
The management outlined it’s vision to become one of the top players in the API business. They plan to grow at 25% CAGR for the next 4 years with 23-25% margins and achieve revenues of $750 million over a 4-5 year period.

They plan to do this by growing their base business, launching newer higher margin products, increasing the share of the CRAMS segment and making acquisitions that add value.

12. Capex plans:
To support the vision of Solara 2.0, the management has guided that they will be making investments of ₹200-250 Cr every year for the next 3 years.

The management has guided towards 1.7-1.9X asset turns which results in incremental revenues of ₹1500-1900 Cr over the next 4-5 years.

13. Valuations: The valuations on Solara are extremely attractive. The company is trading at about ~19x PE. Another commodity API player,

Aarti Drugs is trading at ~23x PE. The increase in margins combined with increase in share of CRAMS business should cause PE expansion.

14. Risks:
Like all businesses, Solara faces some risks related to its business.

They are very highly dependent on Ibuprofen and a dip in Ibuprofen demand caused profits to decline. They also received a OAI for their Cuddalore plant which could cause blacklisting of the facility if the requirements of the USFDA are not met.