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Nath Balakrishnan

FRESH exposures can be considered in the stock of Unichem Laboratories, a Mumbai-based mid-sized pharma company that predominantly derives its revenues from the domestic formulations business. The stock has appreciated by about 45 per cent since the earlier recommendation (Business Line, December 22, 2002) when the stock traded at about Rs 215. For those willing to buy into the stock from a two-three year perspective, there still is scope for capital appreciation even from the current levels.

Business profile: The company derives close to four-fifths of its revenues from formulations that cater to the domestic market; bulk drugs and exports chip in with the rest. Realising that an excessive dependence on the anti-infective segment would be counter-productive to its financial health, Unichem has sought to broaden its product offerings by entering the pain management, cardio-vascular and central nervous system therapeutic areas, also known as the lifestyle categories.

The upshot of this change in product profile has been manifold. The anti-infective segment is riven by price competition, which hurts realisations.

On the contrary, the lifestyle segment is growing at a faster clip and with drugs addressing this segment falling outside the ambit of price control, Unichem would also have better latitude when it comes to pricing.

The company has also decided to take the co-marketing route to fill any gaps in its product offerings and also to move faster to capitalise on first-to-market opportunities.

Existing agreements are with companies such as Glenmark, Bharat Biotech, Cadila and Ind-Swift.

These tie-ups, perhaps, reflect Unichem's marketing strengths. Such strengths would also be sought out by MNCs looking at launch vehicles for their products in the post-2005 patent regime.

Export focus: At present, Unichem derives close to 10 per cent of its revenues from the export market. The company has been prudent in the scale up of its export operations.

It has preferred to target markets such as Europe, Brazil and CIS countries, to name a few, rather than make inroads into the US market, which, though lucrative, would also be an expensive proposition. Unichem has a JV in the UK, Niche Generics, which should provide it with a beachhead to penetrate the generic opportunity in Europe. Further, the company proposes to set up an additional manufacturing facility for formulations and use its facility at Goa exclusively for exports.

An upgradation of bulk drug facilities is also on the cards, with an eye on making them suitable to target the exploding generic opportunity in the US. Admittedly, inspection of these facilities and subsequent commencement of supply would not happen immediately; the effects of these initiatives would bring in over a two-to-three year period, once approvals are obtained.

Outlook: At the current price, the stock trades at about nine times its trailing four-quarter earnings per share. Modest valuations, coupled with encouraging long-term prospects, make Unichem a stock that could merit a look-in.

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