Stock Fundamentals

Alkem Laboratories: The right remedy - Buy

Dhuraivel Gunasekaran | Updated on August 18, 2019 Published on August 17, 2019

Focus on high-margin chronic products and key launches should drive growth

The stock of Indian drug maker Alkem Laboratories has been under pressure over the past 12-15 months. It has fallen by more than 25 per cent from its September 2018 high. Multiple headwinds such as inclusion of more number of drugs in the National List of Essential Medicines (NLEM), ban on fixed-dose combination (FDC) drugs, increase in raw material prices and pricing pressure in the US business, have impacted the stock over the past year.

Over the medium to long term, the company’s changing product mix in favour of high-margin chronic segment, and launches in key therapies should translate into good growth. Change in distribution channel and added field force should rev up growth in the company’s revenue.

 

In the first quarter of FY 2019-20, Alkem’s consolidated revenue grew by 12 per cent (year-on-year) to ₹1,850 crore and net profit was up by 36 per cent to ₹186 crore, driven by robust sales in India and the US. The company’s operating margin improved 200 bps to 14 per cent during the period.

At the current price of ₹1,758, the stock trades at a little over 18 times its estimated 2020-21 per share earnings. This PE multiple is lower than the valuations of 19-21 times that other large-cap pharma players such as Cipla, Lupin and Torrent Pharma enjoy. Investors with a long-term perspective can buy the stock.

Strong domestic business

 

Alkem generates two-third of its overall revenue from domestic business. It holds leadership position in key acute therapies in the Indian market such as anti-infectives (No. 1), gastrointestinal (No. 3), pain and analgesics (No. 3) and nutrient supplements. Key brands include Pan, Pan-D, Clavam, Taxim, Taxim-O, A to Z NS, Gemcal and Ondem — these have been market leaders in their respective categories.

In FY19, Alkem’s domestic and US business grew by about 9 and 39 per cent year-on-year, respectively.

About 85 per cent of the domestic revenue (as on FY19) have come from acute therapies. Over the last two years, Alkem’s domestic business was largely impacted by the inclusion of more acute therapy brands under the NLEM price control (around 30 per cent of Alkem’s domestic portfolio). The company is now focussing on alternative products to compensate the loss in sales.

Alkem is focussing on building the portfolio of high-margin chronic drugs in therapeutic areas, including neurology and CNS, dermatology, cardiac and anti-diabetes. The company has added 2,000 medical representative (MRs) in FY19 (totally around 9,000 MRs) to support growth of its mega acute brands and gain share in the chronic segments.

Going ahead, better competitiveness in the high-margin acute portfolio, increasing share of chronic products and stronger field force, should lead to a significant volume growth in the domestic business.

Robust US business

Currently, the US business contributes around one-fourth of the company’s total revenue. Alkem has a strong growth potential in the US, given its small base, low price risk and likely increase in approvals. Its US pipeline has been strong which, including 15 Para-IV filings in differentiated categories, largely focused on the chronic therapies. The management has guided for launching more than 25 new products in the US over the next two years.

As on June 30, 2019, the company has filed a total of 127 ANDAs (including 1 NDA) with the USFDA and has received 73 approvals (including 11 tentative approvals and 1 NDA). However, any adverse outcome from the USFDA inspection of the key facilities will impact the US business. Currently, Alkem’s St. Louis (US) facility is under the USFDA scanner. In July 2019, the company’s Baddi (India) facility got a clean chit from the USFDA, which is positive for the company.

The R&D spend has been 5-6 per cent of the sales towards building the US pipeline. Despite several challenges, Alkem’s consolidated revenues grew by 14 per cent to ₹7,357 crore and net profit by 12 per cent to ₹774 crore Y-o-Y in FY19. Its operating profit margin stood at 15.2 per cent during the period.

Published on August 17, 2019
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