Unichem Laboratories: Good prognosis

Price controls in the domestic market and a relatively conservative growth strategy in its US operations had put pharma company Unichem Laboratories on the back-foot in the past.

But with the company restructuring its India business and strengthening its presence in the US, its performance has improved and the outlook seems good.

Investors with a long-time perspective can buy the stock that has under-performed the pharma index over the past few years.

At ₹270, the Unichem stock trades at about 24 times its trailing 12 month earnings, nearly the same as with its three-year average, but cheaper than similar sized peers such as Indoco Remedies and Granules India.

Exposure though can be limited, given the small-cap nature of the stock (market cap of about ₹2,400 crore).

Unichem gets more than half its revenue from Indian operations, nearly 40 per cent from acute therapy products and the rest from chronic care products. The price control regime tightening in 2014 took a toll.

Nearly a quarter of its domestic product portfolio was part of the National List of Essential Medicines (NLEM) and suffered price cuts in the range of 25-30 per cent. Also, it did not help that more than half the domestic portfolio was in the mature category with legacy but slow moving products. This contributed to a sharp slide in the company’s performance in 2014-15 with profit more than halving year-on-year. But Unichem has taken many steps since then to rev up its India business. These include adding new marketing divisions and ramping up the sales force with better incentives. From about 1,600 in 2013-14, the field force has increased to more than 2,500 with the focus more on non-NLEM products.

Also, focus on large brands, price hikes in products not covered in the NLEM and shift from distributor-driven model to a clearing and forwarding (C&F) driven model have helped. Besides, the recent exclusion of Losar, one of the company’s key drugs from the NLEM, has brought down Unichem’s exposure to the list to about 13 per cent of its portfolio. Price hikes in Losar in the coming years should boost reveneue. Ditto with taking the over-the-counter (OTC) route to market the high-potential Unienzyme product.

Unichem is also bolstering its US operations that accounts for a chunk of revenue from international operations. Formulations account for most of the US business revenue and have been growing at a healthy pace. The company is well-placed on the regulatory front with no adverse observations regarding its facilities. Capacity expansion at its Goa plant along with several launches in the US should add to the growth momentum.

The company has filed 38 ANDAs (abbreviated new drug applications), of which 21 have been approved with 14 product launches.

The remaining ANDA approvals could boost growth in the coming years. It has also filed 47 US-DMFs (drug master files). With the US product portfolio being highly competitive, there is less pricing risk. The company’s business in the UK and Brazil though remain sluggish.

Unichem has spent about ₹300 crore for expansion of its Goa, Pithampur and Kolhapur facilities. R&D spend has also been good at 4-5 per cent of revenue.

This along with steps taken to aid growth in domestic and international markets has translated into good financial performance in the recent past. Consolidated profit grew more than 43 per cent Y-o-Y in 2015-16 to ₹108 crore. Operating profit margin improved to 13.6 per cent from 10.3 per cent in the previous year; this was aided by high gross margin and low other expenditure. In the recent quarter ended December 2016, Unichem’s profit grew about 26 per cent Y-o-Y.

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