Alembic Pharma: Healthy growth story

Increased R&D spend should boost revenue over the long term

Alembic Pharma is attractively placed to deliver sustainable growth over the long haul, given its strong US business, focus on domestic speciality segment and commitment towards developing a long-term product pipeline through proactive investments in research and business.

Investors with a three- to five-year time horizon can consider buying the stock. The stock is down 12 per cent from its September 2016 highs, despite its recent run-up. At the current price of ₹610, the stock trades at 29 times its trailing 12-month earnings — a 10 per cent premium to its three-year average. While the near-term upside may be limited, the premium valuation is justified, given its increased R&D spend and capex plans, which can provide a leg-up to long-term revenue and earnings prospects.

The growth story of Alembic Pharma has been commendable, post-demerger of the pharmaceuticals business from Alembic Limited in April 2010. The company restructured its domestic business by moving towards specialty medicines, while tapping the lucrative generic pharma market abroad by launching limited competition generic products in the US. This resulted in strong topline growth which rose to ₹3,145 crore in FY16 from ₹1,462 crore in FY12, a compounded annual growth of 21 per cent. The operating profit and net profit also grew at a higher pace during the period, clocking 46 and 53 per cent compounded annual growth to ₹1,006 crore and ₹719 crore, respectively. As on FY16, the international, domestic and API businesses accounted for 46, 38 and 16 per cent of total sales, respectively.

US business

The US market has been the key growth driver for Alembic Pharma, contributing about three-fourth of its export generic sales in FY16. Many generic filings with the US FDA have met with considerable success. Some of its flagships generic products include Abilify (CNS), Exforge (CVS), Celebrex (Pain) and Micardis (CVS). As on March 2017, out of 85 Abbreviated New Drug Applications (ANDA) filed, it received approvals for 45 and 40 ANDAs are pending (of which 40 per cent are Para IV and shared exclusivity filings). Besides, the company has 85 Drug Master File (DMF) applications for APIs. The future growth prospects of the company lie in the new launches, especially in the US. The company has guided for filing 8-10 ANDAs per annum going forward, of which one or two products could be limited competition opportunities. The setting up of own front-end business in the US will lead to better margins in the medium to long term by cutting down on intermediary costs.

Domestic business

The revenue from domestic branded formulations stood at ₹1,104 crore in FY16, contributing about 35 per cent to the topline. The contribution of specialty products has increased to 56 per cent in FY16 from 44 per cent in FY12. Constant additions under new speciality segments should help the company scale up its business. The scope of price hike up to 10 per cent in the products that are not part of the National List of Essential Medicines (NLEM) should also prop up the company’s revenue in the near term.

Higher R&D and capex spend

Alembic Pharma’s spend on R&D has grown to 15 per cent in FY16 from around 4 per cent of sales in FY11. The company has guided for R&D spend of ₹450-500 crore over the next few years to establish the Hyderabad-based R&D facility and for new products in dermatology, oncology, ophthalmology and injectables. The company has spent ₹600 crore in FY16 to develop the new Sikkim facility. In the next two years, the company plans to invest almost ₹1,500 crore for setting up injectable and oral solid oncology facilities and ramping up API capacity. This also includes the joint venture project with Orbicular Pharma for development, manufacture and commercialisation of dermatology products for global markets. All these should hold it in good stead over the long term. However, capex plans could put pressure on margins in the medium term.

Recent performance tepid

In recent quarters, the performance of Alembic Pharma has been impacted due to the steep price erosion in the US in one of its key products, Abilify (anti-psychotic drug), post expiration of exclusivity. On the domestic front, growth was muted on account of demonetisation and NLEM price cuts (pertaining to about 20 per cent of portfolio including Azithral). During the December 2016 quarter, the company’s topline declined by 16 per cent YoY to ₹776 crore due to high base. PAT came in at ₹87 crore, a de-growth of 68 per cent YoY. The upcoming March quarter results will need a close watch. While investors may need to weather near-term volatility in the stock, long-term prospects of the company remain healthy and the company has a sound balance sheet with nil debt and cash of ₹439 crore as of March 2016.

None of Alembic Pharma’s manufacturing facilities faces regulatory action currently. Lately, its bioequivalence facility located at Baroda was inspected, but no 483 forms (issued to the firm for violation of standards found) issued by US FDA at the end of the inspection.

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