Alembic Pharmaceuticals: Regaining health

Stocks of Indian pharmaceutical companies have been in the doldrums over the last couple of years. Major headwinds such as regulatory tangles and pricing pressure in key markets have continued to weigh on the revenue and earnings of these companies.

However, companies with geographical diversification, dynamic product mix and focus on high-margin, complex and specialty generics are likely to do well, going forward.

Alembic Pharma is one such company. The improved set of numbers reported in the last two quarters point towards traction in volume growth in US generics and improving momentum in the domestic business.

In the medium-to-long term, the growth prospects of the company look robust, given its strong US product pipeline, improved product mix in the domestic 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. It is down 20 per cent from its April 2017 highs, despite its recent run-up. At the current price of ₹543, the stock trades at 24 times its trailing 12-month earnings — at around 5 per cent discount to its three-year average. However, the near-term upside may be limited, given high R&D spend and pricing pressure in the US that could keep earnings and margins under check.

 

Muted show

Alembic’s US business contracted in the last two quarters of FY17 and the first quarter of this fiscal year due to price erosion in base business, channel consolidation and increased competition. The US growth had further deteriorated due to the steep price erosion in one of its key products, Abilify (anti-psychotic drug), following the 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). These impacted the company’s overall business. In FY17, the company reported 1 per cent and 44 per cent decline in consolidated revenue and net profit to ₹3,131 crore and ₹401 crore respectively , as compared to the previous year.

However, over the last two quarters, the company has reported some growth. During the December quarter of 2017-18, Alembic reported a year-on-year growth of 8 per cent and 52 per cent in consolidated revenue and net profit respectively. This was mainly attributed to a traction in volume growth in the US, coupled with recovery in India business, post-GST transition.

The market share gains in existing products in the US led to higher volumes. This helped offset price erosion in the US portfolio. The US market has been the key growth driver for Alembic Pharma, contributing about 28 per cent of the overall sales (₹917 crore in FY17). 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 January 2018, out of 119 abbreviated new drug applications (ANDA) filed, it received approvals for 70 and 49 ANDAs are pending (of which 40 per cent are Para IV and shared exclusivity filings). The company aims to launch 8-10 products in the US annually.

The company’s growth prospects lie in the new launches, especially in the US. It recently acquired Orit Laboratories, which has enhanced its US product portfolio (seven approved ANDAs and four tentative ANDAs).

Alembic has already operationalised its new oncology oral solids and derma facility, while two other injectable facilities (oncology and general) are to be commissioned in the first half of FY19. This could help Alembic ramp up its ANDA filing intensity to 20-30 every year.

Its API (bulk drug) business contributes around 20 per cent of the total revenue. The company has 85 drug master file (DMF) applications for APIs.

Alembic’s non-US international business comprises non-branded generics in Europe, Australia and Canada and limited contribution from the UK and Brazil. Overall, its international business contributes around 40 per cent of the total sales.

Improving domestic sales

The revenue from domestic branded formulations stood at ₹1,255 crore in FY17, contributing about 40 per cent to the topline. The contribution of specialty products has increased to 58 per cent in FY17 from 44 per cent in FY12. Constant additions under new speciality segments should help the company scale up its business.

Currently, the company markets 170 products in India and plans to launch 20-25 products every year. Alembic has managed to grow market share in cardiac, gynaecology and diabetes — which indicates improving sales-force productivity and good brand presence in the domestic segment. Currently, the company holds the field force strength of 4,050.

Higher R&D and capex

Alembic Pharma’s spend on R&D has grown to 14 per cent in FY17 from around 4 per cent of sales in FY11. R&D expenditure stood at 11.7 per cent of sales in the third quarter, given its increased focus on complex and niche ANDA filings in areas like dermatology (via Aleor JV), oncology (oral oncology, oncology injectibles) and general injectibles. About 80 per cent of this R&D is allocated for US launches.

All these should hold it in good stead over the long term. However, capex plans could put pressure on margins in the medium term. In FY18, the company guided for a R&D spend of ₹450 crore. Given the capex of ₹700 crore as guided for FY18, around ₹500 crore is allocated towards new facilities.

None of Alembic Pharma’s manufacturing facilities faces regulatory action currently. The company has a sound balance sheet with nil debt and cash of ₹159 crore as of March 2017.

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