Alembic Pharma: Right prescription

On the back of successful regulatory inspections, the stock of Vadodara-based Alembic Pharmaceuticals has rallied by almost a fourth in the last two months. In late June, the company’s API 1 and API 2 facilities at Panelav, Gujarat were inspected by the US drug regulator FDA. Its API plant III facility at Karakhadi, Gujarat, inspected in April 2015 received the ‘all clear’ notification. These events are positive for the stock.

Considering the company’s growth prospects, investors with a three- to four-year time-frame can buy the stock. Despite the recent rally, the stock now trades at ₹646, down 12 per cent from its October 2015 high. The stock trades at 16 times the trailing 12-month earnings, at a discount to its five-year average of 21 times. Near-term upside though may be limited, given the company’s proposed capex which may put pressure on margins.

Alembic Pharmaceuticals, which was spun off following the demerger of the pharmaceuticals business from Alembic Limited in April 2010, has been doing quite well, especially in its key US market which contributes nearly half of its revenues.

First, the US first day launch of the generic version of Abilify in the last fiscal through its marketing partner, aided the company post a good set of numbers in 2015-16. The drug is used to treat schizophrenia and bipolar disorder.

The company in the last fiscal established its own front-end office in Bridgewater, New Jersey. This can lead to better margins in the medium to long term by cutting down on intermediary costs.

Next, the company’s Abbreviated New Drug Application (ANDAs) filings with the US FDA have met with considerable success. As of June, out of 78 ANDAs filed, it had received approvals for 47.

The company expects to increase the rate of filing from eight in 2015-16 to around 15 ANDAs in the current fiscal and further to around 20 in 2017-18. Besides, the company has 82 Drug Master File (DMF) applications for APIs. Alembic also has a 60 per cent stake in a joint venture (Aleor Dermaceuticals) with Orbicular Inc. The construction of the facility is expected to begin shortly. It will manufacture dermatology products. With exports accounting for around 60 per cent share of its revenue in 2015-16 from 42 per cent in 2014-15, compliance has taken centre-stage.

Though all its facilities are in compliance with the US FDA, the company continues to invest in infrastructure to maintain the momentum.

The company, which has five manufacturing facilities and two R&D centres, has lined up sizeable capex plans to support its growth initiatives.

In the next two to three years, Alembic expects to invest almost ₹1,500 crore to increase manufacturing capacity and for its R&D efforts. Its operations in Algeria are expected to start commercial operations this fiscal.

The company has a sound balance sheet with nil debt and cash of ₹439 crore as of March 2016.

Over the last few years, the company’s spend on Research & Development (R&D) has grown from around 4 per cent of sales in 2011-12 to 11 per cent in 2015-16. It proposes to allocate around 80 per cent of its R&D resources to the US market.

The company’s focus on exports over the last few years has paid off well. Revenue rose 53 per cent year-on-year to ₹3,145 crore in 2015-16.

Higher margins on exports drove operating profit to ₹1,006 crore, up 148 per cent year-on-year. Slower growth in raw material and staffing costs also helped. As a result, net profit grew at a healthy clip of 154 per cent to ₹719 crore.

The good show continued in the recent June quarter. Net sales were up 25 per cent Y-o-Y at ₹736 crore. As operating margin increased from 17.5 per cent a year ago to 21.6 per cent, operating profit jumped 50 per cent to ₹160 crore. Net profit rose 45 per cent to ₹100 crore.

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