Ipca Laboratories: On the mend

After a series of US regulatory hiccups, the firm seems to be recovering

Many Indian pharma companies have registered dismal performance over the past 2-3 years due to regulatory hurdles — especially those introduced by the US drug regulator — and pricing pressure in key markets. While some players have tried to contain the downside by foraying into high-margin, limited-competition complex generics, a few others have shifted their focus to global markets other than the US and strengthened their domestic business.

Ipca Laboratories has adopted the latter strategy. A strong domestic presence, a diversified business model across geographies, potential API (active pharmaceutical ingredient) capabilities, and a robust position in the pain-management and anti-malarial segments, are its positives.

Along with the broader market corrections, the stock has declined 23 per cent from its August 2018 highs. Also, the regulatory issues associated with the company’s three key facilities are yet to be resolved. However, the stock has lately bounced back from its lows, possibly because of the company’s improved earnings visibility. At the current price of ₹667, the stock trades at about 18 times its estimated FY2019-20 per-share earnings, compared with its three-year historical average of 48 times (when earnings were subdued).

Improved earnings numbers in the recent quarters could indicate that the company has turned the corner, from the decline seen over 2015-2017. Timely resolution of the US regulatory issues and the consequent revival of operations should boost the profitability over the next 2-3 years. Investors with a time horizon of three years can consider buying the stock.

Ipca’s product range includes anti-malarial, pain-management, antiemetic, antibiotic, analgesic, anti-diabetic, cardiovascular and central nervous system medicines. The company is one of India’s largest suppliers of bulk drug APIs (contributes 23 per cent to the company’s total sales), including atenolol, chloroquine and artemisinin derivatives, and furosemide.

About 77 per cent of the firm’s total sales are generated from the formulation business. Of this, domestic formulations contribute 43 per cent, while export formulations generate 30 per cent of the total sales. Pain management accounts for about 44 per cent of the revenue.

The company has been a market leader in anti-malarial drugs. However, with the decreasing incidences of malaria worldwide, Ipca has gradually shifted it focus to other therapeutic areas.

Regulatory overhang

After posting a healthy revenue growth at a CAGR of 21 per cent over FY09-14, Ipca was caught in a regulatory tangle with the US Food and Drug Administration that hit its overall business. Ipca’s API manufacturing facility in Ratlam, Madhya Pradesh, received six observations from USFDA in July 2014, followed by an import alert in January 2015. This impacted the production at the company’s formulation-manufacturing units dedicated to the US business —– Piparia (Silvassa) and Indore SEZ (Pithampur). In March 2015, these two manufacturing facilities, too, received import alerts.

The alerts not only impacted the US business, but also the firm’s institutional orders.

Since then, the company has implemented robust remediation measures — including re-modelling of facilities — and deployed three consultants. Later, the USDA requested for more data after conducting re-inspections at the facilities. Ipca has submitted the required data for the Silvassa plant, and is expected to do the same for the other two in Q3FY19.

New ANDA (Abbreviated New Drug Application) approvals in the US will likely depend on how the issues at the three units are resolved.

Ipca has filed four ANDAs since the 2015 import alert, totalling its filings to 48. The company has received approvals for 18; 30 ANDAs are pending with USFDA. Ipca’s recent acquisition of US-based Pisgah Labs demonstrates its inorganic strategy to tap into the American market.

Strong domestic presence

The company’s domestic business (contributed 43 per cent to FY18 revenue) has grown 10 per cent over the past five years, driven by new launches and field force additions. Its product portfolio has been expanding in the fast-growing therapeutic segments — including cardio vascular, anti-diabetic and dermatology — which is expected to deliver steady growth going ahead. Currently, around 25 per cent of the firm’s domestic portfolio is listed under NLEM (National List of Essential Medicines).

The company has a presence in Australia, New Zealand, Canada and South Africa, apart from a significant footprint in the UK.

A likely recovery in the institutional business and a revival in the UK sales will provide a leg up to the company.

Ipca’s consolidated revenue grew by 3 per cent y-o-y to ₹3,259 crore and net profit grew 24 per cent in 2017-18. Operating margin stood at 15 per cent.

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