Alkem Laboratories: A new prescription therapy for investors

The company's domestic business will continue growing at the current pace while US business will be fueled by launch approvals in the largest pharma market

            Alkem Laboratories, India's fifth largest pharmaceutical company by market share, is coming out with its initial public offer (IPO). Besides India, Alkem has also spread its sales network in the international arena building a sizeable business in the world’s largest pharmaceutical market, the US. While the company’s impressive growth rates in the domestic market continues, its US business should also grow over time. The company is also making efforts to grow its chronic product portfolio.

            However currently, the product mix is in favour of the 'Acute' segment which is highly competitive compared to the chronic space where margins are better and growth rates higher. On this front, Alkem has been increasing investments on field force and promotional activities, the benefits of which should accrue in the medium-term. In the US, it has built up a large product pipeline through product filings and continues filing for more new products.

            But, since majority of the filings are pending approvals, timely nods from the regulatory authority (USFDA) and consequently product launches will play a crucial role in driving its US growth. While one may have to keep patience till the approval rates pick up and benefits accrue, the IPO is fairly priced vis-a-vis valuations of peers. Given the future prospects of the company, investors can consider the offer.

Leadership position in India

            Having started from East India three decades ago, from where it still derives a third of its revenues, Alkem Laboratories Share Price has expanded to emerge as a pan-India player. In the domestic arena, the company’s strength lies in anti-infectives, gastro-intestinal, pain relief besides vitamins, minerals, nutrients, where it has built a strong product portfolio and enjoys a leadership position.

            Alkem derives majority of its sales from the Acute segment, which is highly competitive and thereby offers comparatively lower margins. It is the volumes that play a crucial role and have been supporting the segment's growth. Alkem, however, is working towards developing its chronic portfolio in the gynecology, diabetic care, dermatology, cardiology streams, etc, which should give returns in the medium term. The company had also acquired Indchemie and Cachet's portfolio that is likely to drive growth further. Supported by the acquisition, consolidated sales of the company during first six month of FY16 have grown by 36.1 per cent year-on-year. During FY11-14, the company’s domestic sales have grown at compounded annual rate (CAGR) of 14.2 per cent versus industry’s 11.5 per cent.

Building International business

            Alkem started strengthening its US presence from 2010, first by acquiring Pharmanetwork LLC for building the marketing platform followed by Norac Pharma‘s API manufacturing assets and recently (in June 2015) Long Pharmaceuticals' formulation manufacturing assets. Ever since, it has also filed 69 ANDAs (abbreviated new drug applications), of which 21 are approved, three have received tentative approvals while 45 are pending approvals. There are about 30 para-IV filings and one may see some launches on exclusivity too. However, these launches are likely to accrue benefits only in the longer run.

Strong financials

            The company’s consolidated revenues have grown at a CAGR of 22.3 per cent during FY11-14. However, EBITDA and earnings have grown at a CAGR of 17 per cent and 12 per cent, respectively. The company’s profit growth during FY13-15 has remained subdued due to multiple reasons. While the new drug pricing took a toll on domestic operations, Alkem has also expanded its field force and stepped up its marketing and promotional expenditure to grow the chronic segment. The drug filings in the US too have increased and higher investments led to softer profit growth. Analysts feel the company will derive benefits from these investments over time and hence is not a worry. Besides, the company is debt-free and with strong cash flows it can continue scouting for inorganic opportunities.

            IPO valuations too are reasonable with some analysts saying it is at a discount looking at the growth during first six months of current fiscal. Analysts at Reliance Securities say that Alkem is valued at 15.7-16.2x FY18 EPS, which is fairly valued given its operational scale. Analysts at Motilal Oswal Securities say that at the higher-end of the price band, the company would trade at 27x FY15 and 16x 1HFY16/PER (about 15-20 per cent discount to peers).