Alkem Lab: A new formula for investors

Growth in domestic business to continue at current pace; US venture will be fuelled by launch approvals

Alkem Laboratories, India’s fifth largest pharmaceutical firm by market share, is coming out with its initial public offering (IPO). Alkem has spread its sales network in the international arena, building a sizeable business in the US, the world’s largest pharmaceutical market.

While the firm’s impressive growth rates in the domestic market continues, its US business should also grow over time. It is also making efforts to grow its chronic product portfolio. 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. Since a majority of the filings are pending approval, a timely nod from the US Food and Drug Administration (FDA) wil l play a crucial role in driving its US growth.

While one might 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 could consider the offer.

Having started from east India three decades ago, from where it still derives a third of its revenues, Alkem has expanded to emerge 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 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 gynaecology, 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 months of FY16 have grown by 36.1 per cent year-on-year. During FY11-14, the company’s domestic sales have grown at a compounded annual growth rate (CAGR) of 14.2 per cent versus the sector’s 11.5 per cent.

Alkem started strengthening its US presence from 2010, first by acquiring Pharma Network to build the marketing platform followed by Norac Pharma’s active pharmaceutical ingredient manufacturing assets and in June 2015, Long Pharmaceuticals’ formulation manufacturing assets.

Ever since, it has also filed 69 abbreviated new drug applications (ANDAs), of which 21 are approved, three have received tentative approvals, while 45 are awaiting approvals. There are about 30 para-IV filings and one might see some launches on exclusivity, too. However, these launches are likely to accrue benefits only in the longer run.

The company’s consolidated revenues have grown at a CAGR of 22.3 per cent during FY11-14. However, earnings before interest, taxes, depreciation and amortisation as well as earnings have grown at a CAGR of 17 per cent and 12 per cent, respectively. The company’s profit growth during FY13-15 remained subdued owing 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 the first six months of the current financial year. Analysts at Reliance Securities say Alkem is valued at 15.7-16.2 times its FY18 earrings per share, which is fairly valued given its operational scale.

Analysts at Motilal Oswal Securities say that at higher-end of the price band, the company would trade at 27x FY15 and 16x 1HFY16/PER (15-20 per cent discount to peers).