Double-digit sales dip in anti-infective segment to weigh on Alkem Labs

Higher chronic sales, US market could offset some of the weakness in sales growth

Even as the BSE Healthcare sector has made substantial gains since the start of lockdown, India’s sixth-largest domestic health care company, Alkem Labora-tories, is lagging peers. The firm has given a return of 24 per cent, against the 78 per cent gain for the BSE Healthcare index since March 23. The lower returns in the market reflect the operational performance of the firm in recent months.  For the trailing 12 months ended August, the  sales were down nearly 8 per cent; the pharmaceutical market witnessed only a little over 2 per cent decline during that period. The reason: Sales of anti-infectives, of which Alkem is the largest player, have been declining by double digits. This is due to the lockdown and a lower number of prescriptions. 

To offset the weakness in the acute segment (anti-infectives is the largest sub-segment), the firm is expanding its presence in the chronic segment, which is growing at 10 per cent. Within this, Alkem is focussing on the cardiovascular, central nervous system, diabetes, and dermatology segments and has a portfolio of over 200 products. 

The other positive is that within the acute segment, it is benefiting from high demand for vitamins, minerals, and nutrients after the pandemic. Sales in the segment, which accounts for 13.3 per cent of its therapy mix, were up 21 per cent in August, and 6 per cent over the past 12 months. The company has also highlighted that trade generics have grown at a much faster pace than branded generics over the past six months and this should cushion the slowdown in growth. 

While its exposure to the Indian market (which accounts for two-thirds of revenues) may dampen overall growth, this can be offset a bit by higher growth in the US market, which accounts for just over a quarter of sales. The company —which has 60 ANDAs (abbreviated new drug applications) pending approval —plans to launch 10-12 products in that market annually. With 15 per cent annual growth in the US market over the next two to three years, analysts at Motilal Oswal Research expect capacity utilisation to improve, driving operating leverage. With a major capex phase completed in the last four years, analysts expect free cash flow to improve. 

While the easing of the lockdown and an increase in patient visits to the doctors are positive, the recovery will be gradual. Given the near-term headwinds, investors should await broad-based growth in the acute segment before considering the stock.