 "IPO")
Pharmaceutical companies are having a bad time on the bourses. With the US Food and Drugs Administration (FDA) becoming stricter on products entering its shores, Indian companies, especially the bigger ones, are being pulled up.
Dr Reddy’s has nosedived again on issuance of a warning letter on data integrity observations. The company had earlier received warning letters on three of its manufacturing facilities, due to which the stock corrected by nearly 25%. Cipla was served nine observations for their Indore unit while Lupin received a letter for their Goa facility. Sun Pharma posted poor numbers on the back of disruption in sales from its Halol plant which failed to meet US FDA standards.
At times like these, when interest in pharmaceutical stocks is low, a company planning to tap the primary markets to raise funds is surprising. Alkem Laboratories, India’s fifth largest pharmaceutical company by domestic sales, is planning to hit the market with an issue of around Rs 1,500 crore.
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Company sources have been quoted as saying that they have received very encouraging interest from institutional investors, both foreign and domestic, for the IPO during the road shows. Promoters of the company will be diluting their stake by 10% and are looking at a valuation of upward of Rs 15,000 crore.
Alkem posted consolidated revenues of Rs 3,964 crore and a profit of Rs 460.75 crore in FY15. A valuation of Rs 15,000 crore would mean a price to earnings ratio of over 32 times. That looks steep given the fact that the bigger pharma companies are trading around the same levels after the current correction in their prices.
But Alkem’s model is different from the bigger Indian pharmaceutical companies. Alkem is largely a domestic company with only 25% of its revenue coming from global markets. Alkem has been slow to respond to the call of US markets. The company received its first ANDA (Abbreviated New Drug Application) approval only in 2009 for amlodipine.
But to its credit, the company has since moved fast. In a span of six years it touched a turnover of $100 million from US markets. Inorganic growth was the vehicle used by the company to expand its presence in US. Alkem acquired a generic marketing company, Ascend Laboratories in 2010. The company acquired two API manufacturing units in 2012 and 2013. In 2015 Alkem acquired a formulation unit in the US.
Rather than having manufacturing units located in India which export to the US, Alkem is largely using its US subsidiary ThePharmaNetwork Llc to drive growth. The US subsidiary has increased its revenue from $10 million in FY11 to $100 million.
Alkem has filed for 66 ANDAs for the US market, of which 29 are paragraph IV fillings in the US. Paragraph IV are meant to tap the opportunity of exclusive marketing rights for a period of six months after a product goes off patent. Most top pharma Indian companies have grown using the sharp burst in revenue on account of paragraph IV wins.
Alkem hopes to double its global market contribution in the next five year. From a contribution of 25% to total revenue the company hopes international market will account for 50% of its revenue in the next five years. US markets will naturally be driving the growth.
The key differential between other large Indian pharmaceutical companies and Alkem is that the company is operating from the US, using units which are already US FDA complaint and people who are well versed with the nuances. Out of the 16 manufacturing facilities that the company has, five are US FDA compliant; two of these are in the US, contributing the largest portion of sales to US.
Alkem has proven itself in the Indian market being the fifth largest player. With the IPO proceeds it will need to fortify itself for the challenges in the American market, which perhaps it has not yet felt because of its size of operation and presence in generic market. But with the paragraph IV fillings the company will be using the same business model that the bigger Indian companies have adopted.
