This Company From The Pharmaceutical Sector Is Right Prescription For The Health Of Your Portfolio

Recommendation from Pharmaceuticals sector 


Company Introduction 

Alembic Pharmaceuticals Limited boasts a legacy of over 110 years and is a significant player in the healthcare industry. Headquartered in Vadodara, Gujarat, the company manufactures and markets active pharmaceutical ingredients (APIs) and generic pharmaceutical products such as anti-infectives, analgesics and cold and cough medicines. These products are sold in India as well as internationally in over 75 countries, including the US, Europe, Australia and South Africa. Furthermore, APL also focuses on chronic therapies such as cardiology, diabetes and gynecology, to name a few. 

Industry Overview 

While the overall economy exhibited signs of recovery in 2017, the global pharmaceutical industry experienced some headwinds. This was owing to customer consolidation in the US, mounting pricing pressure and competition among industry rivals. Indian pharmaceutical companies too have suffered considerable value erosion and demonstrated notably lower growth in the recent past (growth of 5.5 per cent in annual turnover in CY17). The challenges associated with demonetisation and the implications of GST proved to be a drag for the industry. Despite this, the Indian pharmaceutical industry has better prospects as it is expected to grow to USD 55 billion by 2020 from the current USD 30+ billion. In March 2018, sales of Rs 10,029 crore were recorded as the market grew 9.5 per cent year-on-year. Rapid urbanisation, coupled with increasing penetration of health insurance in the country and developing medical infrastructure, will serve as a catalyst for growth of the pharma sector. India is ranked as the world’s largest provider of generic medicines. India's exports to the US amounting to USD 16.8 billion accounted for about 40.6 per cent of India’s total exports, while Europe, Africa and Asian countries accounted for 19.7 per cent, 19.1 per cent and 18.8 per cent, respectively. 

Focus on Innovation and Technology 

With a strong focus on innovation and technology, APL has bolstered its product innovation capabilities by investing heavily in R&D. The company runs four research facilities in Gujarat and Sikkim, while also operating three research centres in Vadodara, Hyderabad and the US. With over 900 research scientists and 13 per cent of turnover allocated to research expenditure, the company has managed to maintain a strong foothold and attain sustainable growth, despite the stiff competition in the industry. The company’s competencies comprise of branded formulations, international generics and APIs. The chronic therapy has been at the forefront as it contributed 67 per cent of the company’s branded sales basket. 

On the international business front, APL established a stable front-end in the US in 2015, generating USD 100 million in sales during the current year and posting a remarkable growth of 69 per cent. 

Product Pipeline:- 

APL is focusing on building a stronger product pipeline for the US market by allocating 90% of research funds to this area. The company seeks to discover molecules with multiple technological barriers as it will award the company a competitive edge over its peers. APL’s dermatology business has filed three ANDAs in the financial year, while having a planned pipeline of 45 products. APL acquired Orit Laboratories LLC to expand its capabilities in the US; mainly pertaining to soft gelatin-based oral solids and oral liquids. 

Apart from enjoying a relatively higher ROCE compared to its peers, APL is reflecting a relatively higher dividend yield as well. With acceptable RoE and its P/E below the industry P/E, we believe the stock is trading at reasonable valuations. The pharma industry P/E stands at 33. 

Growth Drivers for Alembic 

With a view to attaining sustainable growth in enterprise value, the company identified R&D projects to be a major avenue for value addition. APL plans to potentially acquire new drug candidates and futuristic technology. It has allocated Rs 1,100 crore for establishing major facilities to expand its capabilities. The performance of the US front-end picked up in Q4FY18 and it appears to be promising for the future. The everevolving domestic product mix in favour of chronic/specialty segments are likely to propel growth. The greenfield oral oncology plant and derma plant are ready to be commissioned in FY19. The oncology injectable and general injectable plants will be completed in FY19. 

The growth strategy of the company involves actively investing in the international generics market with successful ANDA and DMF filings. The branded formulation sales also serve as growth drivers for the company. In addition to this, the company hopes to venture into therapeutic areas revolving around dermatology, oncology, and injectable formulations. 

Revenue Mix 

Of the three major business segments of APL, international generics, branded formulations and APIs contributed 38 per cent, 41 per cent and 21 per cent respectively to the total revenue. Of the 91 products launched so far, 13 products were launched during 2017-2018. Besides, APL has planned over 10 new product launches in 2018-19, thereby depicting a promising outlook for the company’s prospects in the immediate future. The products launched in the last five years cover 2 per cent of the market share and contributed 19 per cent to the sales. Of the new product launches, 90 per cent are in specialty segment. 

Financials 

APL reported a surge in market capitalisation at a CAGR of 18 per cent from 2013-14 to 2017-18. Despite disruptions in the last couple of years, APL has retained its market share and maintained its EBITDA margins. Looking at the YoY performance, in Q1FY19, the company’s revenue surged 37.50 per cent to Rs 811.42 crore from Rs 590.11 crore in Q1FY18. Similarly, the net profit in Q1FY19 spiked 124.94 per cent to Rs 113.98 crore from Rs 50.67 crore in Q1FY18. The EPS was reported at Rs 6.05 in Q1FY19, while it was Rs 2.69 in Q1FY18. 

In FY18, the company reported total revenue of Rs 3,131 crore, posting a meagre decrease of 0.09 percent as against total revenue of Rs 3,134 crore in FY17. Out of the total sales, 44 per cent were generated domestically, while 56 per cent were contributed by exports. The net profit showed a reasonable growth of 1.99 per cent, as it increased to Rs 409 crore in 2018 from Rs 401 crore in 2017. In 2017-18, APL reported an EBITDA of Rs 642 crore, posting a growth of 4.39 per cent in comparison to an EBITDA of Rs 615 crore. APL reported market capitalisation of Rs 10,300 crore and an EPS of Rs 21.89 in 2018. The company spent 2.34 per cent more on R&D, amounting to Rs 481 crore in 2018 versus Rs 470 crore in 2017. By virtue of these financials and statistics, we urge our reader-investors to HOLD this scrip.