HDFC sec recommended Alembic Pharma
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/2997809
Link: http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/2997809
Don’t you think their EPS estimates are a bit too conservative? 10.1/share seems a bit on the low side to me…I would look at 11 atleast
EPS projections can wait. We need more discussions on the concerns. Alembic followers please come forward and negate these:
Concerns (From the HDFC report)
1)APL has been a late entrant in tapping the opportunities in theRegulated markets. Hence, intense competitive pressures could impact its performance.
- Dependency on top 5 brands still high:Over the past 3-4 years the top5 brands have contributed ~40% to the total sales. So degrowth in any of these brands could adverselyimpact its financials and profitability.
3)Forex fluctuations:~43% of APLâs sales comes through exports and any adverseforeign currency fluctuations could affect its earnings.
4)New pricing policy:In the domestic market, there is talk of introducing a new pricing policy - NLEP. If this policy comes into effect, it would bring APLâs largest drug, Azithral (Rs.100 crs brand,) into its pricing purview, which could affect growth projections going forward.
5)Currently, only around 30% of the total sales (mainly acute therapy) come fromproducts under price control. The management indicated that with the coverage ofnew products in the acute therapy segment, thepercentage of products under the DPCO couldincrease to 35% and this in turn could hurt its financials.
6)Falling API sales :APLâs API sales has been falling continuously over the last few quarters due to competition fromChina and other sources. Thishas impacted the API exports,which is also showing de-growth. However APL is making consciousefforts of exiting low margin API sales and instead concentrating on captive consumption (to increase to 50%over 3-5 years from current 30%) and/or tying up with ANDA &DMF holders for improving the margin profile of its API business.
I was waiting to see when and if any contrary opinion emerges:-)
While there is new-found confidence in the company, and there are big positives, what has been holding me back is the aggressiveness being professed by the company in its maiden US debut.
So far it has been partnering Big pharma for its US Foray like you might have noticed in the press announcements. What we found out this time is that the Management now plans to go it alone in the US market - setting up its own marketing/distribution network.
This has been a discordant note for me. And while a Sun has done it and so has a Lupin, the stakes are much higher for a late entrant into the biggest (and toughest?) pharma market in the world. Not a given!
Arguments that a 15-16 P/E is a mouthwatering buy for a Pharma company - may be too simplistic and generalised. More work needs to be done on Alembic. I am not sure the organisation is ready on the US/marketing front and it may just extract heavy investment if they set too scorching a pace.
I will try to put up Alembic Q&A in next couple of days - but this above line of thought we couldn’t pursue in the Q&A - I was frankly pretty blown by the confidence on show and the ready answers:-) (couldn’t think clearly on my feet:-.
We can always put it up now and elicit a proper response from Management.
But that’s not the same thing as doing it LIVE! Observing how it comes - the answers - straight from the hip, or…gives us many clues. Still that’s worth getting than being blind about it!
Donald,
By reading the recent AR of alembic pharma, I got a similar feeling that, these guys knows what exactly happening in pharma market, where the money is, and how to align themselves to make the most of it.
Hi Rudra,
Alembic management have factored many concerns related to domestic market, when they have given 7-10% growth projection for domestic market. This is not the most exciting part of alembic story.
The most exciting part of alembic story is of export, which management has guided to grow at 30-40% (these projection were given much before this sudden fall of rupees to 66-62 level).
The second best part is reducing debt, and hence reducing interest cost, which again will add to bottom line, and the chance of higher dividend payment (Alembic Ltd has very big stake in Alembic Pharma, and might be more happy with a higher dividend).
Combining these 3, one can expect a 20-25% growth in EPS in next 1yr for alembic pharma. The good thing about alembic (for some, it is bad thing) is the not-so-clean past of promoter family, which is one of the primary reason of low pe as compared to other pharma cos with similar size. But, behavioral economics tells us that people has a poor long term memory, and hence alembic will reach to the average pharma pe in long run. So there is a scope of small pe expansion in near future.
These are the investment rational behind alembic pharma.
Disc: I have been adding alembic from 100 level. It is my 2nd largest holding in my pf. So my views are bound to be biased.
Hi Donald,
Actually it would be good if you canput up how the management’s body language wasduring your interactions, especially on trickier questions.But itit might betoo much of a task tryinig to observetheir body language, while at the same time digesting their answer and preparing your next question.But in case you notice something really glaring, that should definitely rasiesuspisions.
BR,
Shankar.
Very relevant concerns raised.
I feel that the management realises that they have been working in the domestic markets for way too long(100 years!!) so one can understand their itch in going to US markets.Also,niche segments will always have a sizable market…so they may not be ‘late’.However,this means R&D attains prime importance…recently,they got the nod for Para IV Desvenla which inspires confidence on the same front…it would be very interesting to monitor where APL goes.I am pretty sure they know what they are doing by ‘doing it themselves’ in the US. 
Disc.: Hold 20%+ in APL & am even more bullish now…
Its not about R&D strength - we are in agreement Alembic has it in them
Q is about the absence of Marketing strength - key is getting the Insurers’ to prescribe the generic medicine (like in the case of Desvenlafaxine, a bioequivalent version of Pristiq by Pfizer) is the biggest challenge. Thatswhy they went to Ranbaxy for this drug.
But in next 12 months they want to go it alone in the US market - which primarily means setting up their own manpower/field-force in US. A Sun Pharma and A Lupin have done it successfully - they maintain ~350 salespeople in US alone. Distribution & Logistics will be outsourced just like Sun and Lupin has done. But they are much bigger companies 5x-10x the size.
This is pretty aggressive. Can Alembic pull it off? The US product basket is small - attracting and retaining the right talent for this itself is a very big challenge apart from the costs involved (these are highly skilled in-demand pros).
A more balanced approach would have been to go the collaboration route with Ranbaxy/Others for a couple of years, learn the ropes and then make an aggressive bid on its own. This is kinda going for broke - what if it doesn’t work out? what are the pitfalls in that? Can the earlier relationships be revived? …
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The other thing ironically that bothers me somewhat - is the extreme effort put at communication. Look at the Investor Presentations - fabulous - every slice & dice is already offered to you ;-). And the 2013 AR - as Subash Nayak mentioned - does 2x better. Haven’t seen in a long time an AR going to these lengths to present every bit of segment info, product mix slices, plans, topped by P&L analysis and BS analysis!!
Too much of a good thing? Giving you so much of pre-cooked analysis - that you stop doing your own analysis?
don’t get me wrong - we all can see the positives - but I am raising issues here - so everyone is aware of the “aggression” - it’s like a sleeping giant has suddenly woken up - and is out to prove ton the world - that it can also play in the league of the big boys of Indian Pharma - something that it has floundered along all these years - why in the RoW markets its performance is much worse than even our Ajanta Pharma!! Every market brings its own challenges and not every organisation is geared up/ or can suddenly morph its culture/character to handle big time challenges!!
Now that you have some food for thought, please wait for the Management Q&A update - which is bound to wow! folks all the way - its hard NOT to feel wowed!- that’s what I felt again as I tried to look through my scribbled notes/reconstruct the conversation.
This & the above post from my side to get everyone in the right mindset - not to get swayed completely by say a ‘right-talking’ management. They might deliver every bit of that aggression, yes that’s a distinct possibility - given some major successes.
But instead of playing blind…let’s not lose our critical thinking ability. Let’s question as hard as we can:-). And then…
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I think it makes sense to focus on some risks pertaining to alembic pharma…
First is the risk of litigation in US markets… If they face a big enough litigation then they could land up in really big trouble… the feedback from the management was that they think real hard, take opinions of some expert attorneys before venturing into this landmine. According to them the risk is very very low.
Coming to other risk factors since the focus is on exports, currency fluctuation can take a toll… Management feedback was they do very conservative hedging and dont go into any exotic hedging.
Because of focus on exports, it faces regulatory risks… We have seen what happens to stock prices when US FDA waves its magic wand, in stocks like Wockhardt. Again here Alembic management feedback is that they have been inspected twice in recent past and practically nil queries have been raised.
Coming to risks in domestic markets… Azithral its top brand worth more than 100 crores has come under DPCO… Prices have been slashed from around 95 per 3 tablets to around 60 Rs per share. If more products come under new pricing policy, it can be affected to a larger extent… Management accepts that company will take a hit of around 20 cr in revenues bcos there will be rise in vols once price is cut…(I personally will vouch for that bcos I did not prescribe Azithral bcos of extremely high cost of drug… but now it will be a preferred brand for me mainly bcos it is available in each and every medical store)
FOCUS AREAS for the company to attain the expected 20% CAGR growth are formulation exports and speciality therapy focus in domestic markets… These are likely to be the growth drivers.
Overall I think a lot of growth drivers are in place for Alembic Pharma… To add to this the company is improving its balance sheet… It reduced close to 165 crores debt in fy 13 inspite of having neared expansion… So all in all for me it looks a good stock to buy on sharp declines.
Coming to donald’s observation about management providing too much of details etc… about things being too good to believe… I think I would like to give them the benefit of doubt…I think its a feather in the cap for the investor relations guys… they have done a stellar job in preparing the annual report and the first quarter investor presentation.
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Regarding the AR,even Torrent Pharma’s AR was pretty detailed…a smaller co.,Marksans Pharma also gives decent detail.Then,you have your Ipca,Lupin,Glenmark with their attention to detail.At first,I felt proud(in an arrogant way) of being invested in a co. of this pedigree(on reading the AR)…then the liberal dividend policy…I DO see that they are trying to reach out to investors & tell them all there is to know/attract them.
Also,one thing that is giving rise to ‘concerns’ is the lack of financial history.We only know that the co. has done very well(& should do well) in the past 2 years & the management is aggressively pursuing new opportunities.APL has been around for over a 100 years,maybe the US was a well planned foray…maybe they are being too aggressive about it…maybe they CAN handle a new field force…these ifs & buts are less known to the markets,so we have the ValuePickr advantage intact
How can we know more? Is Management Q&A still an option? Or one will have to find an APL employee? Should we also monitor the interest cost parameter more closely? (won’t setting up a new field force require cash? Or even,new debt? Would that lead to a rise in interest costs…here,there? 100 cr. is the red line for 'em though)
Donald sirji,what do you suggest?
A lot of things can go wrong on the US front. Also revenue visibility from ANDA filings is lot probabilistic as price destruction (post patent period) and distributed market share (post FTF exclusivity) are very difficult to ascertain in a sacrosanct manner. Lot of work still needs to be done.
For example: A brokerage reads…
"…Generic Pristiq ER launch has not gained much traction. Company is hoping togain traction over the next few quarters. We have reduced our assumption form30% price erosion and 10% market share to 50% price erosion and 8% market sharefor FY14E and from 70% price erosion and 15% market share to 50% price erosionand 15% market share for FY15E… "
Waiting for the management Q&A. Lot of work still needs to be done. Margin levers, de-leveraging balance sheet, focus of chronic segment growth and strong R&D led pipeline are definite positives, but we need to weigh them in tandem with the risks involved.
Azithral 500 alternatives sells for as low as 73 paise a tablet as against Rs.21 for Alembic’s azithral tablet (500mg). Bdom F 500 by Bewel Labs, Kolkata sells for Rs.7.27 per strip of 10 tabs! Is it any indication of the cost of making it and profit involved?
For all the bulls in Alembic, want to leave you with some food for thought - as I start reconstructing the Management Q&A. Its been my contention that among all the impressive presentations and updates from Alemebic, it's easy to get lost in all the impressive details, and lose focus!!
How many of us have got this snapshot very very clear in our heads? A simple fact that 35% of the business actually hasde-grown significantly in 2012-13??
| Segment % | FY13 | FY12 | Change | |
| Domestic Formulation | 58% | 887.2 | 782.6 | 13% |
| Domestic API | 8% | 113.91 | 94.71 | 20% |
| International API | 16% | 236.76 | 279.14 | -15% |
| International Branded | 3% | 44.16 | 56.64 | -22% |
| International Generics | 16% | 235.86 | 241.47 | -2% |
And if you follow sequential quarter after quarter patterns, that might leave you with more questions.
I have to make an admission here. Somehow Alembic was not in our priority list for the Gujarat trip last, and we weren't prepared beforehand. On the eve of our Q&A, it took me some 2 hours to just get this in my head along with quarterly breakups - and still couldn't do full justice to this in the questioning:(.
But we can make amends now:). Obviously there are counterpoints to above from latest quarter trends. So lets have some views in - What does this data tell you - how would you question Management systematically on above?
The best questions get incorporated in the left-over questions (TBD) of the Management Q&A.
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Just to stimulate critical questioning and get inputs from everyone, I am leaking selective portions of Management Q&A in advance:-)
If we had prepared for this Q&A in peace, this is how I would have gone about questioning.Please HELP contribute in questioning each segment critically. We can still get all questions answered, hopefully
1.OVERALL BUSINESS MIX/SOURCES OF GROWTH
|
International business seems to have de-grown significantly - 35% of Revenues from 40% levels ?? Kindly Comment.
TBD
1.1 INTERNATIONAL BRANDED
Kindly take us through the International Branded business. Does it cater to the ROW Markets?
Products are the same as our domestic branded formulations. Yes this segment caters to the ROW Markets like Russia & Africa.
Is there a country specific branding/sales strategy or it's the same brands across geographies?
Its the same brands being marketed in every country
Competition must be intense in these countries as most Pharma companies from India have a significant presence in these markets?
Yes there is lot of competition. But we have formed a new Team focusing on this segment. We should see 25-30% kind of growth in next 2-3 years.
Isn't there a need to strategise differently for these markets? For example, we know of Ajanta Pharma that follows a complete country-specific product model based on demographics/ prevalent disease profile/ affordability and has invested in building up country-specific brands over last several years in these same markets. Kindly comment
TBD
What is the Marketing/Distribution set-up in these markets? How many field-sales employees currently, and typically per country? What is the plan for scaling this up in next 2-3 years?
TBD
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Attaching file which shows how alembic is slowly moving towards export segment (which is a good thing when rupees is losing its sheen)
Alembic-Pharma.xlsx (18.8 KB)
@Subash - Thanks for the data. What additional questions come to mind? Look critically.
Leaking the next set of questions. Please help guys.
1.2 DOMESTIC API
As we understood from you last, this is a segment that is completely fragmented, intensely competitive, and if I remember correctly you planned to get out of this segment. However this is the segment showing highest growth by 20% over FY12. And thus increased contribution to Sales from 7 to 8%. Kindly comment
The API segment (Acute therapy) that we were present in is very competitive - it is in turmoil. Chines products have flooded markets world-over and India is no exception.
We have done 2 things a) Shift Focus on our own products - increase Captive use b) Shift focus to cater to large pharma company ANDA API requirements - become their first or second source. We have been seen successes on both these fronts.
Give us a sense of the domestic API product mix today and how it has changed in the last 2-3 years, and more so over the last 1 year? How many are specialty APIs and how many Acute Therapy APIs still?
TBD
What’s the domestic API product basket size today? And in last 2-3 years?
TBD
How much is the Captive API use today in volume share terms? is this likely to go up in the coming years in view of the expanding branded and generics formulations footprint of the company?
TBD
While Captive API use is likely to aid margin pressures, its not contributing to Revenues. How sustainable do you see the growth in requirements from large pharma companies for this segment? How many large pharma clients?
TBD
What are the main challenges here? Catering to more number of customers? And maintaining existing relationships with large pharma customers/penetrating deeper?
TBD
Sales have actually been contracting sequentially for the last 4 Qtrs - From around 33 Cr to just about 20 Cr in 1QFY14. How is this likely to pan out in FY14-15?
TBD
And here’s a section that I completely missed asking ;( - just because my hurried Q&A notes missed noting this segment down explicitly. Just goes to show how inadequate preparation gets you inadequate results!
Please flag if you think of more questions.
1.3 INTERNATIONAL API
Kindly educate us on this segment. Is it correct to say Internal APIs consist of Sales to Regulated markets (primarily Europe, no US ) as well as semi-regulated emerging Markets? Which are the emerging markets with API Sales?
TBD
What is the product basket size for regulated Markets today?Is it a correct statement to make the Regulated market DMFs are mostly Specialty APIs?
TBD
Kindly give us a sense of the Customer base in regulate market APIs. Is it true that in recent customer wins in Europe, you have successfully positioned Alembic as the primary/alternate source vendor? How do you strategise/execute on this key sales premise?
TBD
Why will this be sustainable? What is your niche among so many Indian pharma companies with approved/pending DMFs?
TBD
Total no of DMFs already approved? How many expected to be filed in 2013-14?
TBD
What about the Emerging markets API basket? Is it essentially the domestic API products? Who are your customers for these markets - local pahrma or global pharma companies? What are the challenges for these markets?
TBD
International API Sales have improved over the last 4 Qtrs - from 57 Cr to 86 Cr in 1QFY14. However in 1QFY13 it was at 83 Cr. Kindly comment on the outlook for FY14 and FY15? Why will future growth be sustainable?
TBD
I had done an small exercise on how Alembic pharma Q2 sales should look like (mostly interpolation of past data, along with the export tilt + rupees devaluation). Sharing with everyone.
Note: This is just an extrapolation based estimate (a pure mental calculation)
Alembic-Pharma.xlsx (19.4 KB)