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Alkem Laboratories Ltd: Indian pharmaceutical company growing consistently

Alkem Labs, an Indian pharmaceutical company

Annual Report 2019 notes
Alkem is Ready to Scale the Next Frontier of Growth. It was a landmark year for the Company AS IT CROSSED THE REVENUE MILESTONE OF US$ 1 billion. The intense focus on building market-leading brands, investing in state-of-the-art manufacturing and R&D FACILITIES, ensuring continual adherence to quality and compliance, setting up robust supply chain and distribution network, penetrating deeper into key focus markets and driving efficiencies and productivity enabled it to achieve this significant milestone. While Alkem has firmly established itself among the leading pharmaceutical companies in India, the determination and drive to outperform itself remains as high as ever.

In the domestic market, Alkem is amongst the prominent players in the acute therapy segments of anti-infective, gastro-intestinal, pain/analgesics and vitamins/minerals/nutrients. The Company looks to further consolidate its position in these therapy segments through market leading brands, comprehensive product portfolio, extensive marketing and supply chain reach and an experience of over 40 years. In the fast-growing chronic therapy segments of neuro/CNS, cardiology, anti-diabetes and dermatology, the Company is taking rapid strides to emerge as one of the faster growing companies in the country. The Company looks to outperform in the chronic segments on the back of new product launches including in-licensed products, effective sales and marketing strategies, improved sales force productivity and building strong brands.

In the US market, the Company has developed a healthy pipeline of products with over 120 ANDA filings of which more than half are yet to be commercialised. Continuous investments in R&D, adherence to quality and compliance and timely product approvals will be pivotal in taking growth to the next level, not only in the US market but also in other international markets. Investments in biosimilars and its in-house manufacturing is another tactical lever for growth.

All in all, the capabilities and capacities are in place, be it product offerings, manufacturing, R&D, supply chain, technology or control systems. At the core of the Company’s ability to realise an even stronger tomorrow, is the unshakeable competitive desire of its talented team to outperform and a work culture that is aligned with organisational goals. These strategic levers will bolster the successful progression to the next level.

The financial year 2019 has been a mixed year for the Company. While our International business, mainly led by the US business, delivered a robust year-on-year revenue growth of 31.2%, our India business faced challenges on account of FDC ban on select products, relatively weak anti-infective season and muted growth in our trade generic business due to tightening of credit terms by the Company. Our EBITDA margin dipped by 60 basis points compared to the previous year on account of higher API prices, increase in R&D cost and change in revenue mix. However, on the working capital front, we showed good improvement over the previous year, and that translated into better operating cash flows during the year.




Clavam, one of their brands features in the top 10 drug brands sold in India

Key risks mentioned in the annual report include
Alkem’s products face fierce competition from multiple pharma players, which may lead to shrinking revenues and impact its competitive advantage. The occurrence of quality issues, manufacturing defects and adverse audit findings by regulatory agencies may impair Alkem’s reputation and expose it to liabilities, fines or penalties. Adverse pricing regulation by NPPA on prices of key products may reduce company’s revenue and margins.

My view

The company witnessed strong growth across major therapeutic areas in Q2 FY20. As per the company’s quarterly results, anti-infectives and gastro-intestinal segments grew 30.8% and 17.5%, respectively, whereas Indian pharma industry in that space grew only 19.9% and 12.1%, respectively. The stock can do well especially because majority of the market is looking at MNC companies and ignoring other quality companies.

Technically, Alkem is near its 52 week high breaking out with a cup and handle pattern with high volumes
Disclosure: I have recently bought a tracking position in Alkem India, I might buy more/exit if the thesis changes. Hence recency bias. I invite other members of the forum who have looked at this company to share their opinions.

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I have been tracking Alkem for last 2-3 years. I feel it is one of the best bets in Pharma given their large chunk of existing revenues are coming from domestic market thus, they were largely untouched by the regulatory storm witnessed by the rest of the players with major focus on US market.
Other good thing the company did is, during the time when everyone was trying to fix their house to come to terms with FDA, Alkem worked on building a strong pipeline for US market, thus making sure they don’t miss out when the US market sees an upturn post 2020.

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Limited Coronavirus Impact: China remains a major source for the procurement of intermediates and APIs for Indian pharmaceutical companies. Alkem’s direct sourcing of raw material from China is insignificant, and it has an inventory for the next one-to-two months. However, with significant indirect dependency on overall sourcing of raw materials from China, Ind-Ra believes the company’s gross margin will be impacted if the coronavirus outbreak spreads across different regions in China.

src: India Ratings

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Q4 FY2020 Results

https://finance.yahoo.com/news/edited-transcript-alkem-nse-earnings-194358138.html

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What I find interesting about this business -

2/3rd revenue from domestic market, within that 41-42% from the anti infective portfolio. Most of the portfolio is towards acute therapies, around 25-26% of the portfolio under NLEM. Domestic revenue growth of 13-15% per annum

US revenue at 2300 Cr with all applicable plants now compliant with US FDA norms. This part of the business has been growing fast since 2017 and has almost doubled over the period.

Reading between the lines from the Q4 conf call, US book (some of it exported from India and some of it made at US based plants) works at a post R&D EBITDA margin of 9% and it broke even at around the 1500-1600 Cr mark. Which means the India + non US export book works in the 21-22% EBITDA range, to be expected for an acute therapy heavy portfolio.

R&D spend of approx 6% of sales, of this 90% is towards the US business which implies an R&D to sales ratio of around 16-18% as of now for the US business. This is very high by usual standards and will most likely come down as the US revenue scales up due to new launches from their approved ANDA pipeline.

Good amount of delta possible from the US business on the margin front while the India business should steadily grow at the usual range once the COVID-19 situation normalizes. Minimal legacy issues on the US book since bulk of the growth happened post the 2015-16 reset that Indian pharma players had to face in the US. Return ratios and profitability likely to trend higher from here while revenue growth should stay in the 13-15% over the medium term. Regulatory risk is within acceptable levels in my assessment.

Disclosure: Interested and invested for self, customers

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@zygo23554 How do you decide to invest in a particular company in Pharma sector (Alkem in this case) when there are multiple companies with somewhat similar offerings (Domestic & US business, Branded Generics, Biosimilars etc.). Specifically, Alkem is a relatively newly listed company (Dec 2015) and so not enough track record to judge management’s ability to deliver on promises made in Investor communications. Is it just the growth drivers?

Sorry if it sounded like a noob question. However, I’d really appreciate your perspective.

Disc: Interested in Alkem.

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Not a noob question at all. This may look like a noob question superficially but is one of the most obvious questions I asked myself when I started looking at pharma.

Just a bit of background - I never invested in pharma till end of 2018. All my interest and investments in pharma are only post Oct 2018

So when I finally got around to looking at pharma after I made investing my full time career, I started with building the industry landscape using screener and made the following observations -

  1. There are 20 companies that trade at a market cap of > 10,000 Cr
  2. All of them are profitable with an average promoter holding of 55%
  3. Mid size companies focusing on specific segments/therapies/niches have had a higher ROCE than the large ones since 2016

There appears to be no great skill or management quality involved in running a decently profitable pharma setup and taking it to some level of scale. This will not be a consolidated industry, the oligopoly industry structure is likely to stay. Barring the past 3-4 years, pharma stocks have more often than not made money for investors. To summarize, this is one of those “difficult to screw up” business models. For this very reason, betting on the right horse would not be my approach to selecting pharma stories. It would be more of - get into stories that have minimal risks and can keep growing over time where one can allocate a good amount of capital. I do not believe there are any out sized returns on offer from pharma for the average investor - unless one has deep domain knowledge.

Next step was to see why did pharma fall out of favor post 2015?

Increased regulatory risk for those companies that has a US heavy business
Consolidation in the distribution channel leading to the emergence of three concentrated buying centers who started negotiating hard on pricing
US regulator also started encouraging competition in the generics space to try and push down the cost of healthcare in US. Healthcare was starting to be a big drag on the US Govt budget

A lot of incumbents who saw abnormal growth in the US business prior to these changes had started making a lot of investments into newer areas. In addition to the the execution risk that was anyway there, the payback period for these investments suddenly had a higher level of uncertainty due to these developments. All these stories have under performed for this very reason, though the 5 year revenue growth has been > 10% for a lot of them, the profit growth, depressed ROCE just collapsed the terminal value due to the higher uncertainty that investors came to terms with.

On the other hand, segments like API making and domestic pharma were relatively lower on all these risks - that is where I naturally drifted towards initially. I remember my initial screener was something like minimal business from US market, ROCE > 15%, no promoter pledging and revenue growth > 10% over the past 5 years. Other than NLEM, domestic pharma has no regulatory risks worth worrying much about.

In a nutshell, my preference for certain pharma stories is based more off risk management and my own acknowledged lack of deep understanding of the pharma domain . I might start looking at the other larger peers in pharma now that my own understanding is at some respectable level having tracked a particular set of stories for 5-6 quarters now.

Coming to Alkem, though they have considerable exposure to the US market, the bulk of the business growth there has happened post 2015. They had the advantage of not having a legacy book in the US, so they were able to calibrate to the changed operating scenario. The domestic business continues to grow at a healthy 13-15% with stable margin and ROCE profile. The possibility of steady growth in the domestic business coupled with significant operating leverage in the US business is what makes the possibilities interesting here.

I do not have a view on the promoters other than the simple view that they look like they know what they are doing. They are restrained and consistent in communicating business prospects in the conf calls, and also have sensible answers handy whenever someone asks them questions on strategic intent. I will continue to pay keen attention to that rate at which they are able to monetize their ANDA approvals - the fast paced growth in the US business indicates to me that their R&D spends are well controlled and targeted. If and when that changes it might trigger me to question my thesis.

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Thanks for the detailed insight on pharma industry dynamics. Which quality companies you see that can grow at a faster clip from here given the tailwind ? Many thanks

How has the equity capital increased from 12 crores to 24 crores from 2014-15. Not finding any bonus/rights issue

Some copy paste of interesting information from the company’s AR:

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While we have global ambitions for our biosimilars, we would be launching our first biosimilar product in India from our own R&D and manufacturing facility in FY 2020-21. It’s a 99.91% subsidiary.

In addition, it has a 100+ bed clinical research facility for conducting bioequivalence and bioavailability studies to prove the efficacy and effectiveness of dosage forms. Over the medium to long-term, Enzene aims to launch biosimilar products which are in preclinical and clinical development stage in India and core international markets.

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In India, we continued to drive a strong performance with a double-digit revenue growth of 12.9%.

In May 2019, we had launched Evogliptin in India, a novel molecule in the anti-diabetes segment. Our medical representatives have been extensively engaging with health professionals to educate them on the virtues of this molecule vis-à-vis other molecules currently available in the market. Backed by science to serve unmet needs, this molecule has received an encouraging response from health professionals across our country.

Our International business complimented the India business with healthy growth of 14.4%. The US, which is our key international market, grew at 15.9% driven by contribution from new product launches and market share gains from existing products. Other markets like Australia, Chile, Philippines, Kazakhstan, Middle East and African markets also delivered healthy growth during the year.

Standalone revenue growth of 17 %. Export revenue growth of 31%.

During the year, we invested ₹ 4,726 million or 5.7% of our revenues in R&D, as against ₹ 4,622 million in FY 2018-19. Led by the efforts of our researchers, we filed 18 ANDAs during the year and received 22 ANDA approvals which includes 6 tentative approvals. Alkem now has a total of 144 ANDAs (as on 31st March, 2020) filed with the USFDA and 89 approvals.

The Company has already made significant capex investments through FY 2016-17 to FY 2018-19 which it will look to leverage to drive future growth and profitability

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The Company continues to rank as the number one anti-infectives Company in India for over 15 years and also features amongst the top 5 pharma companies in the therapy areas of gastro intestinal, pain & analgesic and VMS.

Company’s top 10 brands feature amongst the top 2 selling brands in their respective molecule category and have been growing at a steady pace.

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In the fast-growing chronic therapy areas of neurology, dermatology, anti-diabetes and cardiology, the Company grew at 1.5x – 2x the market growth rate. During the year, the Company not only gained market share in these therapy areas but also improved its rank in segments like anti-diabetes and dermatology. As per IQVIA data, the Company now features amongst the top 7 Neuro/CNS companies in India and ranks amongst the leading companies in the Alzheimer’s segment.

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As per IQVIA report, the India pharmaceutical market is expected to be one of the fastest growing pharmaceutical markets in the world……

….there could be some near-term impact on the Indian pharmaceutical industry due to COVID-19. Due to extended lockdowns in a large part of the country and because of the fear of getting infected, lot of elective surgeries are getting deferred. Many of the hospitals have shut their OPDs and doctors have stopped going to their clinics. This has impacted the generation of new prescriptions which is an important growth driver for the pharma industry. With the gradual relaxation in lockdown rules, activity levels are expected to pick up in hospitals and clinics, which should help the pharma industry to gather momentum.

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The Company’s US business has demonstrated sustained growth over the last ten years….to further scale the growth and navigate through these headwinds, the Company has created its own front-end and supply chain, backed by
cGMP compliant manufacturing facilities.

The Company has filed more than 1,100 dossiers across international markets with more than 750 approvals.

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Hi All,

Alkem Laboratories has launched Favipiravir for the treatment of COVID-19 patients under the brand name ‘Alfluenza’. Favipiravir is approved by the Drug Controller General of India (DCGI) for restricted emergency use.

Earlier this week, top drug makers including Lupin and Sun Pharma have launched a generic version of the antiviral drug favipiravir to treat COVID-19 in India.

Lupin’s version of the drug, called Covihalt](https://www.livemint.com/science/health/at-rs-49-per-tablet-lupin-launches-covihalt-for-covid-treatment-11596606287592.html), will be priced at ₹49 per 200 mg-tablet, it said. Sun Pharma on Tuesday launched its own version, at ₹35, so far the cheapest in India.However the article is silent on the pricing of Alkem’s ‘Alfluenza’.

Thanks,
Deb

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Superb result declared.

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Disc - Invested

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Hi,

Undoubtedly extraordinary results in this unprecedented times.India business degrew only by 5%.and icing on the cake is “US sales for the quarter was ₹ 6,664 million, recording a year-on-year growth of 38.3%”.
Which seems to be the primary reason for the EBIDTA to jump more than 100% and Margin to increase more than 1230 basis point.

In terms of market positioning point of view of various products not much change is there.
Kindly refer to the below screenshot.
Alkem

If this results are sustainable company should be re-rated in my view.

Thanks,
Deb

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Pharma as a pack coming out of long consolidation. Most of the pharma companies are posting excellent number, thanks to lower base. However I am not sure if this trend is sustainable. Look at the number posted by Alkem, 8% increase in sales triggered massive upswing in bottom line. Do I see margin of 26% sustainable going forward ? I dont have confidence. Until recently narration about pharma companies were mostly on the product differentiation or type of new launches. But all of sudden there seems to be paradigm shift in the business. Is it COVID introduced short term change ? I dont know.

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Agree… the performance is superb…but I am not sure how many API’s they make…though the management is strong and dynamic…
API is going to be the future…
I am sure they must have some plans…
Discl: invested since last one year…holding it patiently though the stock had fallen quite a lot in recent past …

sustaining the growth in india may be possible (as lesser growth)… From here on it will be only positve direction. I believe, if you have good quality management - US or other international business should be possible to grow 30%. Also, Alkem focus on biosmilars may add some advantage in revenue growth cycle… It is a good stock to have (as domestic focus as cussion and chances of good growth international markets)… balanced one - not like Lupin/Sun

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Q1 con-call highlights.
While intl business seems to be on bright note;
Must keep an eye on the domestic sales in coming quarters

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Hi,

They have 3 plants with API capability.2 in INDIA and 1 in US.

California (US)
Ankleshwar (India)
Mandva (India)

But how may API products are there that information I couldn’t find.

Thanks,
Deb

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To give you an idea, Dr Reddy’s lab has 60 APIs, IPCA has 80 API’s, Cadila 38 , Cipla 100 and Aurobindo has 200…:slight_smile:
Alkem also has some…but not sure how many ? and whether for captive consumption or for selling…??
And if it sells API, then how much revenue it has earned from ApI sale in q1, 2021?

I listened to the concall of alkem q1 fy 21 results.

First of all the management articulation to all questions is superb, trying to honestly answer all questions and not trying to hide anything at all.

US business was the star of the show with tremendous growth. Half of their approved ANDA are yet to be commercialised. They plan to launch new products on a consistent basis in the US markets.

R&D costs at around 5.9 % of sales which is a big variation from the high teens of alembic like companies.

Company has become net debt free.

3.5 million USD (nearly 25 crores ) was a one time outlicensing R&D income. Company can expect such incomes in future too but as I understood, there would be lumpiness.

Some spillover of sales from March to June quarter. But similar spillover happens in subsequent months too. July for domestic markets has performed well.

Traditionally because of antibiotic predominance in the portfolio, q2 and q3 are the best quarters for the company. So need to watch next 2 quarters on how company performs.

The Trump executive order was discussed. Company says its meant mainly for big pharma companies. It has manufacturing facilities in US too. No definite answer on the question but the tone suggested that it is not a cause for concern.

Company is not a predominant API player and does not intend to be.

All in all the company has performed very well and the q1 results atleast for me was an unexpected postive surprise.

disc: no investments but under watchlist.

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