Alembic Pharmaceuticals Ltd

ABOUT THE COMPANY

APLLTD is vertically integrated with the ability to develop, manufacture and market pharmaceutical products, pharmaceutical substances and Intermediates. Alembic is the market leader in the Macrolides segment of anti–infective drugs in India. Alembic Pharmaceuticals presents an extensive range of branded and generic formulations, in compliance with international and national regulations. Alembic’s manufacturing facilities are located in Vadodara and Baddi in Himachal Pradesh. The plant at Vadodara has the largest fermentation capacity in India. The Panelav facility houses the API and formulation manufacturing (both US FDA approved) plants. The plant at Baddi, Himachal Pradesh manufactures formulations for the domestic and non–regulated export market. The company has a state of the art Research Centre at Vadodara.

API’s makes up a significant part of the operations for Alembic Pharmaceuticals. It has an exclusive facility for manufacturing synthetic APIs, consisting of independent manufacturing blocks for Macrolides, NSAIDs and other drugs. The API manufacturing facility at panelav has successfully under gone inspection of USFDA and EDQM. The company makes product of Anti Infectives, Cardio Vascular, Musculoskeletol, Erectile Dysfunction and Gastro–Intestinal.

BUSINESS PROSPECTS

R&D Led Growth

As shown in above graph, APLLTD has really upped its game in terms of product innovation with larger R&D spends and accelerated ANDA filling translating into higher number of approvals for the company than filings in FY20. R&D as a percentage of sales is industry leading 14% while comparable peers are at average 10% or lower. APLLTD has spent around INR 2290 crore on R&D over FY16-20 and this has resulted in three times more approvals for the company between 2015-16 and 2019-20 and this can accelerate going forward. The company has filed 191 ANDA’s, received 125 Approvals and launched 79 products so far. APLLTD will keep increasing its US product portfolio and launching more products every quarter on the back of strong R&D strength. The company has R&D facilities in Vadodara, Hyderabad and USA with 1200+ strong workforce.

US Generics Scaling Big

US business which constitutes 44% of sales in FY20 has grown at CAGR of 44% over last 5 years.

US Opportunity is huge as shown by the large number of drugs going off-patent in US over the next 5 years. Alembic is well placed to take advantage of this opportunity with its high volume capex and industry leading US ex-R&D EBITDA margins. Hence, going forward US Generics could contribute a major percentage of its revenues and its margin profile could also improve due to this. The company expects US sales to shoot up present INR 2000 crore to INR 4000+ crore plus by FY23.

High Capex Cycle Nearing its End

APLLTD is building a robust foundation for the next phase of growth in the US through huge capex. Over the years from FY16-20, the company has spent around INR1500 crore to enhance its manufacturing strength in dosages other than oral solids (largely Injectables, Ophthalmic, and Derma). The company is in late stage of capex cycle with another INR700 crore capex planned in FY21. With this, it is expecting the opening of the below US FDA Approved facilities in FY21 and FY22. Aleor facility at Karkhadi has cleared USFDA inspection without any observations while the formulation oral solids facility in Panelav was audited by the USFDA with four procedural observations. All plants are cleared by USFDA.  

APLLTD is looking to raise INR 1000 crore through QIP to fund the remaining capex and pare debt. Its net debt is currently around INR 1200 crore. The company has not been able to generate free cash flows over the last 4 years due to the high capex involved in each of the years and this has resulted in its net block increasing from 708 cr in FY16 to 1552 cr in FY20. Over the next 12M, the completion of the capex cycle and increased pace of ANDA approvals would enable improvement in FCF. Once all the facilities are commissioned, this will be enough to drive growth over the next 3-4 years. As capital investment declines post 2020-21, APLLTD will witness higher cashflow generation and more attractive return ratios. Cashflows so freed up will be used to de-leverage the balance sheet.

India Business and API

APLLTD generates 23% from its Branded Generics business in India and 20% from API business. India’s business suffered off-late due to COVID related lockdown which led to lower outpatient visits and lower demand for its branded drugs in sections like gynaecology, gastrology, diabetes etc. The key differentiator for the company is that out of its Top 10 drugs for India only 2 comes under price controls. It is therefore insulated from government led price controls in its India business. Over the past two to three years, APLLTD has doubled its API capacity to 1,100 metric tonnes per annum in order to meet the rising demand. The company thus expects the API Business to show strong growth due to China substitution and strong price trend in the API’s it produces.

KEY RISKS

• High amount of debt on the balance sheet and capex still not over.
• The company raising QIP of INR 1000 Cr to fund future capex and pare debt – leads to equity dilution.
• Price controls for its major drugs by the US administration – Trump is already indicating towards price controls.
• APLLTD is major player in Sartan (used to treat blood pressure) portfolio with 15 ANDAs. Though the competition has increased in the US in sartans, but products are complex and high volume so no one player can take very large share. However, any pricing pressure in this portfolio can impact the company adversely.
• Over the last 4 years, the company has not generated free cash flows due to its high capex cycle.
• High depreciation could start from FY21 when APLLTD starts operating its factories as currently majority of the capex is CWIP.
• Management compensation as percentage of sales high at 1.4%
• Any delay in facilities inspection and opening remains a major risk

KEY POSITIVES

• Industry leading R&D spend as a percentage of sales at 14%. Most peers are at 10% of lower. This could lead to accelerated ANDA filings and increased business.
• High capex cycle is nearing its end and company is well positioned to exploit the drugs going off-patent over the next 4-5 years in US.
• High amount of ANDA filings and approvals which will proper growth going forward.
• Industry leading EBITDA margins in US ex-R&D which denotes a nominal increase in revenues could lead to operating leverage as costs remain constant.

GROWTH OUTLOOK AND VALUATION

APLLTD could start showing good growth once its factories start opening up from FY20 and FY21. The company is trading relatively cheaper at PE of 16.3 compared to its pharma peers due to uncertainty over how the investments will pan out. High debt and Negative free cash flows is another concern the market participants will be watching carefully. The company can rerate if the facilities open on time without any observations from USFDA and start contributing meaningfully in such a way that it generates enough free cash flows to reduce debt and increase the dividend payout.

Disclaimer: Have personal investments in Alembic Pharmaceuticals at the time of writing this note. Information in this blog is for educational purposes only. The articles  may contain external links , references and compilation of various publicly available articles. All copyrights and trademarks of images belong to their respective owners and are used for Fair Educational Purpose only.