Suhani Adilabadkar

Alkem Laboratories reported a stable fourth quarter, though Covid-19 has dented its domestic numbers. Highly focused on marketing, distribution and strong branding since its early years, Alkem’s dominance in the anti-infective segment has remained unchallenged for over a decade. The generic drugmaker is engaged in the development, manufacture and sale of high quality pharmaceutical and nutraceutical products marketed in India and over 50 countries internationally. Alkem boasts of over 800 brands, an infrastructure of 21 manufacturing facilities (six US FDA approved), 5 R&D centres in India and US, a growing presence in more than 50 international markets, with US, Australia, Chile, Philippines, Middle East and East Africa being its key overseas markets. 

Quick Takes

• Domestic business grew at a tepid rate of 3% YoY though international sales gave the required boost, rising 23% YoY.

• Operating margin stood at 14.79% expanding 212 bps YoY and PAT came out at Rs. 191 crore growing 12% YoY in Q4 FY20.

• Taxim was the first Rs. 100 crore brand not only for Alkem but also for the Indian pharma industry.

• US market, witnessed double digit growth of 26% YoY while domestic business grew 3.3% in Q4 FY20. 

• Alkem is the second largest player in the country in trade generics which is growing in double digits.

• According to Alkem management, significant delays in transportation resulted in lower booking of sales for the month of March and the Quarter ended March FY20.

• Alkem is very bullish about its US business growing in double digits, with a target of 10 product launches in FY21 and ROCE of 15% within 4-5 years of time frame.

Profits Improved in March Quarter FY20

Alkem ended FY20 on a strong note with annual PAT growing at 48% YoY along with operating profit and revenue moving at 32% and 13% YoY respectively. Domestic business grew at a tepid rate of 3% YoY though international sales gave the required boost rising 23% YoY in a covid hit March quarter FY20.

Revenue in Q4 FY20 stood at Rs. 2049 crores against Rs. 1854 crores in the same period last year, growing 10% YoY. Higher efficiency and cost containment measures drove operating profit from Rs. 235 crores in Q4 FY19 to Rs. 303 crore in the March quarter FY20 rising 29% YoY.

Operating margin stood at 14.79% expanding 212 bps YoY in the March quarter. Net Profit or PAT came out at Rs. 191 crore in Q4 FY20 compared to Rs. 170 crore same period previous year growing 12% YoY. R&D expenses during the quarter was at 6.1% of revenue from operations and 5.7% for FY20.  Commenting on the Covid-19 impact, Sandeep Singh, MD, Alkem Laboratories, said, “Because of the current situation, while there could be some slowdown in near term we can navigate through these tough times on back of the strength that we have built over the years. Those are strong brands, large field force, extensive product portfolio, pan India distribution and an experienced management”.  

Alkem Labs – From Metron Tablets to Taxim

Alkem’s IPO was subscribed 44 times and the stock listed at a premium of 32% in december 2015. Initiating its journey in 1973, Alkem initially manufactured broadcillin capsules and metron tablets through its loan license, but its major breakthrough came in the form of Taxim (antibiotic tablet) in 1989.

Taxim was the first Rs. 100 crore brand not only for Alkem but also for the Indian pharma industry. Alkem’s other iconic brands include Clavam, Ondem, Pan, Pan D, Taxim-O, A to Z, Gemcal, Xone and Pipzo. Taxim has 77% market share while Pan, Pan D and Ondem about 30% market share in India.

Moving on to the March quarter results, domestic market contributed 62% to total revenue mix, reported at Rs. 1217 crore growing 3.3% YoY and 12% YoY for FY20. Within this tepid growth, anti-infectives segment grew at more than 1.5x the industry therapy growth rate, maintaining its leadership position while vitamins / minerals / nutrients segment jumped 2x the industry therapy growth rate. According to Alkem management, significant delays in transportation resulted in lower booking of sales for the month of March and quarter ended march FY20.

The domestic formulation business has been growing at a CAGR of 15% over the past five years. The US market, on the other hand did not exhibit any such weakness witnessing double digit growth of 26% YoY reported at Rs. 607 crore contributing 30% to total revenue basket in Q4 FY20 and 16% for the full year FY20 mainly driven by new product launches and market share gains. Over the last five years, the US business has been moving at a CAGR of 25%. And lastly, other international markets excluding US, stood at Rs. 145 crore constituting 7% of total sales rising 14% YoY in Q4 FY20. 

Revenue Mix Skewed In Favour of Acute Therapies

Acute segment dominates more than 45% of Indian pharma followed by one third hold of chronic segment and roughly 10-12% by sub-chronic segment. Acute therapy segment mainly constitutes drugs such as anti-infectives and for respiratory and gastro diseases for shorter duration while chronic segment caters to lifestyle diseases such as diabetics and hypertension, for longer durations driven by rapid urbanization and high stress levels.

In the post covid scenario with lockdown measures implemented across the country, infections such as bacterial, respiratory and gastro reduced as people restricted themselves indoors leading to lower sales in acute therapy segment. With schools and other educational institutions, public places such as malls, restaurants, hotels still not re-opened and higher hygiene awareness among masses, acute segment is expected to face pressure compared to chronic segment which witnessed panic buying in last days of month of march. In fact, in the months of april and may, pharma industry witnessed double digit decline in anti-infectives, pain and analgesics and gastroenterology therapies while anti-diabetic and cardiac reported stable growth.

Alkem is one of the top five players in acute therapy in India and thus analyst community is concerned about high concentration of acute therapy in its total revenue mix. Anti-infectives along with gastro-intestinal contributes more than half of the company’s domestic sales. High skewness towards acute (anti-infectives) might impact revenues in near term due to slow patient inflow in hospitals and postponing of elective procedures in the current infectious Covid environment. Among pharma bigwigs, Dr. Reddy’s Lab, Alkem, Pfizer and Wockhdart are some of the companies highly dependent on acute therapy. 

Cautiously Optimistic in the Near Term

The management doesn’t seem too worried about it, sporting an optimistic attitude. Alkem is very bullish about its US business growing in double digits with a target of 10 product launches in FY21 and ROCE of 15% within 4-5 years of time frame. With respect to US business growth, Mr Singh said, “We now have a fairly strong product pipeline of 144 ANDAs already filed with the U.S. FDA with over half of them yet to be commercialized.

Timely new product approval and their commercialization would be our key focus to drive growth in the U.S. market”. Significant positive for US business, with the successful closure of USFDA inspection in Baddi, India (march 2020) and St. Louis, US (may 2020), the company has received EIR in all its six US focussed manufacturing facilities in India. Another growth conduit is trade generics segment where Alkem is the second largest player in the country, which is growing in double digits. And though the management agrees that april-may business is impacted by lockdown, Alkem is confident of outperforming the market, as the country continues to unlock, private clinics if not hospitals witness higher patient inflow and elective surgeries resume. Management thinks Alkem is ready to beat the market by at least 200-300 bps and clock double digit growth in FY21 - an aggressive target in the Covid19 age. Q1FY21 results will be interesting to watch.