Ajanta Pharma’s (AJP) 3QFY18 sales/EBITDA/earnings grew 10%/11%/3% yoy to Rs 5.87bn/Rs 1.97bn/Rs 1.47bn, beating EE by a massive 17%/34%/39%. The outperformance was mainly led by (a) a surprise performance in the Asia market (+80% yoy) and (b) above-expected US market revenues, supposedly helped by channel filling in gKapvay, the benefits of which should taper off with incremental competition. Key catalysts in the near-to-long term remain a revival in domestic market growth and continued new launches in the US market. We reiterate ADD on the stock with a Jun’19 TP of Rs 1,658 set at 27x P/E.
Domestic business reports tepid growth but long-term prospects solid: AJP’s domestic business grew only 4% yoy, affected by a decline in the dermatology therapy. Nevertheless, AJP continued to beat IPM growth; as per IMS MAT data, the company grew by 9% during the quarter while IPM 5%. We expect a revival in the domestic growth on the back of (1) a drop in the share of Melacare revenues and its sales stabilising, (2) niche launches in the domestic market, and (3) improving sales-force productivity.
US business aided by new launches: US revenues increased by ~US$ 7mn qoq, mainly led by the launch of gComtan, gKapvay and gRelpax. The quarter was aided by channel filing in gKapvay, even as revenues from the drug would likely decline with rising competition. We expect the US business to be a key growth driver for the company, and benefit from GDUFA’s target reviewing 95% filings in 10 months. AJP has 16 ANDAs pending approval and targets to file 10-15 ANDAs each year.
Asia biz surprises; recurrence to be key: Asia business revenues jumped 79% yoy to ~Rs 1.6bn during 3Q. AJP had consciously calibrated supplies to the Asia market due to adverse cross-currency movements, but has resumed supplies with currency stabilisation. We will be closely monitoring revenues from Asia, as recurrence would be a key for future growth.
Africa business declines marginally; IPCA's re-entry should hurt: AJP’s Africa business declined by 15% yoy due to lower revenues from the tender business, even as branded business growth has started picking up. We expect Africa business to remain under pressure with IPCA’s return. Recently, WHO has re-qualified IPCA as a preferred supplier for anti-malarial medicines in Africa. It is negative for incumbents such as AJP, who benefitted in FY16 when IPCA exited the global fund business. Additionally, allocation from Global Fund towards malaria treatment is on a declining trend, which can hurt revenues. Lower institutional revenues should offset strong growth in the branded Africa business and keep overall revenues muted. We therefore expect flat revenues for the Africa business between FY17-FY20E.
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