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INVESTMENT THESIS

Alembic Pharmaceuticals Ltd (‘ALPM’) reported a weaker than expected Q1FY22 performance on the back of headwinds in key products (Sartans and Theophylline) and pricing pressure in the base portfolio. India business reported an excellent set growing by 57% on the back of Azithromycin in Acute portfolio. Subdued US performance was on the back of headwinds coming from Theophylline competition and pricing erosion in the base portfolio, which is likely to continue in the medium term. While the management has withdrawn its FY22 EPS guidance, higher launch rate, faster remediation of Injectable unit and approval for CLL indication remains key positive triggers for the medium term. We have lowered our FY22E/FY23E EPS estimate by 21%/11% to factor in pricing headwinds in the US generics and delay in approval of Injectable plant. We maintain BUY on the stock, however reduce our March FY22 TP to Rs1,200 from Rs1,480, on account of modeling changes, thus an upside of 48% over the CMP. ALPM is currently trading ~18x / ~13x PE for FY22E / FY23E. Delay in Clearance of Injectable, USFDA action in Panelav F1 and domestic underperformance remains key risk.

Weak performance in US on pricing headwinds; Domestic business & API surprises in Q1FY22

* US business down 38% YoY and 22% QoQ on the back of competition in Theophylline and base portfolio; medium term pressures likely to sustain. Key triggers in the US includes higher launch rate and approval for the Injectable unit.

* Domestic business had an all round good show; Acute grew on the back of Azithromycin (120% YoY) as it was used for Covid related treatments. Azithromycin run-rate to thus taper with normalisation. Market share gains and new launches in the chronic portfolio remain key triggers.

* API business in strong momentum growing at 30% QoQ; RoW market business to grow on the back of new registrations

Medium term headwinds in the US; Long term guidance of US 400mn in FY24E remains intact

* Post results ALPM has corrected and thus is now trading at ~20x PE(x) FY22E consensus estimates (INR 39rs EPS). This was given the Q1FY22 performance, fading tailwinds from Sartans, competition in Theophylline and significant delay in injectable plant approval

* We believe the headwinds in the US business can might as well continue over the medium term. However, given the capex initiatives, pending Injectable approval, CLL approval trigger and the launch rate, this should be taken as a bottoming out of the earnings cycle.

Revenue Visibility, Valuation comfort makes it a worthy re-rating candidate

* We maintain BUY on the stock, however reduce our March FY22 TP to Rs1,200 from Rs1,480, on account of modeling changes, thus an upside of 48% over the CMP. It is currently trading ~18x / ~13x PE for FY22E / FY23E

* ALPM’s rich return ratios and potential approvals for new capacities, both in International business & API business, makes room for a re-rating.

* Delay in Clearance of Injectable, USFDA action in Panelav F1 and domestic underperformance remains key risk to our investment thesis.

Theophylline impact likely to continue.; New launches to support US business

* Q1FY22 US performance was on the back of a lot of pressures in pricing, to give a perspective Q4FY21 US portfolio size was USD 64mn vs USD 50mn for Q1FY22

* As per the management, the bulk of USD 15mn hit on the portfolio was on account of erosion while volume share ALPM was able to maintain

* The theophylline pricing impact was around USD 5mn. Given that Glenmark launched the product in June, Q2FY21 is likely to see full impact of of the competition in Q2FY22E

* Support to the US portfolio to come from 5+ launches in Q2FY22, as guided by the management

Clearance of Injectable unit critical for US business growth H2FY22 onwards

* General injectable plant has already been audited by the USFDA on Feb-2021, deemed mission critical.

* Further, as per us, the observations made in the 483 does not merit an adverse USFDA action on the facility and thus we are curious to understand the delay in clearance of the plant.

* Commercialization of the general injectable facility and ramp-up of approvals for the unit is critical in the overall growth H2FY22 onwards.

Domestic Business in a strong momentum

* Q1FY22 saw 120% jump in the Acute portfolio largely on account of the Antibiotic portfolio (Azithromycin) which had tailwinds due to surge in Covid cases.

* We believe this tailwind to taper off as the cases are now moderating in Q2FY22.

* Further, Chronic portfolio grew by ~29% YoY on the back of base effect. However, increased doctor visits and higher field activity would lead to better performance in Chronic over FY21 base.

* Overall, ALPM has been able to grow faster than its represented market over last 2 qtrs.; market share gains and new launches in Chronic portfolio is something to track over the medium term.

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