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On growth path despite high base of past year

* ALKEM is well-placed to benefit from a medium term recovery in the Domestic Formulation (DF) business.

* It had a positive impact of higher offtake of COVID-19 associated drugs in the recent past. The reduction in COVID-19 cases, coinciding with seasonal change, bodes well for a pick-up in the performance of Acute therapies.

* Bunched-up ANDA launches over the next 12-15 months are expected to improve sales growth as well as profitability of the US business.

* We have tweaked our FY22E/FY23E EPS estimate by 2%/3% and continue to value ALKEM at 23x 12-months forward earnings to arrive at our TP of INR3,730. We remain positive on the back of robust growth in the DF segment and improving profitability in the US segment. Reiterate Buy.

Gastro/VMNs outshines; Acute therapies in revival mode

* ALKEM witnessed strong demand for Vitamin/Minerals/Nutrients (VMNs) and Gastrointestinal drugs due to increased prescriptions associated with COVID-19. ALKEM posted strong growth (82% YoY) in May’21 (v/s 60% for IPM; as per AIOCD data) for VMN therapy. Its Gastrointestinal therapy saw 49% YoY growth in May’21. Anti-Infectives and Pain therapies recovered, growing over 75% each in these therapies in May’21.

* COVID-19 cases are on a downtrend with lockdowns and increased vaccination rate. The daily new case run-rate is down to 0.13m from a peak of 0.41m on 6th May’21. We expect reduced COVID-19 cases to lead to a partial reduction in the intensity of lockdown measures across states. The gradual opening of the economy is also supported with seasonal change, which would drive higher offtake of Acute therapies like Anti-Infectives. In fact, the intensity of decline in the Anti-Infective segment has been on a downtrend over the past eight months.

* ALKEM is the second largest trade generics player in India. The business contributed 20-25% of sales, with robust (over 20% YoY) growth in FY21 led by higher influence by chemists and commensurate availability of trade generic brands. Momentum is expected to continue over the medium term, with increasing influence of chemists, particularly in Tier II/III cities.

* We expect 15% sales CAGR in DF to INR75.4b (67% of sales) over FY21-23E.

Faster filings/approvals - key to growth in US sales

* The US business is expected to grow faster in FY22E, led by higher number of launches YoY. ALKEM currently has 110 approved ANDAs, half of which are yet to be commercialized. 

* It has 26 ANDAs under approval and plans to file 10-12 ANDAs annually over the next two years, which will enable it to build a pipeline of products for future launches. With products under approval and future filings, ALKEM will have enough products in the pipeline to sustain its launch target even in the future.

* ALKEM has already received a favorable ruling from a lower court for para-IV litigation on g-Duexis. The final approval from the USFDA and/or favorable litigation outcome in a higher court would provide potential upside from this product.

* We expect a ramp-up in recent and forthcoming launches to drive 10% US business CAGR over FY21-23E to USD404m in FY23E.

Valuation and view

* On a high base of FY21, we expect 9% earnings CAGR over FY21-23E, led by steady ramp-up in DF sales and improving margin in the US business.

* We continue to value ALKEM at 23x 12-months forward earnings to arrive at our TP of INR3,730. Reiterate Buy.

* We remain positive on ALKEM on: a) better sales outlook in Anti-Infectives, b) growth in Chronic therapies like Anti-Diabetes and Cardiac, c) sustained cost reduction on higher usage of digital tools, and d) healthy ANDA pipeline in the US market.

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