IGI Logo

DF outshines for the quarter; US to follow suit shortly

Biosimilars in buildup mode

* Alkem Lab (ALKEM) delivered a strong beat on expectations in its 1QFY22 performance, led by superior execution in the Domestic Formulations (DF) segment and International (ex-US) segment. While the US business witnessed higher price erosion in 1QFY22, upcoming niche launches would offset this and drive double-digit growth in the US.

* We raise our EPS estimate by 4%/2% for FY22/FY23, factoring in a) the atrisk launch of g-Duexis, b) biosimilar launches in India, c) the higher off-take of products in the VMN category, and d) increasing marketing and promotional spend with the easing of the COVID situation. We continue to value ALKEM at 23x 12M forward earnings to arrive at Target Price of INR4,030.

* We remain positive on ALKEM on the back of a) a healthy outperformance in DF in the Acute and Chronic therapies, supplemented by a leadership position in trade generics and new introductions (including in biosimilars) and b) a revival in US sales growth. Reiterate Buy.

DF drives earnings growth for the quarter

* 1QFY22 revenues grew 38% YoY to INR27.3b (our estimate: INR22b).

* DF sales grew 65% YoY to INR19b (70% of sales). Other International sales grew 56% YoY to INR1.9b (8% of sales). US sales were down 9% YoY to INR6b (22% of sales).

* The gross margin (GM) contracted ~300bp YoY to 60%, weighed by higher pricing pressure in US generics and provisions related to expired products.

* The EBITDA margin contracted at a higher rate of ~390bp YoY to 21.7% (our est: 18%) due to lower GMs and higher other expenses (+310bps as a percentage of sales). This was partially offset by lower R&D costs (-170bp YoY as a percentage of sales).

* EBITDA increased 17% YoY to INR5.9b (our est.: INR4b).

* PAT was up 17% YoY to INR4.7b (our est.: INR3.1b).

Highlights from management commentary

* With industry growth expected at 11–12% for the year ahead, Alkem expects a growth rate in the high teens for the next 12M.

* ALKEM guided for an EBITDA margin of 20–21% for FY22.

* It maintained the guidance of 15–16% YoY growth in the US business for FY22.

* Marketing cost stands at 85% of pre-COVID levels. Alkem expects costs to increase over the near term with the normalization of patient-doctor connect.

* ALKEM has ~11k MRs currently, with good scope to increase MR productivity.

* ALKEM has INR9.8b in cash. It generated free cash of INR4.5b in 1QFY22.

* ALKEM has invested INR6.5b in the Biotech segment to date, largely in Onco and Osteo therapy products. There is scope for a ramp-up in onco products.

* The Indore facility awaits pre-approval for an inspection from the USFDA.

Valuation and view

* We raise our EPS estimate by 4%/2% for FY22/FY23, reflecting a) a strong performance from the DF segment, b) niche launches, and c) marketing cost normalization.

* On the high base of FY21 (41% YoY growth), we expect an 11% earnings CAGR over FY21–23, led by a 12%/16% sales CAGR in the US/DF segment – on account of (a) new launches and better traction in existing products in the US and (b) outperformance in the Acute and Chronic therapies in DF.

* We continue to value ALKEM at 23x 12M forward earnings to arrive at TP of INR4,030. We maintain our positive stance on ALKEM on the back of a) an established brand franchise in the Acute category, b) enhanced efforts to improve growth prospects in the Chronic category, and c) a healthy ANDA pipeline comprising limited-competition products. Maintain Buy.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer