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Weakness in US outweighs strong performance in DF

Injectables business traction hinges on successful compliance

* Alembic Pharma (ALPM) delivered in-line 2QFY22 earnings. Subdued performance in US/API was offset by a better-than-expected show in the Domestic Formulation (DF) segment. The YoY declining trend in the US business has reached a trough with the limited impact of price erosion and an increased pace of launches going forward.

* We lower our FY22E/FY23E EPS estimate by 7.5%/5.8%, factoring in a) a delay in successful compliance at injectables sites, b) gradual revival in US sales, and c) higher RM/logistics costs. We value ALPM at 18x 12M forward earnings to arrive at our revised TP of INR860. We maintain our Neutral rating on a limited upside from current levels.

Second consecutive quarter of earnings decline on YoY basis

* 2QFY22 revenues were down 11% YoY to INR12.9b (est. INR13.1b). Muted performance for the quarter was attributable to 40% YoY decline in US sales (INR3.5b; 27% of sales) and 9% YoY decline in API sales (IN2.4b; 18% of sales). Non-US export sales (15% of sales) were flat YoY at INR2b. DF sales grew 23% YoY to INR5.1b (39% of sales).

* The gross margin contracted 440bps YoY to 74.2% on a change in the sales mix.

* However, the EBITDA margin contracted at a higher rate of 1050bp YoY to 19.9% (est. 19.1%), largely due to higher opex. Employee costs / Other expenses / R&D costs were up 380bp/220bp/30bp as a percentage of sales.

* EBITDA declined 42% YoY to INR2.6b (est. INR2.5b).

* Adj. PAT declined 49% YoY to INR1.7b (est. INR1.7b).

Highlights from management commentary

* ALPM believes the current US sales figures (USD47m per quarter) are the new base, and these are expected to improve hereafter, led by new launches.

* ALPM aims to file 20–25 ANDAs and launch 15 in FY22.

* US revenue during the quarter has seen the full impact of the incremental competition in Theophylline.

* Acute therapies in the DF segment witnessed primary growth of 27% on a YoY basis. Excluding Azithral, overall DF sales grew 35% on a YoY basis.

* The USFDA recently inspected the F-3 site once again (the last inspection was in Feb’21) and issued Form 483 with 10 observations. The USFDA has visited the site for three of its products in total now.

Valuation and view

* We lower our FY22E/FY23E earnings estimate by 7.5%/5.8%, factoring in a) slow improvement in US business prospects, b) delay in the successful compliance of injectables facilities, and c) higher operational costs on higher raw material and transportation costs.

* We expect 13% compounded earnings decline over FY21–23 due to increased competition in Sartans and the deferral of injectables commercialization, offset (to some extent) by industry outperformance in the DF segment.

* We value ALPM at 18x 12M forward earnings to arrive at our TP of INR860.

* We maintain our Neutral stance on a limited upside from current levels.

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