Alembic Pharma’s (ALPM) 2QFY18 sales (-10% yoy to Rs 7.9bn) fell short of estimates due to below-expected US and domestic sales. However, EBITDA/PAT at Rs 1.8bn/1.2bn came in ahead of EE mainly on account of lower R&D and other expenses (on lower marketing costs). Going forward, the business is expected to remain under pressure owing to (1) commercialization of the new facility with no commensurate revenues, (2) dearth of high-value launches, (3) normalization of other expenses with an increase in marketing and selling expenses, and (4) higher R&D expenses. We slash FY18/FY19E by 11%/9% on factoring in the slow revenue uptick, and assign SHORT to the stock with a Dec’18 TP of Rs 459 set at 23x P/E.
US biz - New product filings in process; launches 18-24 months away: The US business reported sales of Rs 1.9bn, declining sequentially by Rs 200mn due to continued price erosion. We expect pain in the US business to continue owing to (1) dearth of high-value launches, (2) high price erosion and (3) delay in securing approvals of already-filed ANDAs. APLM mentioned it would start filing products from its oncology oral solid and Aleor (JV with Orbicular) facilities in the coming months. These facilities would require USFDA approval, which we do not expect any time before FY20E.
Update on new facilities: ALPM has completed its oncology oral solid facility and is likely to complete its Aleor facility by 2H, post which it would start filing products. Oncology and general injectable facilities are expected to be completed by next fiscal. ALPM will be expensing the overheads upfront on the completion of construction of these facilities.
Orit acquisition to be EPS accretive from first year: Recently, ALPM acquired US-based Orit Laboratories. Along with the acquisition, it received seven approved ANDAs and four ANDAs which are awaiting approval. Management stated that the acquisition was very small, and refrained from disclosing any numbers. The company would be focusing on improving margins as there is very little headroom for revenue growth in visiting products, considering the stiff competition. ALPM would be filing for product transfer to move manufacturing to India; additionally, it will be marketing through its own front-end.
Margins to decline in 2H: We expect margins to contract by 430bps in 2HFY18E over 1HFY18 owing to (1) higher R&D expenses, (2) commercialization of new facilities with no proportionate increase in immediate revenues, and (3) higher other expenses with increase normalization of selling and marketing expenditure. The company has guided for 20% margins in 2H, while we expect them to be lower at ~15.5%.
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Nigerian facility destroyed due to fire: The company is working on re-building the facility, and to keep the momentum going, it will tie up with third parties to bring products to the market. Note that the event did not have any material impact on ALPM, as the facility’s contribution was insignificant.