Alkem Laboratories Ltd.-Quarterly Results Update

Higher growth visibility and improved margin profile
Alkem reported revenue growth of 15.2% YoY / up 2.2% QoQ to Rs. 29,677 mn and was above market expectations of Rs. 28,650 mn. India’s business reported single-digit growth of 6.7% YoY led by continued traction in chronic therapies. The acute business growth was impacted by the delayed onset of monsoon in certain parts of the country, whereas the International business achieved robust sales of 33.4% YoY during the quarter, driven by substantial growth in US operations and complemented by strong performance in the non-US market. The company continues to feature among the top five companies in the Indian pharmaceutical market and has maintained its leadership position in the anti-infective segment. EBITDA increased 91.5% YoY / up 10.2% QoQ to Rs. 3,892 mn, while EBITDA margin stood at 13.1% (up 523bps YoY / up 94bps QoQ) in Q1FY24, owing to an expansion in gross margins by 213bps YoY to 59.6% due to a decline raw material cost. Profit after Tax stood at Rs. 2,878 mn (up 119.0% YoY / up 325.3% QoQ) in Q1FY24, above market expectations of Rs. 2,320 mn. PAT margin rose to 9.7% versus 2.3% in the previous quarter. R&D investments stood at Rs. 1,200 mn (4.1% of sales) compared to Rs. 1,320 mn (5.1% of sales) in Q1FY23.

Key Concall Highlights

• Domestic Business: The company’s domestic business reported strong annual growth driven by chronic therapies, while Acute therapies remain impacted by the delay in the onset of monsoon. The growth was driven by 1% volume growth, 2% growth in new introductions and 4% growth in price increases.
• US Business: Alkem’s US revenues registered strong performance during the quarter led by moderation in the US price erosion. The US pricing pressure has eased to single digits vs double-digit in FY23. The company plans to launch eight new products in the US market in FY24.
• Enzene Biosciences: In Q1FY24, Enzene biosimilars venture had sales of Rs. 570 mn and expects business to break even by FY25. The company’s Biosimilar franchise is also steadily expanding its product portfolio in India, with two successful launches during the quarter, bringing the total count of products to six which is an impressive achievement for the company.  
• Trade Generic Business: Trade generics, which accounted for 18% of domestic sales, reported weak performance during the quarter led by price increase in trade generics. However, the price increase was lower than the branded business.
• Marketing Representative Strength: Alkem’s India business MR force strength includes 12,000 employees on ground and 5,000 managers. The productivity for Acute therapies stands at ~Rs. 5.9 lakhs and Rs. 3.5 lakhs for chronic therapies. From a distribution perspective, 80% of the MR force is working in acute therapies, while the rest 20% is in chronic therapies. 
• Capex Update: The company has a capex plan that will be between Rs. 3,500-4,000 mn, substantially towards biosimilars in FY24.
• Other Key Highlights:
  R&D spend estimated at ~5% of sales in FY24.
  The tax rate for FY24 will be between 17-19%.
  The St. Louis facility closure is on track and expects the unit closure/ sale in the coming months

Valuation and Outlook: 

Alkem recorded healthy annual revenue growth in Q1FY24 aided by growth in India business (~65% of sales), a key growth driver for the company and was primarily aided by Chronic therapies. Acute therapies, which contribute (~80% of the domestic sales), grew merely 6% as per IQVIA in Q1FY24. Further, Alkem largely underperformed the IPM in its key therapies of Anti-Infective, GI, Pain/ Analgesics, and VMN which accounted for~80% of revenue, while it managed to improve by one rank in CNS, Respiratory, and Anti-Diabetic therapies. We expect Alkem to remain focus on growing its chronic business faster going forward. The US business (~24% of sales) registered strong performance during the quarter led by moderation in the US price erosion. As on June 30, 2023, the company filed a total of 173 ANDAs and 2 new drug applications with the USFDA and has received approvals for 135 ANDAs (including 14 tentative approvals) and 2 NDAs. Biosimilar franchise, Enzene, is steadily expanding its product portfolio in India, with two successful launches during the quarter, bringing the total count of products to six. Going ahead, Alkem’s domestic and international businesses is expected to continue witness better trends, led by improving demand, increasing market share, and softening raw material costs in the coming quarters.