Alkem Laboratories Ltd. – Strong operational performance aided by improved margin profile

Sector Outlook – Positive

Alkem reported a 9.3% year-on-year revenue growth to Rs. 33,239 million, slightly surpassing market expectations. The Indian business saw a robust 12.1% growth, outperforming the industry growth rate mainly due to strong performance in Gastro, Vitamins & minerals, and Anti-diabetic segments. 

However, the US business witnessed a 10.2% decline year-on-year, albeit supported by the flu season. Other International business sales surged 46.9% year-on-year, driven by the launch of limited competition products in key focus markets. 

The company’s EBITDA increased by 18.1% year-on-year to Rs. 7,076 million, with a margin of 21.3%, thanks to a gross margin expansion to 60.8% due to lower raw material costs. 

Profit after Tax reached Rs. 6,043 million, up 31.4% year-on-year, maintaining its position as one of the top five companies in the Indian pharmaceutical market.

Concall Highlights

Domestic Business

The company’s domestic business reported strong annual growth driven by good offtake in the gastro, VMN, and anti diabetic portfolios Alkem expects to retain its high single digit growth guidance for India business in FY 24

US Business

Alkem’s US business declined due to a high base from the previous year, which was driven by the flu season. However, there was a decrease in pricing pressure, which improved to single digits compared to high teens in FY23. 

This easing of pricing pressure is expected to lead to better pricing in the market, which will help Alkem achieve better margins in the US market. As of December 31, 2023, the company filed 173 Abbreviated New Drug Applications (ANDAs) and two New Drug Applications (NDAs) with the US FDA. Alkem has received approvals for 146 ANDAs (including 14 tentative approvals) and 2 NDAs.

Enzene Biosciences

In the third quarter of FY24, Enzene Biosimilars showed substantial growth in its Contract Development and Manufacturing Organization (CDMO) business and in building its own brand. The company’s biosimilar franchise is also growing steadily in India, with the total number of products now at seven, which is a remarkable achievement for Enzene.

Trade Generic Business

Trade generics remain a key driver for domestic sales and reported good performance during the quarter, led by price decline in trade generics The company expects trade generics franchisees to remain a key driver in the growth journey within the Indian business

Chronic Presence

Alkem’s chronic contribution for 9M FY24 currently represents 17 of sales However, the company expects its chronic presence to improve sales by 20 in the next three years

Capex Update

The company has a capex plan of around Rs 2500 mn which is substantially towards building a facility in the US for the biosimilar business

Other Key Highlights

• R&D spending is estimated at 5 of sales in FY24
• The tax rate for FY 24 will be between 12-15
• All manufacturing facilities supplying to the US have an EIR as of date

Valuation and Outlook
In the third quarter of FY24, Alkem reported strong revenue growth, driven by its business in India, which accounts for about 68% of its sales. The growth was supported by the Gastro, Vitamins & Minerals, and antidiabetic segments. 

However, Alkem’s performance in key areas like Anti-Infective and Pain/analgesia therapies was below the industry average. Despite this, the company improved its ranking in respiratory and cardiac therapy segments. 

The international business showed steady growth, although the US business declined due to a high base from the previous year’s flu season. Alkem’s biosimilars franchise, Enzene, is doing well in the domestic market with a portfolio of seven products. The company is optimistic about its future performance, expecting better trends driven by increasing demand, market share, and lower raw material costs.