Alkem Laboratories: Revamping strategy for India Chronic & M&A

8 Nov 2023 , 02:09 PM

Alkem’s Q2 Ebitda margins at 21.7% was 520bps ahead of analysts of IIFL Capital Services estimates, driven by higher GMs on account of better product mix in the US and controlled operating expenses led by cost optimisation across manufacturing & R&D functions. Despite a significant margin beat in Q2, Alkem upgraded its FY24 Ebitda margin guidance by only 50bps from 16% to 16.5%, as product mix benefit in the US might normalise and Q4 is also a seasonally weak quarter for Alkem’s India business. While Alkem’s execution in the acute segment in India has been impressive over the years, it is now revamping its chronic business strategy under the new CEO with efforts to drive productivity-led growth in the chronic segment and fill portfolio gaps through M&A (a departure from Alkem’s earlier conservative stance on M&A). Analysts of IIFL Capital Services upgrade FY24- 26 EPS by 5-12% led by 50-100bps higher Ebitda margins and lower ETR. Alkem (TP Rs4600) remains one of preferred picks in the domestic pharma space, following Mankind and JB Pharma. 

Striving for productivity-led growth in India chronic segment: 

Although Alkem’s India Rx/TGx business grew only 5-6% YoY in Q2 owing to a weak acute season, growth has already started picking up from Sep/Oct’23 onwards. Alkem’s field force expansion from 9.8K reps in FY19 to 12K currently is largely complete and mgmt will now focus on driving double-digit growth in the PCPM for the chronic business. Alkem’s overall PCPM stands at Rs4.6lakhs, with acute PCPM being Rs7lakhs. Analysts of IIFL Capital Services expect Alkem’s overall India sales to clock 8/12/12% growth in FY24/25/26. 

US business expected to grow high-single-digits in FY24, as price erosion has moderated from mid-teens last year to 5-6% currently. Volume growth in the base portfolio, lower price erosion, and seasonal benefit in anti-infectives sales has driven 20% cc growth in Alkem’s US sales from USD148m in H1FY23 to USD178m in H1FY24. With the H2FY23 base for US business being higher, analysts of IIFL Capital Services expect Alkem’s US sales to clock 11/7/7% growth in FY24/25/26. Alkem is conducting clinical trials for Denosumab biosimilar and expects to file 8-9 ANDAs annually in the US. 

Analysts of IIFL Capital Services upgrade FY24-26 EPS by 5-12% led by 50-100bps higher margins and lower ETR. With productivity-led growth expected in the chronic business and cost optimisation efforts, they expect Alkem’s Ebitda margins to expand from 14% in FY23 to 18.5% in FY26, thereby driving 22% Ebitda Cagr over the next 3 years.