Alembic Pharma: Stepping into next phase of high growth

Alembic Pharma

Initiating Coverage | Sector: Healthcare

Alembic Pharma

BSE Sensex

21,826

S&P CNX

6,512

CMP: INR251

TP: INR350

Buy

Changing tide

Stepping into next phase of high growth

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

ALPM IN

188.5

310/94

2/68/120

48.6

0.8

Started as a tincture and alcohol maker in 1907, Alembic Pharma Ltd (ALPM) is one of

the oldest pharmaceutical companies in India. For a major part of the last decade, ALPM

lagged the strong industry growth due to high dependence on the slow growing acute

therapies in India, insignificant presence in international markets, dilution of

management’s time between varied businesses and high leverage. However, we see the

tides changing for ALPM as the new management is investing in right geographies and

markets to build a sustainable business model. We initiate coverage with a Buy rating

and see potential upside of 40%.

Financial Snapshot (INR Billion)

2014E 2015E 2016E

Y/E March

Sales

18.9 22.8 27.7

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Share (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

3.6

2.4

12.5

42.5

34.5

40.8

43.5

20.1

7.3

4.7

3.3

17.3

38.3

44.7

43.6

47.8

14.5

5.6

6.1

4.3

23.0

33.1

58.4

44.6

51.2

10.9

4.3

Getting more organized under new management

Since mid 2007, the day-to-day operations of the company have been taken over

by the next generation of entrepreneurs who have incorporated structural

changes in the organization. They have strengthened their field force in India,

increased ANDA filings in US, ironed out inefficiencies in the organization and

hired personnel in important areas of R&D and marketing. These changes have

led to reduction in cash conversion cycle by 50 days, near-zero net-debt/equity

position and improvement in operational performance witnessed over the last 8

quarters. We believe ALPM has a focused management team in place and has

stepped into its next phase of high growth.

Ingredients in place; large room for growth

Shareholding pattern (%)

As on

Promoter

Dom. Inst

Foreign

Others

Dec-13 Sep-13 Dec-12

74.1

1.5

9.0

15.4

74.1

1.4

8.5

16.0

74.1

0.6

7.6

17.7

ALPM has filed 60 ANDAs with majority of them backed by own DMFs, providing

greater cost control compared to some of its larger peers. The company is

awaiting approval for more than half of its ANDA filings. We note that ALPM has

45% of its ANDA filings with Para IV certification, which is significantly more than

most of its peers. We believe US generics could grow more than 5x to USD125m

by FY16E. In India, ALPM has increased its presence in the fast-growing specialty

therapies which contribute 45% to its business. We believe these structural

changes would enable ALPM to grow its revenue by 21% CAGR over FY14E-16E.

Stock Performance (1-year)

Improving business profile; re- rating candidate

The business mix at ALPM is likely to improve further, with higher contribution

from US generics and specialty therapies in India, while low-margin APIs and

acute therapies may continue to face slowdown. We expected transition to result

in 280bp EBITDA margin expansion and 35% earnings CAGR over FY14E-16E. With

majority of the capex behind them and high free cash generation visibility, we

expect ALPM to be net-debt free by FY16E. Return ratios are expected to remain

above 40%. Our EPS estimates for FY15E/16E are 10%/14% above Bloomberg

consensus estimate. With improving business profile and strong earnings growth,

we believe ALPM is a potential re-rating candidate. Initiate coverage with a

Buy

and target price of INR350 (15x FY16E EPS).

12 March 2014

Alembic Pharma

About Alembic Pharma

Started in 1907, Alembic Pharma (ALPM) is one of the oldest pharmaceutical companies of

Indian origin in the domestic formulations market. The company was first established as a

tincture and alcohol manufacturer and made its way into modern medicine in 1940. Today

ALPM is being run by its fourth generation of entrepreneurs, is the 25

formulations player in India and has sales presence in more than 75 countries.

Oldest pharmaceutical

companies of Indian origin;

more than 100 years old

largest

Predominant domestic player; expanding into international markets

ALPM has historically been a focused domestic formulation player along with

presence in API segments. Its marquee products like Glycodin, Azithral, Althrocin

are household brands in India. Over the years, the company has gradually

increased its presence in the export formulations markets like US, EU and CIS.

Today, ALPM has sales presence in more than 75 countries

Exhibit 1: From a predominant domestic formulations

player…

Exhibit 2: …to a global generic company

Source: Company, MOSL

Strong management team at the helm

Mr. Pranav Amin (39 years)

Mr. Pranav Amin is the elder son of ALPM’s Chairman; Mr. Chirayu Amin. He is

working as Director, International Operations of the Company for last five years.

Pranav holds a Bachelors degree of Science in Economics/Industrial Management

from the Carnegie Mellon University in Pittsburgh, USA. He also pursued his M.B.A

in International Management from Thunderbird, The American Graduate School of

International Management.

Mr. Shaunak Amin (36 years)

Mr. Shaunak Amin is the younger son of Mr. Chirayu Amin. He is the President,

Formulations of the company and is heading the Branded Formulations Division of

the company since 2009. Shaunak has graduated from University of Massachusetts,

USA with Economics as his specials. He has varied work experience with renowned

MNCs including Merrill Lynch and HSBC.

12 March 2014

Alembic Pharma

New management investing in right places

A focused company stepping into its next phase of growth



Since mid 2007, the day-to-day operations of the company have been taken over by

the next generation of entrepreneurs who have incorporated structural changes in the

organization.



Today ALPM has strengthened their field force in India, increased its ANDA filings in

US, ironed out inefficiencies in the organization and hired personnel in important

areas of R&D and marketing.



Result is significant reduction in cash conversion cycle, near-zero net-debt/equity

position and improved operational performance witnessed over the last 8 quarters.

We believe ALPM has a focused management team in place and has stepped into its

next phase of high growth.

Management moves to 4

generation of entrepreneurs

Next generation of

entrepreneurs have taken

over day-to-day operations

Despite its long-standing establishment, ALPM had failed to grow in line with peers

like Cipla, Dr. Reddy’s, Sun Pharma, Lupin and its market share in Indian pharma

market is lower than today’s mid-sized players like Torrent, IPCA Labs, Emcure,

Intas and Wockhardt to name a few. This was partly due to dilution of promoter

group’s interests across varied businesses like glassware, specialty chemicals and

real estate.

Since 2007, the next generation of entrepreneurs, Mr. Pranav Amin and Mr.

Shaunak Amin have taken over the day-to-day operations of the company. In a bid

to increase the focus on the pharmaceutical business, they decided to carve Alembic

Pharma out of the Alembic group. Since then, the management has spent all the

time, effort and resources needed to transform ALPM into a dominant generic

player. The strong improvement in operational performance over the last few

quarters, we believe, is but an undertone of this transformation.

Carved out pharma

business from Alembic

group in 2010 for greater

focus

Exhibit 3: Recent uptick in sales growth led by improving

sales mix…

Exhibit 4: … has led to improving profitability

Source: Company, MOSL

Streamlining processes to create a leaner, steadier organization

In our discussions with the new management, we could not miss the increased

importance laid on streamlining processes in each department within the

organization to increase efficiency. Some of the major changes outlined were:



Restricting repeat sales to defaulting debtors

12 March 2014

Alembic Pharma



Advancement in billing processes

Optimizing the inventory managed at stockiest level

Hired younger staff; average age reduced to 27 years from 40 years earlier

Promoting people from within the organization to higher ranks

Visible improvement in

organization under the new

management

The benefit of these changes can be seen in the company over the last 5 years.

There has been a consistent reduction in cash conversion cycle from 109 days in

FY08 to 57 days in 1HFY14. The debt has been gradually repaid off, net-debt/equity

down to 0.2x in 1HFY14 from 1.1x in FY08. The management indicated that attrition

rate has lowered from its high of 45% to 20% today. There has been a steady growth

in domestic formulations business due to improved field force productivity, in a year

which was impacted by the new pricing policy.

Exhibit 6: Lowering debt burden

Exhibit 5: Tight control on working capital

Source: Company, MOSL

Diversifying into other specialty therapies into India

In India, Alembic has been known among doctor community as a leader in

Macrolides (a class of antibiotics) segment. Some of its marquee offering in the area

include Azithral, Althrocin and Roxid which contribute approx 25% to overall sales.

Their cough syrup Glycodin has a significant brand recall. However, given the intense

competition in these therapies, the slow growing nature of acute therapies and

paucity of new launches, ALPM’s market share has been lower than other midcap

companies.

In the three years ending FY13, the new management has been able to revive the

growth in this division by launching 80 products over this period. These products

today account for 15% of domestic formulations sales.

Identified seven specialty

therapies in India to drive

growth and profitability

More importantly, Alembic has increased its focus on seven specialty therapies

which will be the next growth drivers for the domestic formulations business. These

therapies enjoy higher profitability compared to ALPM’s legacy business and

majority of product launches have been in these areas. The company plans to

maintain the current pace of product introductions, which is likely to drive above-

industry growth rate along with improving profitability.

12 March 2014

Alembic Pharma

Exhibit 7: Increasing presence into fast-growing specialties (% of domestic formulations)

Source: Company, MOSL, * Specialty formulations include CVS, Diabetology, Ophthalmology, Gastro

and Gynecology

Expanding into US; world’s largest free-priced generic market

Sharp ramp-up in ANDA

filings over the last 6 years

With a view to capitalize on the free-priced US generic market, ALPM started filing

for ANDAs in FY07. Over a period of six years, the company has filed for 60 ANDAs

with the USFDA. Despite being a late entrant, we see two strengths in ALPM’s US

strategy.

Firstly, unlike many of its mid-sized peers, ALPM has targeted formulations that it

can support by its own APIs. If one takes into account the approved ANDAs that are

backward integrated (i.e., supported by own DMFs), then the company comes ahead

of peers like Torrent Pharma, Glenmark and Cadila Healthcare. We have observed

that backward integrated launches in US are becoming increasingly important as the

competition has intensified with entry of the fourth wave of Indian generics.

60 ANDAs filed so far, of

which 29 are para IV

Also, the company has filed 29 para IVs of the 60 ANDAs filed so far. As a proportion

of his total filings, ALPM’s para IV filings are ahead than peers like Cadila Healthcare,

Glenmark, Torrent Pharma and IPCA Labs. These low competition opportunities are

likely to provide some bargaining power over the distribution channel in US despite

being a late entrant.

The management indicated that its strategy is to file for products that could typically

be monetized in the next 3-4 years. As such, they plan to launch 8-10 products every

year for the next three years. We expect their US business to scale up 5x to

USD125m by FY16E.

Exhibit 8: Significant scale-up in ANDA filings…

Exhibit 8: …supported by its own DMF pipeline

Source: Company, MOSL, *Till December 2013

12 March 2014

Source: Company, MOSL, * Till December 2013

Alembic Pharma

Better utilization of resources; return oriented approach

The positive changes brought in by the new management have started showing its

impact in the financial performance. Despite deriving 65% of its sales from domestic

formulations, the company has been able to grow its business consistently over the

past 4 quarters, while the industry has been facing slowdown due to the new pricing

policy.

At the same time, there has been steady improvement in EBITDA margins over the

past 7 quarters led by an improving business mix. We note the company has been

generating healthy free cash flow and gradually reducing its debt burden.

We believe these changes in the business are but an undercurrent of the

transformation taking place at ALPM.

Exhibit 9: Steady free cash-flow generation

Exhibit 10: Reduced net-debt/equity

Source: Company, MOSL

Exhibit 11: Above industry-average return ratios (%)

RoE

RoCE

FY09

FY10

FY11

FY12

FY13

1HFY14

Source: Company, MOSL

12 March 2014

Alembic Pharma

Ingredients in place; focus on execution

Investments have just started yielding results; large room for growth ahead



ALPM’s is ahead of most of its peers in ANDA filings in terms of (1) backward

integration and (2) paragraph IV certification.

With more than half of its filings awaiting approval, we expect US generics could grow

by more than 5x to USD125m by FY16E.

Contribution from fast-growing specialty therapies in India has increased to 45%.

These therapies are likely to drive above industry growth in domestic formulations

segment for ALPM.



Hence, we expect the current growth momentum to continue and forecast 21%

revenue CAGR over FY14E-16E.

Expanding into US; world’s largest free-priced generic market

The new management has targeted the free-priced US generic market (worth

USD95b in 2012) as one of the important growth drivers for the company. Starting in

FY07, the company has filed 60 ANDAs with the US FDA till date, of which 27 have

been approved and 18 have been launched. Although the products are

commercialized through marketing partners, ALPM intends to establish its own

front-end in US by the end of FY15E. Despite being a late entrant, we believe that

ALPM has laid the right foundation to achieve USD125m in sales by FY16E; 5x

growth over FY13.

Exhibit 12: Fast expanding ANDA pipeline (Nos)

Source: Company, MOSL, USFDA, *Till December 2013

Backward integrated ANDA filings to provide cost control

More than 80% of ANDA

filings are supported by

own DMFs

While analyzing ALPM’s DMF filings vis-à-vis it’s approved ANDAs, we realized that

more than 80% of its ANDAs are backward integrated, i.e., are supported by its

own DMFs. This is higher than most of its similar-sized as well as larger

competitors.

The US generic market is seeing intensifying competition with increasing number of

players entering the market. We have observed that companies with less backward

integration capabilities have exited certain products due to excessive price erosion.

On the other hand, many companies are able to corner majority market share in

mature products due to strong vertical integration.

12 March 2014

Alembic Pharma

Leading other mid-sized players in para IV filings

Close to 50% of its ANDA filings have a paragraph IV certification, which is high

compared to most of the similar sized peers like Torrent, IPCA, Unichem Labs as

well as larger competitors like Glenmark and Cadila Healthcare. We are of the

opinion that this will equip the company’s portfolio and offer it relatively stronger

bargaining power over distributors, given its late entry in the US.

Moreover, the approved ANDAs outline the company’s strategy to file backward

integrated products. We see ALPM establishing a solid foundation for becoming a

meaningful player in US generics market.

Exhibit 13: Comparison of backward integrated filings

Exhibit 14: Comparison of Para IV filings (%)

Source: Company, MOSL, USFDA

Established R&D capabilities

Greater cost control and

para IV launches to drive

profitable growth

ALPM received approval for its first 505 (b) (2) filing on Desvenlafaxine in March

2013, within a period of 10 months from its date of filing. Desvenlafaxine is an anti-

depressant prescribed for clinical depression. The volume uptick has been slower

than anticipated due to the time taken to shift prescriptions in case of CNS

therapies. However, the FDA approval itself stands testimony to ALPM’s established

R&D capabilities, despite its current size. The management has indicated that it will

be working on a few more 505 (b) (2) filings along with certain other complex

generics. Our estimates do not factor any upside from ramp-up in Desvenlafaxine

sales.

Potential to scale up to USD125m by FY16E

US generics likely to grow

5x over FY13-16E

US generics segment contributed ~9% of total sales in FY13, or approximately

USD25m. This was generated through commercialization of 15 ANDAs of the total

60 filed as of FY13. With more than 55% of its ANDAs still awaiting

commercialization, the management is confident of launching 8-10 products in the

US every year over the next 3-4 years. Moreover, the company plans to file 10-12

ANDAs per year over the same period.

We expect ALPM’s US generic segment to garner USD125m in sales and make up

for 27% of FY16E total sales.

12 March 2014

Alembic Pharma

Exhibit 15: US generics sales to reach USD125m by FY16E

Source: Company, MOSL

About 55% of ANDA pipeline still waiting to be commercialized

Given the apparent strategy to file backward integrated ANDAs, we analyzed

ALPM’s DMF filings to better understand their product pipeline and present below

our findings. We have classified the probable future opportunities into four

categories, based on their likelihood of getting launched in the next three years:

Products whose last patent will expire over the next three years; highest

probability of commercialization.

II.

Products with no patent protection and probably awaiting ANDA approval;

relatively high likelihood of launch.

III.

Products whose substance patents have expired. These probably could be para

IV filings but whose launch is more certain then category 4 below.

IV.

Products whose substance patent expires in next three years. Probable para IV

filings whose launch is dependent on litigation outcomes. There is no clarity

over their launch timeline.

Vast pipeline lends growth

visibility in US; 8-10

launches per year

achievable

Some of the key launches expected over the forecast period include gAtacand,

gNamenda, gCelebrex, gSular and gTracleer (refer Exhibit 16 below). Our analysis

of ALPM’s DMF filings revealed that there are many products whose patents have

already expired and could be awaiting ANDA approval (refer Exhibit 17 below).

Further, our analysis does not even include those ANDAs that the company may

have filed through third party DMFs.

Hence, we are reasonably confident that the company can achieve its target of 8-

10 launches per year for the next three years.

12 March 2014

Alembic Pharma

Exhibit 16: I. Product opportunities with patent expiring in next three years

DMF Filed on

Molecule

Brand

Innovator

Sales

(USD m)

Patent expiration

Competition

Sandoz launched first generic

version in May 2013. Apotex also

received approval on 10 Jan 2014.

Likely launch after Feb 2015 patent

expiry.

Mylan was FTF and recd approval

in Jan 2011. Likely launch after

patent expiry in Nov 2014

Multiple players

Teva is FTF; lost in court. '068

patent has been invalidated.

Expect generic entry in May 2014.

More than 15 DMFs

No ANDA approved. No para IV as

well. More than 10 DMF filers

FTF was filed in May 2013. No

clarity on filer. Only 5 players

including ALPM had DMF at the

time.

Anchen has TA. Teva and Watson

have lost case.

Multiple players already. Market

was USD2.4b before generics.

Likely

launch in

31-Mar-08

Candesartan

Cilexetil

Atacand

AstraZeneca

120

EPE: Jan 9, 2014

LPE: Feb 24, 2015

FY15

7-Oct-11

11-Sep-09

Nisoldipine

Memantine HCL

Sular

Namenda

Shinogi

Forest Labs

103

1500

LPE: Nov 30, 2014

LPE: Apr 11, 2015

FY15

FY16

30-Nov-10

30-Jun-11

Celecoxib

Bosentan

Celebrex

Tracleer

Gd Searle

Actelion

Pharma

1770

EPE: May 30, 2014*

LPE: Dec 2, 2015

LPE: Nov 20, 2015

FY16

6-Apr-11

27-Jun-12

6-Apr-11

Iloperidone

Darifenacin

Hydrobromide

Topiramate

Fanapt

Enablex

Topamax

Novartis

Warner

Chilcott

Janssen

270

LPE: Nov 15, 2016*

NCE: May 6, 2014

EPE: Mar 13, 2015*

LPE: Aug 21, 2016

LPE: Apr 13, 2016

FY17

Source: USFDA, MOSL research; EPE: Earliest Patent’s Expiration; LPE: Last Patent’s Expiration; * Is a Substance patent

Exhibit 17: II. Product opportunities with no patent protection

DMF Filed on

22-Jun-04

26-Nov-07

Molecule

Cilostazol

Levetiracetam

Metoprolol

Succinate

Pentosan

Polysulfate

Erythromycin

Warfarin

Sodium

Mexiletine HCL

Warfarin

Sodium

Rabeprazole

Sodium

Felodipine

Zolmitriptan

Brand

Pletal

Keppra

Innovator

Otsuka

UCB

Sales

(USD m)

Patent expiration

None

NPP: Jun 16, 2015

Competition

8 players have approval. Market of USD178m

when generics entered.

Many players. Market size was USD1b before

generics

Few players. WPL also left due to import alert.

Market was USD1.1b when DRRD entered in Sep

2012.

No ANDA approved. No para IV as well. 6 DMF

filers; none of them meaningful players.

Many players. Pre 1982 product.

Innovatory and another Generic (Sandoz)

discontinued. Only Teva is the approved player.

Many players. Pre 1982 product.

DRRD, LPC, MYL, TRP, TEVA have launched.

9 players have approval. Market size was USD66m

when Wockhardt entered in Aug 2012.

3 players have approval. Market size was

USD153m when Mylan entered in May 2013.

Source: USFDA, MOSL research; NPP: New Patient Population

29-Mar-08

20-Feb-09

27-Mar-09

9-Mar-11

29-Mar-11

5-Apr-11

11-Oct-11

20-Dec-11

Toprol Xl

Elmiron

Coumadin

Mexitil

Coumadin

Aciphex

Plendil

Zomig

AstraZeneca

Janssen

BMS

Boehringer

Ingelheim

BMS

Takeda

AstraZeneca

830

None

12 March 2014

Alembic Pharma

Exhibit 18: III. Product opportunities with no substance patent protection

DMF Filed on

21-Nov-06

7-Feb-07

25-Jun-07

26-Sep-08

Molecule

Clarithromycin

Telmisartan

Alendronate

Sodium

Bupropion HCL

Quetiapine

Fumarate

Duloxetine HCL

Fenofibric Acid

Olmesartan

Medoxomil

Brand

Biaxin

Micardis/

HCT

Fosamax

Wellbutrin/

SR/XR

Seroquel/

Cymbalta

Fibricor

Benicar/

HCT

Innovator

Abbott

Boehringer

Ingelheim

Merck

GSK

Sales

(USD m)

274/

235

500

Patent expiration

LPE: Apr 11, 2017

EPE: Jul 15, 2017

EPE: Jan 7, 2014

LPE: Jan 10, 2020

LPE: Nov 17, 2014

LPE: Jan 17, 2019

LPE: Oct 30, 2018

Competition

9 players already have approval. Market size

was USD500+ before generics

Watson recd FA on 8 Jan 2014 and is FTF. GNP

and ALPM have TA. May launch on 181 day

Many Players already present. Market size was

USD1.9b before generics.

About 10 players

Many players in IR. For XR, 2017 patent was

upheld in court. Accord and Handa are FTF. 5

more para IVs.

12 para IV filers. More than 8 settled. Only 5

launched. No clarity on ALPM's position.

No ANDA approved. No para IV as well. Only 3

DMF filers

Mylan lost in court. Mylan and Sandoz (not for

HCT) have TA. No clarity on ALPM's position

Source: USFDA, MOSL research

30-Nov-09

9-Apr-10

14-Oct-10

25-Feb-11

AstraZeneca

Eli Lilly

Mutual Pharma

Daiichi Sankyo

1200

3300

700/

600

LPE: Nov 28, 2017

EPE: Jan 18, 2015

LPE: Mar 10, 2020

LPE: Aug 20, 2027

EPE: Oct 25, 2016

LPE: May 19, 2022

Exhibit 19: IV. Product opportunities with substance patent expiring in next three years

DMF Filed on

Molecule

Brand

Innovator

Sales

(USD m)

Patent expiration

Competition

31-Mar-09

Tadalafil

Cialis/

Adcirca

Eli Lilly

800

EPE: Jul 11, 2016

LPE: Nov 19, 2020*

EPE: Apr 20, 2015*

LPE: Dec 16, 2024

EPE: May 18, 2015*

LPE: Jul 29, 2021*

EPE: Aug 5, 2014*

LPE: Mar 17, 2022*#

EPE: Jul 26, 2016*

LPE: Jun 30, 2031

NCE: Jul 1, 2014

FTF were filed on Nov 2007 and Oct 2008. Filer

not known. Only Teva, Mylan, DRRD, Orchid

had DMFs at that time. 10 more DMFs today.

7 para IV players. Court upheld Apr 2015

patent. No clarity on ALPM's position

GNP, NYL, TVA have TA. TVA is para IV for tabs

or inj.

Multiple para IV filers. UCB has sued 13

companies including ALPM.

FTF was filed in July 2013. Identity of filer not

known. 15 DMF filers.

18-Nov-09

25-Mar-11

7-Sep-12

Aripiprazole

Linezolid

Lacosamide

Dronedarone

HCL

Abilify

Zyvox

Vimpat

Otsuka

Pharmacia

Upjohn

UCB

5190

430

338

26-Mar-13

Multaq

Sanofi Aventis

Source: USFDA, MOSL research; EPE: Earliest Patent’s Expiration; LPE: Last Patent’s Expiration; * Is a Substance patent; # Re-issue patent

12 March 2014

Alembic Pharma

Entry into specialty segments to drive above-industry growth

ALPM’s growth in domestic formulations has been restricted due to its

overdependence on slow growing acute therapies. The company has identified and

expanded into certain specialty segments like Respiratory, CVS, Diabetology,

Ophthalmic, Gastro, and Gynecology. These will not only drive above-industry

growth, but also improve the profitability of the business along with adding more

stability to it.

Respiratory, CVS,

Diabetology, Ophthalmic,

Gastro, and Gynecology

indentified as key specialty

therapies to drive growth as

well as profitability

Overdependence on slow growing acute therapies in India

The major reason for ALPM’s slowdown has been its overdependence on

Macrolides (a class of antibiotics) and other acute therapies. Legacy brands

Glycodin, Azithral, Althrocin, Roxid and Wikoryl which constitute about 30% of

ALPM’s domestic formulations sales (as per AIOCD), has grown mere 6% CAGR over

last 4 year, while the overall segment grew at 12%. This implies a 15%+ growth in

the balance portfolio over the same period.

Exhibit 21: Specialty therapies (% of domestic formulations)

Exhibit 20: Chronic v/s acute (% of domestic formulations)

Source: Company, MOSL, AIOCD

Expansion into specialty segments

The high growth in the balance portfolio has been driven by new product

introductions in therapies like Ophthalmology, Cardiology, Diabetology,

Gastroenterology, Gynecology, Nephrology and Orthopedic. Prescriptions in these

segments are written by specialists, who usually do not switch brands. Hence,

established brands in these therapies generate sustainable revenues and command

a premium in the market. Further, these specialty therapies are witnessing growth

faster than the overall market due to increasing diagnosis and penetration.

Exhibit 22: 49% contribution from anti-infectives …

Exhibit 23: …reduced to 33% as specialty contribution grows

Source: Company, MOSL

12 March 2014

Source: Company, MOSL

Alembic Pharma

Overall domestic formulations to grow faster than industry

Driven by increasing contribution from specialty segments, we expect ALPM’s

domestic formulations business to grow by 15% over the next two years, which is

higher than our expectation of industry growth rate of 12-14%.

Exhibit 24: Domestic formulations to grow faster than the industry

Source: Company, MOSL

International branded formulations at investment stage

ALPM has been investing to build product portfolios in South East Africa and CIS

markets. However, given the slow approval process and gestation period required

to gain scale in these markets, we believe the branded formulations business may

take another 2-3 years before meaningfully contributing to ALPM’s overall

business. At the same time, growth in these markets may remain high due to the

small base effect.

APIs to slow down due to increasing captive consumption

We expect the API sales to continue its downward trend due to increasing captive

consumption. Given the backward integrated manufacturing approach taken by

the company, this trend is likely to continue until such time as ALPM expands

current API capacities.

Exhibit 25:Investment phase for Intl branded formulations

Exhibit 26: Slowdown in APIs to continue

Source: Company, MOSL

12 March 2014

Alembic Pharma

Improving business profile; re-rating candidate

Likely to be net-debt free by FY16E



Business mix at ALPM likely to improve further, with higher contribution from US

generics and specialty therapies in India.

This is likely to result in 280bp EBITDA margin expansion and 35% earnings CAGR over

FY14E-16E.

With majority of the capex behind them and high free cash generation visibility, we

expect ALPM to be net-debt free by FY16E.

An improving business profile and strong earnings growth makes ALPM a potential re-

rating candidate. Initiate coverage with a Buy and target price of INR350 (15x FY16E

EPS), 40% upside.

Improving business mix likely to result in increasing profitability

US generics and specialties

areas in India likely to make

up 64% of sales in FY16E

We expect contribution from US generics market and specialties therapies in India

to increase from 37% in FY13 to 64% in FY16E. At the same time, low-margin APIs

and acute therapies may continue to face slowdown over this period. This is likely

to result in an overall revenue growth of 21% CAGR over FY14E-16E in our view.

ALPM is also planning to establish its own front-end in the US market (by end

FY15E), which may also aid increase in profitability. Hence, we expect the

improving business mix to drive a 280bp EBITDA margin expansion over FY14E-16E.

This in turn is likely to result in 35% earnings CAGR over the same period. Our EPS

estimates for FY15E/16E are 10%/14% above Bloomberg consensus estimates.

Exhibit 28: … sales growth of 21% CAGR over FY14E-16E…

Our EPS estimates for

FY15E/16E are 10%/14%

above consensus.

Exhibit 27: We expect improving business mix (%)…

Source: Company, MOSL

Exhibit 29: EBITDA margin likely to expand by 280bp…

Exhibit 30: …resulting in 35% earnings CAGR over FY14E-16E

Source: Company, MOSL

12 March 2014

Source: Company, MOSL

Alembic Pharma

Strengthening balance sheet

Free cash-flows expected to

increase given limited capex

needs; could be net-debt

free by FY16E

Owing to the structural changes brought in by the new management, ALPM has

been able to halve its cash conversion cycle over the last 5 years. The healthy cash

flow generation has aided in significantly lowering the net-debt position over the

same period. As major of the company’s capex is behind them, we expect it to attain

a net-debt free position by FY16E. At the same time, return ratios are expected to

sustain above 40% over the foreseeable future.

Exhibit 31: Management has only guided for maintenance

capex

Exhibit 32:

teady free cash-flow generation

Source: Company, MOSL

Exhibit 33: Reduced net-debt/equity (X)

Exhibit 34: Return ratios to remain above industry average

levels (%)

Source: Company, MOSL

12 March 2014

Alembic Pharma

Potential re-rating candidate; Initiate with BUY

We believe that ALPM’s business profile has undergone a sea change at multiple

parameters as discussed above. However, the re-rating undergone over the past 12

months does not adequately reflect this improvement.

Exhibit 35: One year forward P/E chart

Exhibit 36: One year forward P/B chart

Source: Bloomberg, MOSL

Considerable improvement

With increased earnings growth visibility and strengthening balance sheet, we

in business profile; still

ascribe a PE multiple of 15x, which is still a 25% discount to the sector average

trading at significant

considering its relatively smaller scale. We see further room for re-rating once the

discount to sector average

company becomes net-debt free and achieves sizeable scale in US generics and

Indian formulations market.

Exhibit 37: Valuation: Peer comparison

Company

Alembic Pharma

IPCA Labs

Torrent Pharma

Unichem Labs*

Indoco Remedies*

Natco Pharma*

P/E (X)

FY15E

FY16E

14.5

10.9

17.4

14.1

17.5

14.4

12.6

11.1

16.4

11.9

18.4

19.0

EV/EBITDA (X)

FY15E

FY16E

10.2

7.7

11.8

9.7

11.5

9.3

8.0

7.1

9.7

7.3

12.6

13.2

EV/Sales (X)

FY15E

FY16E

2.1

1.7

2.9

2.4

2.0

1.5

1.3

1.6

1.3

3.2

RoE (%)

FY15E

FY16E

43.6

44.6

29.4

28.8

26.8

27.3

18.2

18.5

16.4

19.0

19.9

18.6

EPS CAGR (%)

FY14E-16E

35.7

30.6

10.3

20.4

43.2

21.8

Source: MOSL Research, *Bloomberg

Based on our EPS estimates, stock is trading at 14.5x FY15E EPS and 10.9x FY16E

EPS. We initiate coverage on ALPM with a

Buy

recommendation and a target price

of INR350 (15x FY16E EPS).

12 March 2014

Alembic Pharma

Key risks to our investment arguments

Regulatory enforcement actions

Any enforcement action by the USFDA on any of its facilities could lead to a

significant downgrade in our estimates, as strong growth US generics is one of the

important investment arguments. The management indicated that its formulations

and API plants at Baroda were inspected about 12 months ago.

Corporate governance related issues

Alembic Group has interests in varied businesses like real estate, specialty chemicals

and glassware. Although the extent of inter-corporate transactions has reduced

since the ALPM de-merger from Alembic Ltd in 2009, there were loans worth

INR1.48b given to its associates during FY13. The management has indicated that

the group companies have already repaid this amount and it stood ‘NIL’ at the end

of FY13. The company has also stressed that it would refrain from any such activities

in the future. While these are surely positive signs, any such transaction in the

future will impair investor confidence, leading to a potential de-rating in the stock.

Delay in obtaining ANDA approvals

Management expects 8-10 product launches every year for the next three years.

Prolonged delay in obtaining ANDA approval from USFDA can lead to lower than

expected growth in US generics. This could lead to downgrade in our estimates.

Field force attrition

With an aim to increase its presence in specialties therapies in Indian formulations

market, ALPM has built a strong field force of 3,000 medical representatives. We

have noticed that attrition of trained personnel has impacted other chronic focused

companies like Unichem, IPCA Labs and Torrent Pharma. While the management

indicated that attrition rate has been brought down to 25% (from its high of 45%),

an unexpected increase in attrition can hinder ALPM’s marketing strategy in India

and impact our growth as well as profitability assumptions.

12 March 2014

Alembic Pharma

Financials and valuation

Income statement

Y/E March

Net Sales

Change (%)

EBITDA

EBITDA Margin (%)

Depreciation

EBIT

Interest

Other Income

Extraordinary items

PBT

Tax

Tax Rate (%)

Min. Int. & Assoc. Share

Reported PAT

Adjusted PAT

Change (%)

Margins (%)

2011

12,021

1,602

13.3

296

1,307

276

1,068

215

20.1

854

313

2012

14,654

2,194

15.0

337

1,858

376

128

1,610

309

19.2

1,301

2013

15,204

2,520

16.6

350

2,170

240

133

2,063

411

19.9

1,653

2014E

18,914

3,624

19.2

400

3,224

159

3,115

760

24.4

2,355

(INR Million)

2015E

22,768

4,667

20.5

465

4,202

141

114

4,175

918

22.0

3,256

2016E

27,707

6,096

22.0

553

5,542

123

139

5,558

1,223

22.0

4,335

Balance sheet

Y/E March

Share Capital

Reserves

Net Worth

Debt

Deferred Tax

Total Capital Employed

Gross Fixed Assets

Less: Acc Depreciation

Net Fixed Assets

Capital WIP

Investments

Current Assets

Inventory

Debtors

Cash & Bank

Loans & Adv, Others

Curr Liabs & Provns

Curr. Liabilities

Provisions

Net Current Assets

Total Assets

2011

377

2,590

2,967

3,279

6,300

4,335

1,616

2,720

265

5,419

2,192

2,020

1,144

2,136

1,873

264

3,283

6,300

2012

377

3,573

3,950

3,527

7,572

4,629

1,951

2,678

582

7,226

2,587

1,993

471

2,174

2,947

2,590

357

4,279

7,572

2013

377

4,652

5,029

1,868

139

7,036

5,725

2,283

3,442

323

6,680

2,668

2,329

161

1,522

3,442

2,819

623

3,239

7,036

2014E

377

6,125

6,502

1,668

191

8,360

6,525

2,683

3,842

323

8,190

2,829

2,897

571

1,894

4,028

3,066

962

4,163

8,360

(INR Million)

2015E

2016E

377

8,058

10,629

8,435

11,006

1,468

1,268

191

10,094

12,464

7,725

9,225

3,148

3,701

4,577

5,523

323

10,178

12,820

3,302

3,991

3,487

4,244

1,109

1,811

2,280

2,774

5,017

6,235

3,598

4,354

1,420

1,881

5,161

6,585

10,094

12,464

E: MOSL Estimates

12 March 2014

Alembic Pharma

Financials and valuation

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation(x)

P/E

Cash P/E

Price / Book Value

EV/Sales

EV/EBITDA

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios (%)

Asset Turnover (x)

Debtors (No. of Days)

Inventory (No. of Days)

Creditors (No. of Days)

Leverage Ratios (%)

Net Debt/Equity (x)

2011

4.5

6.1

15.7

1.0

25.7

55.4

41.1

15.9

4.2

31.5

0.4

27.9

19.9

1.9

60.9

66.6

48.5

1.1

2012

6.9

8.7

21.0

1.4

23.6

36.4

28.9

12.0

3.4

23.0

0.6

37.6

28.9

1.9

49.5

64.4

61.3

0.9

2013

8.8

10.6

26.7

2.5

33.4

28.6

23.6

9.4

3.2

19.5

1.0

36.8

32.0

2.2

55.6

64.1

69.1

0.4

2014E

12.5

14.6

34.5

4.0

37.5

20.1

17.2

7.3

2.6

13.4

1.6

40.8

43.5

2.3

55.7

54.6

60.7

0.3

2015E

17.3

19.7

44.7

6.0

40.6

14.5

12.7

5.6

2.1

10.2

2.4

43.6

47.8

2.3

55.7

52.9

59.9

0.2

2016E

23.0

25.9

58.4

8.0

40.7

10.9

9.7

4.3

1.7

7.7

3.2

44.6

51.2

2.2

55.7

52.6

60.6

0.1

Cash flow statement

Y/E March

OP/(Loss) before Tax

Depreciation

Others

Interest

Direct Taxes Paid

(Inc)/Dec in Wkg Cap

CF from Op. Activity

(Inc)/Dec in FA & CWIP

(Pur)/Sale of Invt

Others

CF from Inv. Activity

Inc/(Dec) in Net Worth

Inc / (Dec) in Debt

Interest Paid

Divd Paid (incl Tax)

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Opening Balance

Closing Balance

2011

1,068

296

239

178

-488

950

-624

-568

-305

-164

-470

-88

151

2012

1,610

337

262

327

-616

1,418

-612

-564

143

-372

-216

-446

408

471

2013

2,064

350

146

387

439

2,648

-854

184

-670

-1,696

-288

-304

-2,288

-310

471

161

2014E

3,115

400

109

709

-515

2,401

-800

-750

-200

-159

-882

-1,241

409

161

571

(INR Million)

2015E

2016E

4,175

5,558

465

553

-15

918

1,223

-460

-723

3,289

4,150

-1,200

-1,500

114

139

-1,086

-1,361

-200

-141

-123

-1,323

-1,764

-1,664

-2,087

539

701

571

1,109

1,811

E: MOSL Estimates

12 March 2014

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Alembic Pharma

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ALEMBIC PHARMA

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