BSE SENSEX
27,828
S&P CNX
8,591
Alkem Laboratories
CMP: INR1,804
TP: INR1,800 (0%)
Neutral
Daman facility receives 483 observations
13 observations found during 10-day inspection by US FDA
29 September 2016
Update
| Sector:
Healthcare
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val. (INR m)
Free float (%)
Financials Snapshot (INR b)
Y/E Mar
2016
ALKEM IN
119.6
1,853/1,175
17/26/-
215.8
3.2
409
33.1
Daman-based formulation facility was being inspected by the US FDA over the
past 10 days (from September 20–29, 2016).
Following the inspection, form 483 with 13 observations was issued to the
company.
Daman facility accounted for ~30% of Alkem’s FY16 US revenues (~6% of total
revenues). Also, ~50% of Alkem’s pending ANDAs have been filed from its
Daman facility. Accordingly, it is essential for the company to resolve the form
483 inspectional observations at the earliest.
Crestor approval is due from this facility in early November; if observations
are not critical in nature, then the company should get final approval. There
will be better clarity on 483 observations once they are made available by the
US FDA.
At this stage, these are just observations and it should not have any
immediate impact on the business.
Apart from Daman, the company has zero pending 483s across its facilities.
The Taloja bio equivalence center was the latest facility to receive US FDA
clearance. Alkem’s other key facility in Baddi was inspected by the US FDA in
2HFY15 and has already received Establishment Inspection Report (EIR).
Alkem is one of the fastest growing pharma companies among the top-10
domestic peers. Despite regulatory headwinds, Alkem’s domestic business is
poised to deliver robust mid-to-high teens growth in FY17 on the back of its
consistent outperformance in the acute segment and a lower base in the
chronic segment.
Strong secondary sales growth in July-Aug in the domestic market suggests
2QFY17 could turn out to be another quarter of robust performance.
More clarity awaited; Early resolution critical
2018E
2017E
Net Sales
EBITDA (Rs b)
Net Profit
EPS
EPS Gr.(%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
49.9
8.5
7.7
64.7
67.4
293.0
23.8
17.6
27.9
6.2
57.2
10.0
8.8
73.8
13.9
351.9
22.9
20.7
24.5
5.1
68.5
12.7
10.3
85.8
16.3
418.4
22.3
20.5
21.0
4.3
Shareholding pattern (%)
As On
Jun-16
Promoter
66.9
DII
3.4
FII
3.5
Others
26.2
India business to remain the cash cow
Mar-16
66.8
3.2
3.6
26.4
FII Includes depository receipts
Stock Performance (1-year)
Alkem Lab
Sensex - Rebased
1,900
1,650
1,400
1,150
900
Recent run-up of stock coupled with US FDA-related uncertainty provides
limited room for upside
The US business achieved break-even in FY16 and thus its contribution to
profits remains negligible currently. However, going forward, the US would act
as a key catalyst given ~50 pending ANDAs. A warning letter situation will
impact our FY18E EPS estimates by 6-8% (low probability event, in our view).
We continue believing that Alkem is the best way to play the domestic growth
story (~72% of revenue and >90% of EBITDA came from India in FY16).
However, given the ~50% run-up in the stock over the past five months, the
re-rating story has largely played out. We maintain the target price of
INR1,800, but downgrade the stock to
Neutral
as uncertainty related to US
FDA action may keep the stock range-bound in the near term. We will review
our thesis once more clarity regarding US FDA action emerges.
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
Gaurav Tinani
(Gaurav.Tinani@motilaloswal.com); +91 22 6129 1552
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.