Initiate with ‘buy’ on Alkem Lab; target price Rs 3,315

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March 26, 2021 8:09 AM

Alkem boasts best-in-class domestic anti-infectives portfolio and leadership in multiple GI and vitamin sub-therapies. Its Chronic base is small, but growing at 18-20%.

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Alkem boasts best-in-class domestic anti-infectives portfolio and leadership in multiple GI and vitamin sub-therapies. Its Chronic base is small, but growing at 18-20%. In the US too, Alkem has emerged as an industry-leader in many molecules by dint of sustained execution. Alkem is in good health given its, presence in fast-growing sub- therapies and steady market share gains should drive above-industry growth; improving US launches should ease gross margin pressure; and sales force expansion largely over, incremental business will log higher margin. We estimate FCF to jump 6x and revenue/PAT CAGR of 10%/17% over FY20-23 reflecting holistic potential beyond the FY21 blip. Initiate with ‘BUY’ and TP of Rs 3,315 (24x June 2022E EPS).

Over the past four years, each of Alkem’s top-10 brands have outgrown the market (Exhibits 15, 22). We forecast FY21–23 domestic formulations growth at 12% driven by the recovery in anti-infectives, continued uptake in VMN and steady growth in GI. We forecast Alkem’s chronic portfolio (~11% of sales) would expand at a CAGR of ~20% driven by CNS, anti-diabetes and cardiac therapies. With a sales force of ~10,500, presence in large sub-therapies, ability to convert patients to own brands/therapies, and pursuit of niche but untapped therapies (Exhibit 17) should help the firm sustain above-industry growth.

The US business has ramped up 3x over the last seven years; we forecast a 14% revenue CAGR for FY21–23. Even so, Alkem has historically launched only highly ‘genericised’ products that—while helping it gain scale (Exhibits 30, 32) due to superior execution—have kept its margin muted at single-digits. Launch quality over the past 12–18 months though has improved with products such as gJadenu, gColcrys and gSensipar (Exhibit 31). Upcoming launches such as gDuexis, gMethylin ER, and gLubrax mean the company is likely to capture the first wave of launches.

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