Buy Alembic Pharmaceuticals, target Rs 590: HSBC
Alembic Pharmaceuticals is a midcap company, operating in pharmaceuticals and health care sector.
Shares of Alembic Pharmaceuticals traded at Rs 506.65 around 1 pm on 28 June, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
As per the brokerage, after receiving 16 ANDA approvals in FY19, ALPM has already received 8 approvals in Q1FY20. It earlier indicated more than 10 products launches in Q1FY20 (it plans launches for 20 products in FY20 against 8 in FY19).
ALPM is not only seeing its quantity of US filings and approvals going up, but it is also seeing an improving width and quality of its US portfolio (it has received approval for 7 ophthalmics products since December 2018 and 2 derma products since October 2018, versus only approvals for oral solid products in the past).
It has obtained approvals for ophthalmics by filing ANDAs through CDMO (contract partners), but it expects to start filings from its own facility in 2H FY20.
Its new plants for oncology injectables, general injectables and ophthalmics are broadly on track to start ANDA filings from 2H FY20.
"We upgrade ALPM to buy from hold as we believe its R&D efforts over the past few years are starting to fructify in the US (e.g. derma ANDA approvals from Aleor JV, 7 ANDAs approvals for ophthalmics). We expect filings and approvals to improve further as its new plants come on board over FY20e-21e," said the brokerage.
While cost pressure will continue for ALPM on ongoing R&D spend for its US pipeline and costs associated with new facilities, the brokerage assumes the scale-up in US sales should result in steady margins. In the long term, the China market should provide another leg of growth.
"We derive our target price of Rs 590 (earlier Rs 575) by discounting back our 1-year forward fair value, which is based on 21 times (Gordon Growth-based PE, unchanged) March 2021e EPS of Rs 30.25 (earlier Rs 29.55), by our COE assumption. Our inputs to Gordon Growth model include a sustainable RoE of nearly 17 per cent (average of FY20-22e), long-term growth of 4 per cent (unchanged), and cost of equity of 7.7 per cent (risk free rate of 6 per cent, equity risk premium of 3 per cent and beta of 0.79)," said the brokerage.
A further slowdown or delay in the recovery of India sales growth, a delay or failure to receive drug approvals in the US and margin pressure from higher R&D expense as any overshoot of R&D expense will adversely impact margins, said the brokerage.
Moreover, an adverse FDA actions at its manufacturing plants could de-rail its plans to scale-up US sales significantly.