While most Indian pharma players have been facing multiple headwinds over the last few years, Ipca Laboratories has managed to put up a good performance, thanks to its diversified business model.
The stock has rallied almost 82 per cent from our last buy call given in October 2018. Although there may be limited upsides in the near term, the growth prospects over the long run are still intact, given the company’s diversified business model, strong presence in the high-growth therapies in the domestic market and traction in the institutional anti-malaria business.
Ipca’s ability to grow in non-US markets is a key positive, given that other players focussing on the US market continue to face headwinds in the region, leading to a slowdown in growth and reduced profitability.
At the current price of ₹1,233, the stock trades at about 21 times its estimated FY2020-21 per-share earnings; its large-cap peers Sun Pharma, Lupin, Cipla and Dr Reddys trade at 19-22 times their respective FY2020-21 per-share earnings. Investors with a long-term time horizon can accumulate the stock.
Diversified business model
The company generates most revenues from the domestic formulations business that contributes 45 per cent to the overall revenue (as of the second quarter of 2019-20).
It derives around 28 per cent from the export formulations business, while the remaining 27 per cent comes from the API (Active Pharmaceutical Ingredient)bulk drugs business.
Ipca’s product range includes anti-malarial, pain-management, antiemetic, antibiotic, analgesic, anti-diabetic, cardiovascular and central nervous system medicines. Pain management accounts for about 46 per cent of the domestic revenue.
The company is one of India’s largest suppliers of bulk drug APIs, including atenolol, chloroquine and artemisinin derivatives, and furosemide.
The company had been a market leader in anti-malarial drugs. However, with the decreasing incidences of malaria worldwide, Ipca has gradually shifted its focus to other therapeutic areas.
Strong domestic presence
The company’s domestic business has grown by 10 per cent CAGR over the past five years, driven by new launches and field force additions. Its product portfolio has been expanding in the fast-growing therapeutic segments, including cardio vascular, anti-diabetic and dermatology, which is expected to deliver steady growth going ahead. The management has guided for strong growth of more than 20 per cent in its pain management and antibiotics segments in FY20.
Currently, around 25 per cent of the firm’s domestic portfolio is listed under NLEM (National List of Essential Medicines).
Struggling US business
After posting a healthy revenue growth of 21 per cent CAGR over FY09-14 in the US (that had contributed more than 10 per cent to the total sales), Ipca was caught in a regulatory tangle with the US Food and Drug Administration in 2014.
In November 2019, its Silvassa plant was classified as Official Action Indicated (OAI) by the USFDA; the remedial process is expected to be completed by FY22. Over the past year, the company has stopped filing new generic (ANDA) applications with the USFDA. Resumption of US business is critical to improve profitability. The company has a presence in Europe, Australia, New Zealand, Canada and South Africa. Ipca’s generic export business registered healthy growth in the recent quarters, driven by Europe and Canada.
Institutional business
Ipca’s institutional malaria business, which had generated around 25 per cent of its overall sales until 2015, started to decline as the Global Fund stopped sourcing drugs from the company. The company has now started receiving orders from the Global Fund again.
The firm is also participating in tenders for injectable formulations. The institutional malaria sales recorded sales of ₹61.5 crore in Q2FY20. The management has guided for ₹215-220- crore revenue in FY20 and ₹300 crore in FY21.
In Q2FY20, Ipca reported a y-o-y growth of 63 per cent and 27 per cent in its consolidated net profit and net sales, respectively.