Investors with a two to three-year horizon can subscribe to the initial public offer of drug maker Alkem Laboratories. The issue is an offer for sale by its promoters.

The company is geared to sustain healthy growth in revenue and profit over the next two to three years on three counts.

First, the shift in focus from seasonal acute therapies such as anti-infectives to chronic therapies such as anti-diabetes, neurological disorders and cardio-vascular ailments should help Alkem sustain growth in the home market.

Second, Alkem is scaling up its presence in the US — the world’s largest pharma market. The company has a good pipeline of drugs pending approval by the US Food and Drug Administration (FDA) which if it comes through should provide a leg up to its overall revenue and profit growth.

Third, with cash of Rs 691 crore in its books as of September 2015, the company is also exploring inorganic opportunities in the US. Higher contribution from the US geography, which enjoys higher margins, should help Alkem’s performance in the medium term.

Also, sustained weakness of the rupee against the US dollar, if it happens, can rev up the company’s profitability.

At the upper end of the price band (Rs 1,050), the issue discounts Alkem’s 2015-16 expected earnings by about 15 times. This implies an over 15 per cent discount to its peer Unichem Laboratories, which has a similar revenue mix.

Better revenue mix Alkem ranks fifth in the domestic market; its market share according to research firm IMS SSA stood at 3.6 per cent as of March 2015.

Revenue from the home market has grown 18 per cent annually over the FY11-15 period.

Domestic market currently accounts for about three-fourth of the company’s consolidated revenue.

It gets the chunk of the domestic revenue from drugs that cater to acute therapies such as anti-infectives, gastroenterology and pain management.

However, over the last few years, the company has gradually been increasing its footprint in the chronic segment.

Besides organic expansion, the company is exploring in-licensing opportunities across therapeutic segments.

With a field force of 5,745 people, the company reaches out to over two lakh doctors, who currently prescribe its brands.

Alkem’s 13 drug brands, which include antibiotic brands such as Clavam and Taxim-O, featured among the top 300 brands in the Indian pharma market as of September 2015.

Expanding footprint

Improving revenue mix in favour of chronic therapies should aid the company’s overall revenue and profit growth in the medium term.

Alkem’s export revenue has grown at a robust 46 per cent annually over the last four years, although on a low base.

The share of exports has increased from 12.6 per cent in 2010-11 to 25.3 per cent in 2014-15. This has been primarily driven by a pick up in the lucrative US market. The company has filed 69 products with the US FDA.

Of this, only 17 products have been launched so far, thus leaving room for growth over the next two years, once the other drugs get approved.

Besides this, the company is also exploring inorganic opportunities to increase its footprint in the US market.

Given the attractive margins, higher contribution from the US should boost Alkem’s profits.

While strong growth in key markets — India and US — is a positive, the high attrition rate for its domestic field force at 40.7 per cent is a concern. But the company’s initiatives in training and development of the field force should help contain this.

Given Alkem’s high dependence on the domestic market, any price tightening move by the government may have a bearing on its performance.

In 2014-15, the company grew revenues 21 per cent to ₹3,789 crore. Revenue growth for the six months ended September 2015 was a healthy 36 per cent, thanks to strong performance in the US market.

Though its operating profit margin remained flat at 12.9 per cent in 2014-15, compared with the year before, it has improved significantly over the last six months.

For the first half of the fiscal, the company reported an 8.2 percentage point improvement in its operating margin to 17.9 per cent, compared with the same period last year.

This was on account of strong pick up in the US market.

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