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Alembic Pharmaceuticals (533573.BSE) - 30% sales CAGR in the next two years

1/8/2014

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Alembic Pharmaceuticals Limited is an Indian pharmaceutical company established in 1907, later spun off from Alembic Ltd. in 2010. The Company operates mainly in the generic (51%) and specialty therapy segments (49%). It is vertically integrated, meaning the company develops, manufactures and markets pharmaceutical products itself, without any intermediaries. Alembic is the market leader in the Macrolides segment of anti-infective drugs in India. It's Vadodara plant has the largest fermentation capacity in the country. 

Management has been slowly shifting the whole company from generics to specialty pharmaceuticals, resulting in an explosion of margins and profits: EBITDA margins increased from 10% in 2010 to 16% now, and net profit has quadrupled over the same period. In other words, Alembic is targeting areas with low competition and high profit margins. The company has sales sales presence in 75 countries, and manufacturing facilities approved by regulatory bodies in developed markets. They increased their US portfolio of 3 products in 2010, to 15 in 2013, growing similarly in Europe from 1 to 5 products in the last 2-3 years. The company has many products in it's pipeline in various stages of approval, and plans to launch 8-10 every year. R&D expenses have grown by 26% last year, representing 5% of sales (4.2% in 2012). Four most recognized brands of Alembic (Azithral, Roxid, Althrocin and Wikoryl) are among top 300 pharmaceutical brands. Given these facts, management expects 30% CAGR of sales over the next two years, with significant margin expansion adding to an even greater profit growth.

The Indian pharmaceutical market is very similar to China. Local companies hold a dominant position, with generics making around 80% of total sales. Prices are very low, driven by intense competition. India is the 10th largest market by value, but 3rd largest by volume. The industry is expected to grow at 15% per year till 2020, outpacing an expected 7-10% GDP growth rate. In addition, many investors have realized India offers a low-cost high-quality manufacturing base for global pharmaceutical majors, which has recently caused an acquisition spree by both domestic and foreign companies: Mylan acquisition of Strides Arcolab, merger of Elder Pharmaceuticals and Torrent Pharma, or Gland Pharma bought by KKR. 

Alembic Pharma is a very solid company with a clear growth plan and bright future ahead. With P/S of 3, and P/E ratio 21, the stock is very reasonably priced and offers a low risk entry with a high potential profit.
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