Focus on high-margin chronic diseases, new products to boost Ipca’s topline

Drugmakers would continue to see strong sales growth on the back of a double-digit growth in domestic pharma industry and focus on low-cost healthcare globally. Ipca Laboratories would benefit from its higher focus on chronic segment in domestic market, its diversification into new geographies for branded formulations and the huge generic opportunity in developed markets.

Business: 
Ipca Laboratories is a fully integrated pharmaceutical company involved in development, manufacturing and marketing of formulations, active pharma ingredients (API) and drug intermediates. The company has a balanced portfolio of close to 222 products for various therauptic areas  like cardio-vascular segment (CVS), anti-diabetics, non steroidal anti-inflammatory drugs (NSAID), anti-malarials, anti-bacterials, gastro intestinal products, , dermatology,  cough among others. Ipca, which has wholly-owned subsidiaries in the UK, USA, Australia, New Zealand, Nigeria, South Africa derives almost 52% of its total revenues from exports.

Formulations:
Ipca generates almost 70% of its consolidated revenues from formulation sales with dosage forms comprising of tablets, capsules, oral liquids, dry powder and injectables. Ipca’s major business comes from CVS, anti diabetics, NSAID and anti-malarial segments. Domestic branded sales contribute to more than half of total formulation revenues with over 3,800 sales force and over 1500 wholesalers promoting the same. IPCA also does branded formulation sales in emerging international markets like Russia/CIS (Commonwealth of Independent States), Latin America and West Africa that contribute to 12% to formulation revenues.

The company has been focusing on generic formulation sales in developed markets like the UK, USA, Australia and South Africa which contribute to one-third of formulation revenues.

API & Intermediates segment: Ipca, which has close to 65 APIs currently derives 30% of consolidated revenues from this segment. The majority of API revenues (69%) come from exports while the rest from domestic sales.

Investment rationale:
The pharma industry is expected to grow 12-14% over next few years on the back of rising instances of lifestyle-related chronic diseases, better medical facilities and increasing awareness apart from improving per capital income. Also, emerging markets are showing the same trend which would help Indian pharma companies to maintain their growth momentum.

Ipca, which has traditionally been a leader in anti-malarials and anti-bacterial segment has managed to gradually increase its share in high margin and fast-growing chronic segments. IPCA which is market leader in rheumatoid arthritis anti-inflammation segment has seen its share of CVS, anti diabetics and NSAID increase to 55% of formulation sales. Also, it has been reducing focus on low-margin products in anti infective segment. 

The company has been targeting branded formulations in emerging and semi-regulated markets by building brands in CVS, central nervous system segment (CNS), anti-infective and anti-malarial segments and introducing new products there. Ipca’s revenues from Russia grew 15% in the last quarter and are seeing traction on back of higher sales force there.

The company, in its generic formulations segment has more than 106 products registered in developed markets while 45 products are under registration and further 24 are under development. Ipca is looking to increase its abbreviated new drug application (ANDA) filings backed by its own APIs to cash in on the huge generic opportunity arising out of large scale patent expiries in developed countries.

In its API segment, Ipca has long-term contracts with few multinational firms and is targeting at least 1 drug master file (DMF) filing per month. Ipca currently has close to 49 DMFs filed with the USFDA and has obtained certificate of suitability for 29 APIs for Europe. 

Ipca recently forayed into contract research and manufacturing services by starting a new division ‘Covenance’ and has started contract research activities for APIs and formulations for some of its international clients. Ipca’s Indore special economic zone, set up to cater to the US is expected to get USFDA approval by Q3FY11 and this would help earn additional revenues of Rs 75 crore this fiscal itself. Further, Ipca plans to file 12 ANDAs from the Indore SEZ.

Concerns:
The company faces typical industry specific risks like delay or failure in getting approvals, delay in launching new products and currency fluctuations risk.

Valuations:
On the back of its focus on high-margin chronic disease segments in branded formulations, geographical expansion in emerging markets and new product launches post USFDA approval, Ipca’s revenues are expected to grow at compounded annual growth rate (CAGR) of 20% over FY10-FY12. The company is likely to maintain its margins with net profit expected to grow at CAGR of 22% over the same period. At a current market price of Rs279.95, the stock trades at P/E ratio of 14.36 times FY11 earnings per share and 11.31 times FY12E earnings respectively. Investors with a medium to long-term view can consider the stock on declines.

Disclaimer: The writer does not hold any share in the company.