Stock Review: Ipca Laboratories Ltd.

 

Ipca Laboratories Ltd. was founded in 1949. The present management took over the company in 1975. It has a 1.5 per cent share of the Indian pharmaceutical market and is the country's 27th largest pharmaceutical company.

 

The company has a strong presence in both the export and the domestic market. In the domestic market it sells branded generics. Formulations contribute around 83 per cent of domestic sales (the other category is active pharmaceutical ingredients or APIs). Within India Ipca Lab is the leader in antimalarials and rheumatoid arthritis.

 

Ipca Lab exports to about 110 countries across the globe. In FY10 exports accounted for 52 per cent of its total revenues. Between FY08 and FY10 exports grew at a compounded annual growth rate (CAGR) of 22.6 per cent. Abroad the company sells branded generics in semi-regulated markets such as the CIS countries, Africa (Kenya, Sudan and Nigeria) and Sri Lanka. In the more developed markets such as Europe (mainly UK) and US, Australasia and South Africa it sells unbranded generics.

 

Strengths

Backward integration. The company manufactures the APIs for most of the therapeutic areas that it is present in. This will enable it to both garner a larger market share and improve its margins.

 

Own field force. In the semi-regulated markets, it has its own field force of about 500. In the domestic market the company has a field force of 5,000 people through whom it is focusing on brand building among doctors.

Approved manufacturing facilities. The company has integrated manufacturing plants where it can manufacture both formulations and APIs. Some of them have approval from the US regulator (Food and Drug Administration) and UK's Medicines and Healthcare products Regulatory Agency (MHRA).

 

Low debt. The company has a debt to equity ratio of 0.60 which is not high.

 

Weaknesses

Dependence on core portfolio. The company generates around 70 per cent of its revenue from its top 25 products. In particular, it is dependent on key drugs like Lariago, Raphiter, and HCQS. It needs to diversify its product portfolio further.

 

Price control regime. According to a recent report from HDFC Securities, the company has brought down the number of drugs falling under drug price control order (DPCO) to around 7-8 per cent. It is difficult to get permission for increasing the prices of these drugs. Any change in DPCO regulations bringing more drugs under the ambit of the price control regime would affect the company adversely.

 

Growth drivers-domestic market

Launch of two new divisions. The company launched two new divisions in April 2010: nephrology and urology. These divisions were started with 100 people, and have already been scaled up to 200. The company expects to launch seven drugs in each of these two divisions this fiscal. In future it expects to launch two to three drugs in each of them every year. These divisions are expected to generate around Rs5-6 crore in revenue this fiscal and are expected to turn profitable by FY13.

 

Expanding sales force. The company had earlier targeted increasing its sales force by 1,000 from 4,000 to 5,000 in the next two years. But it has already done so in one year. It plans to increase it further in future.

 

Expanding and changing product portfolio. The company plans to launch one or two products in each of its 10 divisions each year. The new products added in the last five years now contribute 15 per cent of its domestic formulations sales.

 

The company is changing its product profile from acute- to the faster-growing chronic-therapy area. It is also reducing its dependence on antimalarials (whose raw material is available only in China).

 

Growth drivers - international market

Strong growth in branded generics. The CIS countries account for the maximum, 50 per cent, export of branded generics. In the past, the company encountered regulatory changes in this market because of which products had to be registered again. But those problems are behind it now. Ipca is expected to notch strong sales growth in this market in the near future.

 

Strong prospects for generics. The export of unbranded generics is expected to grow faster than that of branded generics. In this segment, the European market is the most important for Ipca currently, accounting for 51 per cent of all the formulations exported by it. Within Europe the UK market makes the maximum contribution. Here the company has submitted 57 dossiers for approval of which 36 have been registered already. Twenty-four more are under various stages of approval. This large product pipeline is a potential source of growth for the company.

 

In the US market the company has filed 22 ANDAs (abbreviated new drug application) of which 12 have been approved. It currently markets eight drugs in this market, each of which has above 15 per cent market share. In the next three to four years the company expects to file 50 abbreviated new drug applications (ANDAs) in the US and receive approval for at least 30.

 

According to a report from HDFC Securities, in Q3FY10 the company received the World Health Organisation's (WHO) approval under the pre-qualification programme for its antimalarial formulation. The WHO prequalification product list is used by the United Nations and other agencies for purchasing medicines. This will enable the company to participate in the global tender process which is worth $300 million annually. The company is also trying to enter into supply agreements with global pharma companies.

 

Capacity expansion. The company is facing capacity constraints, especially for its export markets. It has capex plans worth Rs200 crore for FY11 and Rs150 crore for FY12.

 

The company recently completed its Indore SEZ plant which will be able to cater to the US market once it gets USFDA approval. This plant is expected to generate revenue worth Rs300-400 crore once this approval comes through.

The company has set up a new plant at Sikkim SEZ that will be operational from April 2011. It will cater to the domestic formulations market (taking over from the Dehradun plant whose tax holiday ends on March 31, 2011).

 

Threats

Delay in USFDA approval. The company incurs a cost in maintaining the Indore SEZ plant. It was expected that it would get this approval by the third or fourth quarter of FY11. But this appears to have got delayed.

 

Valuations The company is trading at a 12-month trailing PE ratio of 16.68, which is higher than its five-year median PE of 13.16. Over the past five years, it has notched up a compounded annual EPS growth rate of 28.37 per cent. This gives it an attractive PEG ratio of 0.6. In view of the company's strong growth prospects and reasonable valuations, you may buy the stock with at least a three-year horizon.