Ipca Labs: Buy

Investors can buy the stock of Ipca Laboratories with a two-year perspective. Fully integrated operations, a strong presence in the anti-malarial segment, a growing focus on the US generics market and solid research skills are the company’s positives.

At the current market price of Rs 645, the stock trades at a modest valuation of about nine times its expected FY-09 earnings. This is at a discount to like-sized peers such as Orchid Chemicals, Torrent Pharmaceuticals and Matrix Laboratories.

A diversified business strategy — both segment and geography-wise — helps Ipca achieve significant size and growth in formulations and bulk drug/intermediates.

Strengths in manufacturing and its low-cost advantage have helped Ipca maintain steady margins in its branded formulations business. This has given it a platform to leap into US generics through a partnership-enabled model with Ranbaxy. Under this profit-sharing alliance, Ipca is developing a number of generic prescription pharmaceutical products while Ranbaxy takes care of regulatory approvals and marketing. The duo has already received five USFDA approvals and looks set to increase this number in future.

Another key area that lends further earnings potential is research and development where Ipca spends four per cent of its turnover. It has entered into a collaborative-cum-licence agreement with Central Drug Research Institute for the further development of their compound 99/411, a synthetic substitute for malarial drugs. Ipca’s domain knowledge in malaria underpins its R&D efforts.
Business scenario

Ipca, one of the top 20 domestic pharmaceutical companies, saw healthy operating profit margin of 20-22 per cent (since FY-07) after stagnating in the high teens for three years.

This change was driven by higher focus on diverse geographies such as Europe, Latin America and Africa; scaling up of international formulations business and a conscious foray into difficult-to-make bulk drugs. Ipca’s net revenues grew by a Compounded Annual Growth Rate of 15 per cent and profits by 30 per cent, in the last six years.

To prevent itself from missing out on the US formulations opportunity, Ipca joined hands with Ranbaxy, identifying over 22 molecules for development. This partially contributed to the acceleration of formulation exports, which jumped by over 30 per cent in 2006-07.

We believe that the Ipca’s US generics story is yet to unfold fully as it gains eight per cent market share for the approved drugs by 2010. In future, the company might derive a higher proportion of its revenues from high-margin formulations.

On the domestic front, Ipca looks good to maintain a reasonable success rate with around 20 per cent growth, driven by new launches over the past two years. Its model is much more de-risked now. Over 20 of its brands contribute 60 per cent of the domestic formulation revenues as against merely six in 2005.

Increase of field force (over 1,600) and new products aimed at speciality areas such as heart, lung, brain and pain-related ailments have begun to bear fruit. With an aggressive brand-building exercise initiated two years back, branded formulations is where Ipca is poised to see higher revenues as its ‘focus patients’ are likely shift from non-branded medicines.
Focus areas

In Europe, Ipca has used its strategy of forging relationships with big drug-makers such as Iceland’s Actavis resulting in assured increase off-take of bulk drugs. Region-wise, this is the largest contributor to revenues.

Simultaneously, Ipca has submitted drug dossiers and developed region-specific medicines that it hopes will play a larger role in the next five years. In Africa, which is a ‘future market’, Ipca has ramped up its offering. With over 250 registered products, Africa grossed Rs 70 crore in export revenues and is expected to exceed Rs 80 crore in 2007-08.

The probability of acquisitions in overseas locations are higher for Ipca, which has until now grown organically. These acquisitions can lead to upsides in the stock price.

While Ipca raised debt of around Rs 40 crore to furnish significant capital expenditure at the end of F-Y07, its net change in cash position has improved considerably from the earlier year which will enough generate free cash flow enabling bigger acquisitions in future.

Ipca is also working on a number of molecules based on the Chinese herbal Artemisinin at a time when the global anti-malaria market is waiting for a new and cost-effective drug. When developed, these drugs could be breakthroughs in cost-effective management of multi-drug resistant malaria. Currently, Ipca appears best placed in this space to achieve success. This might also open up a parallel earnings stream of research-backed activities.

In this light, Ipca’s recent open offer for 30 per cent stake in a domestic company — Tonira Pharma, assumes strategic significance. Tonira gives a rich basket of 25 bulk drugs and crucial intermediates along and the know-how to prepare polymorphs of complex chemicals.