Alkem Laboratories margins beat as chronic growth offsets new-business investment

Investment View and Valuation

Motilal Oswal Financial Services retained a Neutral rating on ALKEM Laboratories after a strong margin-led 1QFY27 beat. The broker expects new-business investments to depress FY27 earnings, while the current valuation offers limited upside. ALKEM is valued at 27 times 12-month forward earnings, resulting in a target price of Rs 5,770.

The broker raised its FY27E and FY28E earnings estimates by 4% and 3%, respectively, supported by stronger rest-of-world growth and continued outperformance in chronic therapies. These positives are partly offset by weak trade generics, a longer CDMO breakeven period and the additional time required to consolidate the medtech business.

1QFY27 Financial Performance

ALKEM reported revenue growth of 11% year-on-year to Rs 3,740 crore, broadly in line with Motilal Oswal's estimate of Rs 3,714 crore. EBITDA increased 3.7% year-on-year to Rs 766 crore, 16% above the broker's estimate. Adjusted PAT declined 20.4% year-on-year to Rs 520 crore, but was 19% ahead of estimate.

Gross margin expanded 260 basis points year-on-year to 67.9%, the company's highest quarterly gross margin in the past 10 years, reflecting a favourable segmental mix. However, EBITDA margin declined 145 basis points to 20.5% as higher other expenses and employee costs offset the gross-margin improvement. Additional costs related to the newer CDMO business also constrained EBITDA growth.

Domestic Formulations and Chronic-Therapy Growth

Domestic formulation revenue increased 10.3% year-on-year to Rs 2,500 crore, accounting for 67% of sales. ALKEM continued to outperform the industry in chronic therapies, supported by marketing efforts and industry-beating growth in anti-diabetic, pain, vitamins-minerals-nutrients, respiratory and dermatology therapies.

Branded generics grew around 12%, while trade generics remained broadly flat amid competition, tighter DSO discipline and price increases following higher API costs. Management expects trade-generic primary sales to recover as channel inventories normalise and expects India segment growth of around 12% in FY27.

Biosimilars in India have scaled well, with seven products generating annual revenue of around Rs 150 crore. Backward integration has supported their margins.

International Business and US Operations

International revenue grew 16% year-on-year to Rs 1,220 crore. US sales rose 6.5% to Rs 740 crore, while other international markets increased 34.6% to Rs 480 crore, supported by Germany, Australia and Chile. Management retained its mid- to high-single-digit FY27 US growth guidance.

ALKEM received five ANDA approvals and launched 11 products in 1QFY27. Its US pipeline includes 192 ANDA filings and two NDAs. The US market remains challenging because of limited volume growth and muted launch traction, although price erosion has bottomed out. The Daman site's OAI classification remains an issue, with ALKEM implementing remediation measures.

CDMO, Biosimilars and New-Business Investments

US CDMO capex was around Rs 60 crore in 1QFY27. Management indicated that annualised sales of USD 25–30 million are required for the business to reach breakeven.

Approval of the denosumab biosimilar in the US has been delayed by a few months. In Europe, the Prolia biosimilar will be commercialised through Theramex but is expected to ramp gradually in a competitive market. The Xgeva biosimilar launch is expected within three months.

Management does not intend to pursue further orthopaedics or medtech acquisitions and will focus on scaling the existing businesses. Front-loaded operating expenditure in Enzene CDMOs and efforts to improve medtech profitability are expected to weigh on FY27 earnings.

Earnings Outlook

Motilal Oswal expects FY27 earnings to decline before recovering from FY28 onwards. The central concern is the near-term impact of investment in Enzene CDMOs and initiatives to improve medtech profitability, while stronger rest-of-world growth and chronic-therapy performance provide support.

Key Positives and Risks

• Positives: Record quarterly gross margin, chronic-therapy outperformance, stronger rest-of-world growth, improving US price-erosion trends and the scaling of Indian biosimilars.
• Risks and constraints: Weak trade generics, limited US volume growth, muted US launch traction, the Daman site's OAI classification, delayed denosumab approval, a longer CDMO breakeven period and the need to improve medtech profitability.