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Unichem Laboratories - Better Times Ahead

This pharma player's prospects have improved. Buy on dips

Unichem Laboratories has both domestic (contributes 72 per cent of consolidated revenue) and international operations (contributes 27 per cent). It has a UK-based subsidiary called Niche Generics. It also caters to the US, Europe, Southeast Asia, CIS countries and Russia, and Africa. It manufactures both formulations and active pharmaceutical ingredients (API).

Strengths
Strong brand building ability: One of its strengths in the domestic market is its ability to build brands. Its top seven brands contribute around 50 per cent of its total revenues. Three of its brands feature among the top 100 in the country and five among the top 300.
Focused on high-margin segments: The chronic segment accounts for 57 per cent of its domestic revenues: CVS (42 per cent), CNS (12 per cent) and diabetes (4 per cent). These segments have both high growth prospects and high margins.

Weaknesses
Delayed turnaround at Niche Generics: The recession in Europe and the adverse pricing environment there have delayed the turnaround at Niche Generics.
Overdependence on key brands: The seven top brands contribute 50 per cent of the company’s revenue. One group, Losar, alone contributes about 21 per cent of domestic revenue. The company is now focusing on its second tier of 18 brands.
Price control: If the government expands the number of drugs under the Drug Price Control Order (DPCO), the profitability of its domestic operations could be affected.

Opportunities and growth initiatives
Higher growth likely in domestic market: The company is now focusing more on doctors from whom prescriptions get generated. It has a field force of around 1,800 which it plans to augment to 2,500 in the next 12-18 months to cater to tier II and tier IV towns.
New growth areas: The company has identified new segments that offer high growth potential: opthal, derma and nephro. It also plans to have a separate division that will cater to the needs of hospitals.
Turnaround in international business: So far the company has been investing in the international business, which has been incurring losses. This business is likely to make a profitable contribution from FY12.
The company’s US subsidiary has so far filed 15 ANDAs (abbreviated new drug application: basically a filing with US-based FDA for approval to launch a genetic drug in the US). Of this nine have been approved and five have been launched. The US subsidiary sustained a loss in FY10 but is expected to break even in FY11.
Manufacturing contracts with MNCs: The company is negotiating with multinationals for licensing and supplying drugs such as cephalosporins and beta lactam. It has already invested Rs 100 crore for creating the required capacity for this business. The contracts are likely to be signed in FY11 and revenue flow is expected to begin from FY12.

Valuation
On December 2, the company had a PE ratio of 16.63. This is 72.5 per cent higher than its five-year median PE of 9.64. Over the last five years its EPS has grown at a compounded annual rate of 19.7 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.85. A PEG ratio of less than one is considered acceptable. However, in view of the high current PE (compared to historical levels) buy the stock on dips and have an investment horizon of three years.