US go-ahead to lift Ajanta Pharma

Dahej plant was set up in 2014 to meet Ajanta's requirements for the US and emerging markets

The Ajanta Pharma stock was up nearly a per cent after the US Federal Drug Administration (FDA) cleared the company’s Dahej plant in Gujarat. The company informed the exchanges that the US FDA inspected its formulation facility last week and cleared it without issuing any Form 483 observations. The Dahej plant is one of the relatively newer plants of Ajanta Pharma set up in 2014 to meet its requirements for the US and emerging markets. 

The approval is critical for the company as the US is its fastest-growing geography. Though, of the overall Rs 2,000-crore revenue estimated for FY17, the US will account for just 10 per cent or about Rs 200 crore, it is crucial for driving future growth. Tushar Manudhane of Motilal Oswal Securities believes the company will grow its US business by 46 per cent annually during FY17-20. This is because the company, which has so far filed 32 abbreviated new drug applications (ANDAs), intends to file 12-15 ANDAs annually from FY18. 

Among the key products are the generic versions of Relpax (for migraines), which has sales of $250 million. While analysts have factored about $2-$3 million of sales per ANDA launched, given the company’s superior sales execution for generics of Zegerid (heartburn) and Abilify (anti-psychotic) which helped it to gain market share in the US, there could be a potential of sales hitting $5-$8 million per ANDA. 

The company will also look to improve its performance in the domestic market, which accounts for a third of its revenues. The company has been growing at double the rate of the Indian pharma sector growth for FY12-FY16. While Ajanta Pharma’s growth has come down in FY17, it is still higher than the industry growth. The company will look to improve its growth in the cardiology, ophthalmology and dermatology segments (which account for over 70 per cent of domestic sales). A higher share of branded sales and new launches should help it to maintain its outperformance.

What could play spoilsport on the growth front is the Africa business, which at 38 per cent is its largest sales segment. While the institutional anti-malarial segment helped to grow 45 per cent annually between FY12 and FY16, the pace is expected to slow down given higher base as well as lower funds available (with institutional customers such as the WHO) for procuring the medicines from drugmakers such as Ajanta Pharma. Going ahead though, growth in the African market could come from branded generic business in the antibiotic, anti-infective and cardiovascular system segments, especially from West Africa, where the company has a sizeable presence. 

While analysts expect overall performance to be strong, the stock at the current levels is trading at 27 times its FY18 estimates which is expensive. Investors should await a correction to accumulate this scrip.