ICICI Securities Ltd. | Retail Equity Research April 22, 2016 Monthly Update Exclusivity launches, currency to drive Q4… Companies under the I-direct healthcare coverage are expected to post growth of 15.6% YoY to | 36,287 crore. US sales from the select pack are expected to grow 23.7% to | 11404.1 crore on the back of 1) |/US$ depreciation (8.4% YoY), 2) exclusivity launches (gGleevec by Sun and gGlumetza by Lupin) 3) continued sales traction from gAbilify to Torrent and Alembic post exclusivity and 4) consolidation of acquisitions. Domestic formulations from the select pack are likely to grow ~16% YoY to | 5652.6 crore due to base effect and growth in chronic segment. On the flip side, currency headwinds in other geographies like Europe and emerging economies such as Russia, Brazil and Venezuela continue to impact the overall performance negatively. On the companies front, we expect Alembic, Sun, Torrent and Lupin to register strong growth mainly due to robust US sales while Ajanta and Natco are likely to grow on the back of strong growth in domestic formulations. We expect EBITDA of the I-direct healthcare coverage to grow ~59% YoY to | 9343.2 crore. EBITDA margins are likely to expand ~700 bps to 25.7% due to a better product mix and base effect. We expect net profit of the I-direct healthcare coverage to grow ~53% YoY to | 6137.2 crore mainly due to a strong operational performance. On the regulatory front, four companies Lupin, Natco, Alembic Pharma and Glenmark revealed receipt of Form 483 observations during various earlier USFDA inspections for different facilities. Indoco received clearance (EIR) for the USFDA. On the other hand, Ipca received termination of contract notice from one of the sponsors - The Global Fund - on account of USFDA warning letters to its facilities. Sun Pharma forayed into the Japan prescription market by acquiring Novartis 14 established prescription brands for a cash consideration of US$293 million. Biocon also forayed into Japan when it received approval to sell its biosimilar insulin Glargine in Japan. Finally, the Indian Pharmaceutical Market (IPM) grew 12.6% in FY16. Among covered companies, Dr Reddy’s registered highest growth of 23.4% YoY followed by Glenmark, Alembic, Lupin and Torrent clocking growth of 23.0%, 17.8%, 17.0%, and 15.3%, respectively, in FY16. FY16 a bitter pill; negative returns for first time after FY09… After outperforming the broader indices for five fiscals, the Nifty Pharma Index underperformed, thanks to scores of USFDA related cGMP issues, which weighed on sentiments. Paradoxically, the fiscal witnessed highest number of USFDA product approvals in the last five years. Companies like Sun, Dr Reddy’s, Cadila and Ipca received warning letters. Scores of others received Form 483 observations for different facilities. What came as a surprise even for industry players was the frequency of inspections and the random nature of issues raised in the scrutiny. This, we believe, is likely to be the ‘’new normal’’ for generic players and can be a blessing in disguise as they will be inclined to focus more rigorously on quality aspects. We expect some spill over effect in the first half of FY17 as well. However, with most stocks down 30-35% from their peaks, we expect some accumulation as investors accept the new normal and some good Q4FY16 numbers. Note that the Nifty Pharma forward PE (FY18) has already corrected ~30% and is now quoting at 18.5x. Health Check Sector View Outperformer Index Performance as on April 22, 2016 Return (%) 1M 3M YTD 1Y CNX 500 3 6 -2 -5 Nifty 2 6 -1 -7 NSE Pharma 0 1 -6 -10 Return (%) Stocks Performance Mcap Company 1M 3M YTD 1Y 21-Apr Sun Pharma.Inds. -3 4 0 -15 197251 Lupin 0 -10 -16 -11 69865 Dr Reddy's Labs 2 9 1 -12 53418 Aurobindo Pharma 2 -6 -13 13 44625 Cipla -1 -9 -19 -20 42379 Cadila Health. 1 10 1 -6 33865 Glaxosmit Pharma 4 17 12 16 31306 Divi's Lab. 12 2 -5 22 29233 Torrent Pharma. 4 7 2 23 24855 Glenmark Pharma. -4 5 -14 -12 22245 Apollo Hospitals -1 -2 -6 9 19098 Ajanta Pharma 5 22 10 6 12838 Alembic Pharma 0 -3 -12 23 11594 Wockhardt 5 -16 -34 -42 11127 Biocon 19 15 7 21 11073 Strides Arcolab 10 -1 -12 0 10084 Natco Pharma 1 -11 -19 13 8154 Pfizer 4 -22 -26 -22 7996 Ipca Labs. -13 -23 -33 -25 6258 Jubilant Life -12 13 -7 144 6072 Indoco Remedies -7 -9 -16 -24 2527 Unichem Labs. 4 2 -13 9 2116 Return (%) M Market cap in | crore Price movement 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 4000 6000 8000 10000 12000 CNX Pharma Nifty (RHS) Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Nandan Kamat [email protected]
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ICICI Securities Ltd. | Retail Equity Research
April 22, 2016
Monthly Update
Exclusivity launches, currency to drive Q4… Companies under the I-direct healthcare coverage are expected to post growth of 15.6% YoY to | 36,287 crore. US sales from the select pack are expected to grow 23.7% to | 11404.1 crore on the back of 1) |/US$ depreciation (8.4% YoY), 2) exclusivity launches (gGleevec by Sun and gGlumetza by Lupin) 3) continued sales traction from gAbilify to Torrent and Alembic post exclusivity and 4) consolidation of acquisitions. Domestic formulations from the select pack are likely to grow ~16% YoY to | 5652.6 crore due to base effect and growth in chronic segment. On the flip side, currency headwinds in other geographies like Europe and emerging economies such as Russia, Brazil and Venezuela continue to impact the overall performance negatively. On the companies front, we expect Alembic, Sun, Torrent and Lupin to register strong growth mainly due to robust US sales while Ajanta and Natco are likely to grow on the back of strong growth in domestic formulations. We expect EBITDA of the I-direct healthcare coverage to grow ~59% YoY to | 9343.2 crore. EBITDA margins are likely to expand ~700 bps to 25.7% due to a better product mix and base effect. We expect net profit of the I-direct healthcare coverage to grow ~53% YoY to | 6137.2 crore mainly due to a strong operational performance. On the regulatory front, four companies Lupin, Natco, Alembic Pharma and Glenmark revealed receipt of Form 483 observations during various earlier USFDA inspections for different facilities. Indoco received clearance (EIR) for the USFDA. On the other hand, Ipca received termination of contract notice from one of the sponsors - The Global Fund - on account of USFDA warning letters to its facilities. Sun Pharma forayed into the Japan prescription market by acquiring Novartis 14 established prescription brands for a cash consideration of US$293 million. Biocon also forayed into Japan when it received approval to sell its biosimilar insulin Glargine in Japan. Finally, the Indian Pharmaceutical Market (IPM) grew 12.6% in FY16. Among covered companies, Dr Reddy’s registered highest growth of 23.4% YoY followed by Glenmark, Alembic, Lupin and Torrent clocking growth of 23.0%, 17.8%, 17.0%, and 15.3%, respectively, in FY16. FY16 a bitter pill; negative returns for first time after FY09… After outperforming the broader indices for five fiscals, the Nifty Pharma Index underperformed, thanks to scores of USFDA related cGMP issues, which weighed on sentiments. Paradoxically, the fiscal witnessed highest number of USFDA product approvals in the last five years. Companies like Sun, Dr Reddy’s, Cadila and Ipca received warning letters. Scores of others received Form 483 observations for different facilities. What came as a surprise even for industry players was the frequency of inspections and the random nature of issues raised in the scrutiny. This, we believe, is likely to be the ‘’new normal’’ for generic players and can be a blessing in disguise as they will be inclined to focus more rigorously on quality aspects. We expect some spill over effect in the first half of FY17 as well. However, with most stocks down 30-35% from their peaks, we expect some accumulation as investors accept the new normal and some good Q4FY16 numbers. Note that the Nifty Pharma forward PE (FY18) has already corrected ~30% and is now quoting at 18.5x.
Unichem Labs Quetiapine Fumarate CNS Astrazeneca Seroquel NA
Company Drug Name Therapeutic Area Innovator company Generic Version of Market Size
Alembic Pharma Olmesartan Medoxomil CVS Daiichi Sankyo Benicar NA
Cadila Healthcare Clofarabine Anti-cancer Genzyme Clolar NA
Glenmark Pharma Lacosamide Epilepsy UCB Inc Vimpat US$ 365 million
Tentative Approvals
Final Approvals
CNS: Central Nervous System; CVS: Cardiovascular,GI: Gastro Intestinal, NA: Not available; Source: USFDA, ICICIdirect.com Research
M&As, demergers and JVs
Strides to acquire Moberg Pharma Strides Shasun has agreed to acquire three brands from Sweden-based Moberg Pharma for US$10 million plus inventory value at closing to build its portfolio of over-the-counter (OTC) products. The three brands – JointFlex, Fergon and Vanquish –are marketed in the US, Australia and the Middle East. The deal will add ~US$6.1 million (~| 41 crore) to the Indian company’s revenue. Dr Reddy’s partners with TR Pharma to sell biosimilars in Turkish market DRL and TR Pharma partnered to manufacture biosimilar pharmaceuticals for the Turkish market. The deal is focused on the registration and commercialisation of three of DRL's biosimilar products in Turkey. TR-Pharma will register the drugs and produce APIs for the products. Dr Reddy’s enters into licensing pact with XenoPort Dr Reddy's Labs entered into a US licensing pact with XenoPort for the development and commercialisation of the latter's clinical-stage oral new chemical entity XP23829. Dr Reddy’s enters into licensing pact with Eisai Dr Reddy's Labs entered into a licensing pact with Japan's Eisai Co. Ltd for the development and commercialisation of the latter's investigational anticancer agent E7777 for an undisclosed sum. DRL enters into API supply, development agreement with Cutis Pharma Dr Reddy’s Labs entered into API supply and joint development agreements with the US-based Cutis Pharma to advance several programs in Cutis Pharma’s R&D portfolio, including RM-02, RM-03, and RM-06, toward FDA approval.
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Sun Pharma partners with AstraZeneca for diabetic drug distribution Sun Pharma entered into a partnership with AstraZeneca for distribution of the latter's diabetes medicine dapagliflozin in India. As part of the pact, Sun Pharma will sell AstraZeneca's dapagliflozin, a Type 2 diabetes medicine, under brand name Oxra. AstraZeneca India markets dapagliflozin under the brand name Forxiga. Both companies would promote market and distribute dapagliflozin in India under their respective brand names. Sun Pharma acquires 14 brands from Novartis in Japan Sun Pharma acquired 14 established prescription brands from Novartis in Japan. According to the agreements entered into between the parties, a wholly-owned subsidiary of Sun Pharma will acquire the portfolio consisting of 14 established prescription brands from Novartis for a cash consideration of US$ 293 million. These brands have combined annualised revenues of approximately US$160 million and address medical conditions across several therapeutic areas. Strides Shasun acquires three brands of Moberg Pharma Strides Shasun completed the acquisition of three brands of Sweden-based Moberg Pharma. It had entered into an agreement with Moberg Pharma, Sweden and its affiliates to acquire Jointflex, Fergon and Vanquish brands for a total consideration of US$ 10 million plus inventory value at closing. Biocon enters into agreement for rh-insulin in US market Biocon entered into an agreement with a Mexican firm to co-develop and commercialise generic recombinant human insulin (rh-insulin) for the US market. Through the pact with PiSA Labs, Biocon aims at capturing a share of the US$ 2 billion rh-insulin market in the US, currently dominated by players such as Eli Lilly and Sanofi. Lupin enters into a co-marketing agreement Lupin and Novartis entered into a co-marketing agreement to promote Novartis’s indacaterol/glycopyrronium (110 mcg/50 mcg) inhaler, a treatment for chronic obstructive pulmonary disease (COPD), under the brand name of Loftair. While Lupin will use its own specialty field force to promote Loftair inhaler, NHPL will continue to market indacaterol/glycopyrronium inhaler under its brand name Sequadra through its own sales force. Cipla invests additional US$3 million in Chase Pharma Cipla made an additional investment of US$3 million in US-based Chase Pharmaceuticals engaged in developing novel approaches to improve treatments for Alzheimer's disease. The company in May 2014 had invested $1.5 million to acquire 14.6% stake in Chase Pharmaceuticals. The investment done through Cipla (EU) Ltd, UK, was part of $21 million syndicate to finance Phase 2a and Phase 2b clinical trials for Chase's lead drug CPC 201 for treating the disease. Alembic forms JV with Orbicular for dermatology products Alembic Pharma entered into a joint venture with Orbicular Pharmaceutical Technologies to develop, manufacture and commercialise dermatology products for global markets. Alembic pharma and Orbicular will own 60% and 40% of the equity capital of Aleor, respectively, when the transaction is completed. Price cuts, new launches, recalls, tie-ups
Sun Pharma receives NDA approval for anti-inflammatory ophthalmic drug Sun Pharma received NDA approval from USFDA for its non-steroid drug BromSite used to treat inflammation and prevent pain in patients undergoing cataract surgery. The drug has been developed by InSite Vision which the company had acquired in November 2015. The US NSAID
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ophthalmic market generates ~US$400 million in sales and ~4 million prescriptions, providing an attractive market for Sun Pharma to participate. Biocon receives approval to sell insulin Glargine in Japan Biocon received approval to sell its biosimilar insulin Glargine in Japan. The approval for insulin Glargine was obtained post successful completion of initial development of Biocon and local phase-III clinical studies in over 250 type-1 diabetes patients by its partner in Japan. The company aims to capture a significant share of the Japan’s US$144 million Glargine market (the second largest outside North America and Europe). DRL launches Sumatriptan injection in the US Dr Reddy's Laboratories has launched ZEMBRACE SymTouch (Sumatriptan injection) 3 mg in the US, approved by the USFDA in January 2016 for the acute treatment of migraine with or without aura in adults. Lawsuits, court rulings, settlements, regulatory issues
Ipca’s anti-malarial tender terminated by Global Fund Global Fund, a major contractor for Ipca’s anti-malarial tender for African markets, terminated the contract in light of the warning letter issued to the company by the USFDA on January 29, 2016. They will only source ACTs from other pre-qualified suppliers that have no outstanding issues with regulators. As per the management, the company may lose US$15-20 million (~4% of revenues) business in FY17 due to this development. Natco Pharma receives USFDA observations for API and formulations plants Natco Pharma received 483 Observations for its API manufacturing facility at Manali, near Chennai and the pharmaceutical formulations facility at Kothur, near Hyderabad but believes they are minor in nature. The company has already sent its response and compliance report for these observations and believes there will be no adverse impact to its current or future pipeline products coming from these facilities. Lupin receives Form 483 observations for Mandideep facility Lupin received Form 483 observations for its Mandideep manufacturing facility in Madhya Pradesh. The FDA issued its Form 483 to Lupin, conveying its concerns about manufacturing practices at the Mandideep plant. At an estimated US$200 million, Mandideep is the second largest contributor to Lupin’s US revenue after its Goa plant. Cadila receives WHO warning for its vaccines plant in Moraiya Cadila Healthcare received a Notice of Concern (NoC) or warning from WHO for violations of good manufacturing practices at its vaccine plant in Moraiya in Sanand district of Gujarat. WHO, in its inspection from 26-30 October, found data integrity issues at the plant that manufactures Lyssavac-N, an anti-rabies vaccine. Cadila has responded to WHO and has been implementing remedial measures. There is no significant impact on the business and there were no exports of this product to the US. Indoco receives EIR report from USFDA for its Goa manufacturing facility Indoco has received the establishment inspection report (approval) from US Food and Drug Administration (USFDA) for its solid dosages manufacturing facility at Goa (plant I). Plant I is a product manufacturing facility which includes solid dosages, creams, ointments and liquid dosages. The facility is already approved by UK-MHRA, MCC South Africa and TGA - Australia (for solid dosages, liquid orals and creams & ointments). Alembic Pharma receives four form 483 observations for its Panelav plant Alembic pharma received four minor observations (as a Form 483) from USFDA for its Panelav facility. This facility makes formulations. US accounts for nearly 80-85% of Alembic's international formulations business.
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Glenmark receives USFDA observations for Pithampur plant Glenmark Pharma's Pithampur formulations facility received three Form 483 observations from USFDA post inspection in February, 2016, to which the company has responded by March 2016. Subsequently, the company received two product approvals from this plant. Pithampur formulations facility manufactures oral solids, semi solids and injectables. Others
Natco Pharma completes sale of pharmacy stores Natco Pharma completed sale of its ‘Save Mart Pharmacy Stores’ in the US. The stores were part of the non-core business of the company. Jubilant to receive an upfront payment through its investee company Jubilant Life Sciences will receive an upfront payment of US$4.6 million and contingent payments up to US$18 million based on the achievement of certain predetermined clinical and regulatory milestones from its 10% interest as a limited partner in one of the venture funds specialised in seeding and investing in early stage drug discovery firms. These payments are on account of an acquisition by a large pharma company of one of their investee companies having assets in early stage clinical development.
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Exhibit 2: Patent litigations FY16 [5
Month Innovator ANDA Filer Brand Name API Used for
IPM grows mere 6.4% in March – Lowest growth in FY16 • The Indian pharmaceutical market (IPM) grew 6.4% YoY to | 7917 crore
for March. The growth was mainly driven by price hikes – 5.1%, and new product launches – 6.6% while volumes declined 5.3% in March 2016
• Drugs under NLEM list registered flat growth (-0.1% YoY to | 950 crore) while non-NLEM drugs posted a growth of 7.2% to | 6585 crore. Volume decline in NLEM and Non-NLEM was 2.4% and 4.3%, respectively
• Among companies under I-Direct coverage, Lupin registered highest YoY growth of 20.6% followed by Sun, Glenmark, Alembic and Ajanta registering growth of 10.4%, 12.3%, 8.1% and 7.6%, respectively
• Therapy wise, 12 have outpaced IPM growth. Notable among them with growth rates- Urology – 31.6%, CVS– 13.8% and Gastrointestinal – 13.3%, while Respiratory and Anti-Infective segments de-grew by 4.6% and 1.8%.
• In all, 200 new brands were launched in March 2016 • On a MAT basis, IPM growth was at 12.6% YoY to | 98414 crore • Domestic companies have grown 7.2% while MNC companies have
grown merely 2.0% in March 2016. Exhibit 3: Domestic formulations - growth trend
21.7
18.6
12.8 15
.6
13.2
13.4
9.4
10.3
22.7
20
12.3
12.0
6.4
-5
0
5
10
15
20
25
Mar
-15
Apr-1
5
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct-1
5
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
(%)
Indian Pharma Market
[
Source: AIOCD data base, ICICIdirect.com Research
Exhibit 4: Company’s growth in domestic market in March, 2016
Top brands in Indian pharma market Brand Company Therapy Mar' 16 Mar' 15 Gr. (%)Augmentin GSK Anti-Infectives 317.5 319.0 -0.5Corex Pfizer Respiratory 310.9 228.6 36.0Spasmo Prox Wockhardt GI 309.3 178.2 73.5Lantus Sanofi Anti Diabetic 273.0 220.8 23.6Galvus Met Novartis Anti Diabetic 272.1 187.5 45.1Clavam Alkem Anti-Infectives 239.9 225.4 6.4Becosules Pfizer Vitamins 228.6 243.8 -6.2Volini Sun Pharma Pain 217.0 212.1 2.3Foracort Cipla Respiratory 196.1 169.1 16.0Synflorix GSK Vaccines 195.1 151.9 28.5
Source: AIOCD data base; Date as per MAT Feb 16 & Feb 15 Industry acute to chronic therapy ratio percentage…
Acute, 47401.09,
48.2%
Chronic, 30989.65,
31.5%Sub-
Chronic, 20023.62,
20.3%
Source: AIOCD data base ; As per AIOCD MAT Mar 2016
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IPM grows 9.2% in Q4FY16 – slowest quarter in FY16 • The Indian pharmaceutical market (IPM) registered growth of 9.2% YoY
to | 24093 crore in Q4FY16. • The growth was driven by volume growth – 1.4%, price hikes – 5.0% and
new product launches – 2.9%. • Among companies under I-Direct coverage, DRL registered highest YoY
growth of 21.9% followed by Lupin, Glenmark, Alembic, and Sun Pharma clocking growth of 17.2%, 15.4%, 14.8% and 12.4%, respectively
• Therapy wise, 11 therapies have outpaced the IPM growth. Notable among them with growth rates- Urology – 29.1%, CNS – 14.6%, Anti -Diabetic – 13.8%, Dermatology – 13.6% and gastro intestinal – 12.5%. While, Anti-malarial de-grew 10.2% in Q4FY16.
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