ICICI Securities Ltd. | Retail Equity Research April 17, 2015 Monthly Update High base, fewer approvals to hit Q4… Companies under the I-direct healthcare coverage are expected to post 13.5% growth YoY to | 28790 crore in Q4 as lack of product approvals in the US and a higher Q4FY14 base may continue to have an impact on numbers as was the case in Q3. We expect good traction in domestic formulations (albeit on a lower base) and consolidation of acquisitions to be the main growth drivers in the quarter. Excluding acquisitions of Actavis, Elder, Natrol and Habitrol, growth is expected to be ~10% YoY to | 27842 crore. US core revenues (from select pack ex-acquisitions) are likely to grow 15.7% YoY mainly due to price hike (Taro), gain in market share (Cadila) and exclusivity launches (DRL). However, currency headwinds in other geographies like Europe, Japan and emerging economies like Russia, Brazil and Venezuela would drag overall growth. Indian formulations from a select pack are likely to grow 25.1% YoY to | 5921 crore on the back of new launches and normalcy in trade channels post NLEM price implementation. Among players, Ajanta Pharma, Aurobindo, Cipla, Dr Reddy’s and Sun are expected to do well on the back of strong growth in the domestic market, consolidation of the acquired businesses and expectation of strong US sales on exclusivity launches and price hikes. Apollo Hospitals is likely to clock ~20% YoY growth on the back of robust growth in the pharmacy business. On the filing front, Dr Reddy's filed three new drug applications (NDAs) DFD-01, DFD-09 and DFN-11 with the USFDA. These proprietary products are focused on developing therapies in dermatology and neurology. Quality related issues with regard to Ipca’s plant worsened as the USFDA put import alert on two of its facilities in Pithampur (Madhya Pradesh) and Piparia (Silvassa) as they failed to maintain good manufacturing practices. Ipca’s Ratlam facility has already been under import alert since January. On the acquisition front, Dr Reddy's Labs plans to acquire UCB's domestic portfolio of select established brands of Belgium-based UCB in India for ~| 800 crore to strengthen its presence in the dermatology, respiratory and paediatric segments. Finally, on the domestic formulations front, the Indian pharmaceutical market (IPM) registered strong growth of 20.9% YoY (2.7% MoM) to | 7389 crore for March. The YoY growth was mainly driven by robust YoY volume growth 12.0% (-0.2% in March 2014) followed by price hikes – 5.6% (1.5% in March 2014) and new product launches – 3.3%. In FY15, IPM registered growth of 12.9% YoY to | 86,410 crore. Pharma continues to ride on re-rating wave; consolidation looks inevitable A continued rally in healthcare stocks indicates a second re-rating wave in the current fiscal. This, we believe, is mainly on account of improved approval visibility, facility approvals for two major players Sun and Lupin despite Form 483 observations and return of a strong growth trend in domestic formulations. Strong visibility on the back of a good product basket and a reasonable base business growth continue to attract buying interest in the sector despite premium valuations. Having said that, we expect profit booking across the space, considering the recent rally. Health Check Sector View Outperformer Index Performance as on April 15, 2015 Return (%) 1M 3M YTD 1Y BSE 500 -2 6 5 41 Sensex -3 4 3 31 BSE Healthcare 11 22 19 71 Return (%) Stocks Performance Mcap Company 1M 3M YTD 1Y 16-Apr Sun Pharma.Inds. 7 30 34 80 228557 Lupin 1 32 32 98 84771 Dr Reddy's Labs 12 12 14 46 62929 Cipla -1 6 9 72 54862 Aurobindo Pharma 15 19 21 152 40259 Ranbaxy Labs. 6 33 37 84 36599 Cadila Health. 13 9 12 83 36537 Glaxosmit Pharma 1 4 4 33 28107 Divi's Lab. 7 11 10 43 25170 Glenmark Pharma. 10 24 16 54 24319 Torrent Pharma. 16 20 16 138 22254 Apollo Hospitals -2 18 23 57 19397 Wockhardt -10 65 69 177 18843 Ajanta Pharma 13 40 48 252 12146 Pfizer 8 8 5 84 10343 Biocon 11 10 11 3 9460 Ipca Labs. -9 -7 -9 -15 8416 Natco Pharma 10 52 52 230 7750 Strides Arcolab 9 28 24 201 7088 Indoco Remedies 1 19 18 170 3404 Jubilant Life 4 15 40 -1 2708 Unichem Labs. 12 1 -3 7 2133 Return (%) Mcap: Market cap in | crore Price movement 15000 17000 19000 21000 23000 25000 27000 29000 31000 7500 8500 9500 10500 11500 12500 13500 14500 15500 16500 17500 Mar-14 Jul-14 Oct-14 Jan-15 Apr-15 BSE Healthcare Sensex (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 17, 2015
Monthly Update
High base, fewer approvals to hit Q4… Companies under the I-direct healthcare coverage are expected to post 13.5% growth YoY to | 28790 crore in Q4 as lack of product approvals in the US and a higher Q4FY14 base may continue to have an impact on numbers as was the case in Q3. We expect good traction in domestic formulations (albeit on a lower base) and consolidation of acquisitions to be the main growth drivers in the quarter. Excluding acquisitions of Actavis, Elder, Natrol and Habitrol, growth is expected to be ~10% YoY to | 27842 crore. US core revenues (from select pack ex-acquisitions) are likely to grow 15.7% YoY mainly due to price hike (Taro), gain in market share (Cadila) and exclusivity launches (DRL). However, currency headwinds in other geographies like Europe, Japan and emerging economies like Russia, Brazil and Venezuela would drag overall growth. Indian formulations from a select pack are likely to grow 25.1% YoY to | 5921 crore on the back of new launches and normalcy in trade channels post NLEM price implementation. Among players, Ajanta Pharma, Aurobindo, Cipla, Dr Reddy’s and Sun are expected to do well on the back of strong growth in the domestic market, consolidation of the acquired businesses and expectation of strong US sales on exclusivity launches and price hikes. Apollo Hospitals is likely to clock ~20% YoY growth on the back of robust growth in the pharmacy business. On the filing front, Dr Reddy's filed three new drug applications (NDAs) DFD-01, DFD-09 and DFN-11 with the USFDA. These proprietary products are focused on developing therapies in dermatology and neurology. Quality related issues with regard to Ipca’s plant worsened as the USFDA put import alert on two of its facilities in Pithampur (Madhya Pradesh) and Piparia (Silvassa) as they failed to maintain good manufacturing practices. Ipca’s Ratlam facility has already been under import alert since January. On the acquisition front, Dr Reddy's Labs plans to acquire UCB's domestic portfolio of select established brands of Belgium-based UCB in India for ~| 800 crore to strengthen its presence in the dermatology, respiratory and paediatric segments. Finally, on the domestic formulations front, the Indian pharmaceutical market (IPM) registered strong growth of 20.9% YoY (2.7% MoM) to | 7389 crore for March. The YoY growth was mainly driven by robust YoY volume growth 12.0% (-0.2% in March 2014) followed by price hikes – 5.6% (1.5% in March 2014) and new product launches – 3.3%. In FY15, IPM registered growth of 12.9% YoY to | 86,410 crore. Pharma continues to ride on re-rating wave; consolidation looks inevitable A continued rally in healthcare stocks indicates a second re-rating wave in the current fiscal. This, we believe, is mainly on account of improved approval visibility, facility approvals for two major players Sun and Lupin despite Form 483 observations and return of a strong growth trend in domestic formulations. Strong visibility on the back of a good product basket and a reasonable base business growth continue to attract buying interest in the sector despite premium valuations. Having said that, we expect profit booking across the space, considering the recent rally.
Exhibit 1: Summary of USFDA approvals for March 2015
[5
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeLupin Amlodipine and Valsartan CNS Novartis Exforge US$ 415 millionTorrent Pharma Amlodipine and Valsartan CNS Novartis Exforge US$ 415 million
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeAurobindo Pharma Lacosamide Epilepsy USB Inc. Vimpat US$ 365 millionCadila Ritonavir HIV Abbvie Norvir US$ 400 million
Final Approvals
Tentative Approvals
CNS: Central Nervous System; CVS: Cardiovascular, NA: Not available; Source: USFDA, ICICIdirect.com Research
Regulatory approvals/IP issues
Dr Reddy’s files new NDA applications Dr Reddy's has filed three new drug applications (NDAs) DFD-01, DFD-09 and DFN-11 with USFDA. These proprietary products are focused on developing therapies in dermatology and neurology. Biocon receives approval for insulin Glargine in Mexico Biocon’s insulin Glargine has been approved by COFEPRIS, the Mexican health authority, through its partner PiSA Farmacéutica (Pisa). The combined market for Insulin Glargine in Mexico is estimated to be in excess of US$40 million. Lawsuits/court rulings/settlements/USFDA regulations
Court blocks Glenmark’s bid to launch anti-diabetic drugs The Delhi High Court has restrained Glenmark from manufacturing and marketing anti-diabetes drugs Zita and Zita-Met due to infringement of MSD’s patent. The drug contributes ~| 94 crore (5% of domestic sales and 1.4% of overall sales) to the company. Glenmark to pay settlement amount Glenmark’s US subsidiary firm will pay Texas US$25 million under a settlement reached with the state’s Attorney General over the pricing investigation case under the Texas Medicaid Fraud Prevention Act. As per the settlement, the company will make the payment in 16 equal installments of US$1.56 million every fiscal quarter for the coming 16 fiscal quarters to the state of Texas. The case dates back to 2000 when the state started investigations on numerous pharmaceuticals companies for alleged inflated drug prices to the Medicaid programme. Another two facilities of Ipca under import alert The USFDA has put an import alert on two of Ipca’s facilities in Pithampur (Madhya Pradesh) and Piparia (Silvassa) as they failed to maintain good manufacturing practices. Ipca’s Ratlam facility has already been under import alert since January. Aurobindo to receive settlement money from Plethico Plethico Pharmaceuticals, the previous owner of Natrol Inc, has agreed to pay US$23.30 million in cash in addition to certain global intellectual property (IP) rights and other assets to settle financial fraud accusations levelled by Aurobindo. Aurobindo had acquired US-based neutraceutical company Natrol Inc, formerly owned by Plethico group, for US$132.5 million in November 2014 through a bidding process approved by the US bankruptcy court.
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Sun in settlement agreement with US-based MDCO US based The Medicines Company (MDCO) has settled a litigation with Sun Pharma relating to MDCO’s US Patent Angiomax (bivalirudin; CVS). As a result of the settlement, MDCO will permit Sun to market a generic version in the US on June 30, 2019, or earlier in certain limited circumstances. However, MDCO remains in infringement litigation with Aurobindo and DRL among others.
Price cuts/new launches/recalls
Cipla to launch gSovaldi Cipla will introduce a generic version of Hepatitis C drug Sovaldi. The drug will be sold in India by Cipla under the brand name Hepcvir. This follows a non-exclusive licensing agreement between Cipla (among other players) and Gilead in September 2014.
M&As, demergers and JVs
Dr Reddy’s to buy UCB’s Indian and other brands Dr Reddy’s has proposed to buy select established brands of Belgium-based UCB in India for €118 million (| 800 crore) to strengthen its presence in the dermatology, respiratory and paediatric segments. The company has entered into an agreement to acquire the portfolio of established products of UCB, in India, Nepal, Sri Lanka and Maldives. The transaction includes approximately 350 employees engaged in India operations. The revenues of the acquired business are ~| 150 crore. Lupin acquires remaining stake in Pharma Dynamics in South Africa Lupin has acquired the balance 40% stake in South African drug firm Pharma Dynamics. In 2008, Lupin had acquired a 60% stake in this company. Pharma Dynamics had an annual revenue of | 380 crore in FY14 with a net profit of | 69 crore. Ipca makes open offer to Krebs Biochemicals shareholders Ipca Laboratories has made an open offer to Krebs Biochemical’s shareholders to acquire 26% in the company. In February FY15, Ipca had bought 18.9% of Krebs Biochemicals from its promoters. Krebs Biochemicals has expertise in chemical synthesis, fermentation and enzymatic technologies besides owning two US FDA facilities in Visakhapatnam and Nellore districts. Cipla acquires Brazilian company for | 2.6 crore Cipla has acquired Duomed Produtos Farmaceuticos Ltda in Brazil for a cash consideration of ~| 2.6 crore. Duomed has Anvisa (Brazilian health authority) approval to import & distribute pharmaceutical products in Brazil. Aurobindo divests loss making Australian subsidiary Aurobindo has divested its step-down subsidiary, Aurobindo Pharma (Australia) Pty Ltd to Eris Pharma Australia Pty Ltd. This subsidiary was not contributing any profit to the company. As per the agreement, APL will continue to manufacture and supply products to Eris Pharma for Australian and New Zealand market over the next few years. This divestment is in line with APL's strategy of focusing on the US, EU and key emerging markets.
Capex/investments/fund raising
Cadila buys out JV partner Cadila Healthcare has acquired the 50% stake held by partner Bharat Serums and Vaccines in JV Zydus BSV Pharma. Post the acquisition, Zydus BSV has become a 100% subsidiary of Cadila. Formed in 2005, the JV focuses on focus on the niche segment of targeted therapies in the area of oncology. It also offers contract manufacturing capabilities in the oncology injectable product manufacturing area. It has a finished dosage manufacturing facility at the pharmaceutical specific special economic zone – Pharmez near Ahmedabad.
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Deals & alliances/tenders
DRL to market Hetero’s gSovaldi Dr Reddy's Laboratories has entered into an agreement with Hetero Drugs under which Dr Reddy's has been licensed to distribute and market Sofosbuvir tablets (gSovaldi) in 400 mg strength in India. The drug, to be sold under the Resof brand, is indicated for the treatment of chronic Hepatitis C. Hetero has received approval for Sofosbuvir 400 mg tablets from Drug Controller General of India. NLEM/NPPA
NPPA allows pharma companies to hike prices The National Pharmaceutical Pricing Authority (NPPA) has allowed pharmaceutical companies to hike rates of 509 essential medicines by 3.8% with effect from April 1, 2015. NPPA has issued a notification for price hike of drugs in line with the wholesale price index of 2014 under Drug Price Control Order (DPCO), 2013.
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Exhibit 2: Patent litigations in FY15 [5
Month Innovator ANDA Filer Brand Name API Used for Apr-14 Kowa Aurobindo Pharma Livalo Pitavastatin CVSApr-14 Medicines co Aurobindo Pharma Angiomax Bivalirudin AnginaApr-14 Kowa Aurobindo Pharma Livalo Pitavastatin CVSMay-14 Senju Pharmaceuticals Aurobindo Pharma Zymaxid Gatifloxacin ConjunctivitisMay-14 Otsuka Pharmaceutical Co. Alembic Pharma Abilify Aripiprazole SchizophraniaMay-14 Dr Reddy's Labs Purdue Pharmaceutical Product Intermezzo Zolpidem InsomniaMay-14 Otsuka Pharmaceutical Co. Cadila Healthcare Abilify Aripiprazole SchizophraniaMay-14 Otsuka Pharmaceutical Co. Aurobindo Pharma Abilify Aripiprazole SchizophraniaMay-14 AstraZeneca AB Aurobindo Pharma Onlyza Saxagliptin Type 2 DiabetesMay-14 AstraZeneca AB Glenmark Generics Onlyza Saxagliptin Type 2 DiabetesMay-14 AstraZeneca AB Wockhardt Onlyza Saxagliptin Type 2 DiabetesMay-14 Otsuka Pharmaceutical Co. Wockhardt Abilify Aripiprazole SchizophraniaMay-14 Forest Laboratories Inc. Ranbaxy Labs Namenda XR Memantine Alzheimer's diseaseJun-14 AstraZeneca Pharmaceuticals LP Sun Pharma Global FZE; Onglyza Saxagliptin DiabetesJun-14 Bristol-Myers Squibb Co. Aurobindo Pharma Reyataz Atazanavir HIVJun-14 Teva Women's Health Lupin Quartette Levonorgestre ContraceptiveJun-14 Forest Laboratories Inc Aurobindo Pharma Namenda XR Memantine Alzheimer's diseaseJun-14 Senju Pharma Lupin Pharma Inc. Prolensa Bromfenac Ocular InflammationJul-14 Pfizer Inc Aurobindo Pharma Tygacil Tygecycline InfectionJul-14 GlaxoSmithKline LLC Glenmark Generics Inc. Coreg Carvedilol High Blood PressureJul-14 Allos Therapuetics Inc Dr Reddy's Folotyn Pralatrexate LymphomaJul-14 Acorda Therapeutics Inc.; Aurobindo Pharma Ampyara Dalfampridine Multiple SyrosysJul-14 Alcon Pharmaceuticals Ltd. Aurobindo Pharma Vigamox Moxifloxacin Eye InfectionJul-14 Gilead Sciences Inc. Lupin Ltd. Atripla Efavirenz/Emtricitabine/Tenofovir HIVJul-14 AbbVie Inc. Aurobindo Pharma Norvir Ritonavir HIVJul-14 Alkermes Pharma Ltd. Sun Pharmaceuticals Focalin XR Dexmethylphenidate ADHDJul-14 Otsuka Pharma Co. Torrent Pharma Abilify Aripiprazole SchizophreniaJul-14 Astrazeneca AB Cadila Healthcare Nexium Esomeprazole Acid RefluxAug-14 Janssen Products LP Cipla Ltd. Prezista Darunavir HIVAug-14 Forest Labs Lupin Ltd. Namenda Memantine Hydrochloride Alzheimer's diseaseAug-14 Senju Pharma Ltd. Lupin Ltd. Prolensa Bromfenac Ocular InflammationAug-14 Novartis Pharma Dr. Reddy's Labs Gleevec Imatinib Mesylate Organ RejectionSep-14 Millenium Pharmaceuticals Glenmark Pharma Valcade Bortezomib Multiple MylomaSep-14 Teva Pharma Dr. Reddy's Labs Copaxon Glatiramer Acetate Multiple SclerosisSep-14 Reckitt Benckiser LLC Aurobindo Pharma Mucinex Guaifenesin MucusSep-14 Cephalon Inc. Dr. Reddy's Labs Treanda Bendamustine LeukemiaSep-14 Cephalon Inc. Sun Pharma Treanda Bendamustine LeukemiaOct-14 Novartis Pharma Dr. Reddy's Labs Gleevec Imatinib LeukemiaOct-14 Braintree Laboratory Inc. Taro Pharma Suprep Sodium Sulphate Bowel PreparationOct-14 Cephalon Inc. Wockhardt Treanda Bendamustine LeukemiaNov-14 Biomarin Pharma Dr. Reddy's Labs Kuvan Sapropterin Dihydrochloride phenylketonuriaNov-14 Otsuka Pharma Cadila Healthcare Abilify Aripiprazole schizophreniaNov-14 Otsuka Pharma Alembic Pharma Abilify Aripiprazole schizophrenia
Robust IPM growth on lower base, price hike… • The Indian pharmaceutical market (IPM) registered strong growth of
20.9% YoY (2.7% MoM) to | 7389 crore for March. YoY growth was mainly driven by robust YoY volume growth 12.0% (-0.2% in March 2014) followed by price hikes – 5.6% (1.5% in March 2014) and new product launches – 3.3%
• Drugs under the NLEM list witnessed growth of 17.6% YoY to | 917 crore due to strong volume growth and price hike while non-NLEM drugs posted growth of 21.7% to | 6136 crore
• Among our covered companies, Lupin has registered highest growth of 32.4% YoY followed by Torrent, Glenmark, Cipla, Dr Reddy’s and Sun Pharma clocking growth of 30.5%, 28.1%, 24.9%, 24.1% and 20.0%, respectively
• Therapy wise, eight therapies have outpaced IPM growth while all therapies registered double digit growth. Notable among them along with their growth rates are: anti-diabetic – 32.9%, respiratory – 27.8%, gastro intestinal – 23.4%, anti-infectives – 22.0%, dermatology- 19.2% and cardiac – 19.1%
• In all, 185 new brands were launched in March • On a MAT basis, IPM growth stood at 12.9% YoY to | 86410 crore • Domestic and MNC companies have both grown ~21% in March 2015 Exhibit 3: Domestic formulations - growth trend
5.8 7.
5
11.4 13
.2
9.8 10
.6 12.8
20.1
6.9
20
14.1
18.9
20.9
-5
0
5
10
15
20
Mar
-14
Apr-1
4
May
-14
Jun-
14
Jul-1
4
Aug-
14
Sep-
14
Oct-1
4
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
(%)
Indian Pharma Market [
Source: AIOCD data base, ICICIdirect.com Research
Exhibit 4: Companies growth in domestic market in March 2015
Top brands in Indian pharma market Brand Company Therapy Mar'15 Mar'14 Gr. (%)Anti-Infective GSK Augmentin 319.7 264.0 21.1Vitamins Pfizer Becosules 243.8 228.4 6.8Respiratory Pfizer Corex 228.6 228.6 0.0Anti-Infective Alkem Clavam 225.4 205.0 10.0Anti Diabetic Sanofi Lantus 220.8 170.0 29.8Pain Ranbaxy Volini 212.1 223.9 -5.3Anti Diabetic Novartis Galvus Met 187.5 138.5 35.4Sex StimulantMankind Manforce 183.2 185.1 -1.0Derma Zydus Skinlite 182.7 144.4 26.5Taxim O Alkem Anti-Infectives 180.0 150.9 19.3
Source: AIOCD data base; Date as per MAT February 15 & February 14 Industry acute to chronic therapy ratio percentage…
Acute, 54007.2,
70.6%Chronic, 22479.2,
29.4%
Source: AIOCD data base ; As per AIOCD MAT February 2015
ICICI Securities Ltd. | Retail Equity Research
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Q4FY15 IPM growth backed by robust volume and price hike • The Indian pharmaceutical market (IPM) registered growth of 17.5% YoY
to | 21849 crore in Q4FY15 • YoY growth was mainly driven by robust YoY volume growth of 8.8%
followed by price hikes – 5.5% and new product launches – 3.2% • Growth on account of a price hike of 5.5% was the steepest in the last
many quarters • Drugs under the NLEM list witnessed growth of 12% YoY to | 3058 crore
while non-NLEM drugs posted growth of 18% to | 18156 crore • Among our covered companies, Torrent registered highest growth of
27.3% YoY followed by Ipca, Glenmark, Lupin and Cipla clocking growth of 24.7%, 24.5%, 22.9%, 20.5% and 20.5%, respectively
• Therapy wise, 11 therapies have outpaced IPM growth. Notable among them along with growth rates: anti-diabetic – 30.1%, dermatology- 17.8%, cardiac – 16.6% and anti-infective – 15.8%
Domestic growth recovery in FY15 • The Indian pharmaceutical market (IPM) registered growth of 12.9% YoY
to | 86410 crore in FY15 • YoY growth was mainly driven by robust YoY volume growth 5.6%
followed by price hikes of 3.8% and new product launches of 3.3% • Among our covered companies Ajanta registered highest growth of
28.6% YoY followed by Lupin, Biocon, Ipca, Glenmark, Torrent and Cipla clocking growth of 18.9%, 18.4%, 18.1%, 17.4%, 16.1% and 15.5%, respectively
• Therapy wise, nine therapies outpaced IPM growth. Notable among them along with growth rates: anti-diabetic – 25%, dermatology- 16.6%, gastro Intestinal – 14.2% and respiratory – 14.2%
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