ICICI Securities Ltd. | Retail Equity Research October 15, 2015 Monthly Update US windfalls, rupee depreciation to drive Q2 Companies under the I-direct healthcare coverage (ex-Sun, Ajanta Pharma) in Q2FY16 are expected to post growth of 19.1% YoY to | 28085.4 crore. US sales from the select pack are expected to grow 36.5% to | 7303.6 crore on the back of 1) rupee depreciation (~7% YoY), 2) exclusivity launches (gAbilify by Torrent, Alembic), 3) market share gains (Aurobindo, Cadila) and 4) Natrol acquisition by Aurobindo. Similarly, Cipla through gNexium supply to Teva and Alembic through gAbilify exclusivity are also likely to register strong growth in the US. On the domestic front, Indian formulations from the select pack are likely to grow 14.6% YoY to | 5993.4 crore driven by strong growth in the chronic segment and a recovery in the acute segment. On the flip side, currency headwinds in other geographies like Europe, Japan and emerging economies such as Russia, Brazil and Venezuela are likely to impact the overall performance negatively. On the companies’ front, we expect Alembic, Cipla, Cadila, Aurobindo and Torrent 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 the domestic market. On the other hand, Lupin and Glenmark are likely to deliver a weak set of numbers due to lack of meaningful US launches while Ipca’s numbers are likely to be impacted due to ongoing cGMP issues. Restructuring at Sun is likely to continue in Q2 also. Biocon has acquired the USFDA approved API unit from Vizag-based Acacia Life sciences. Sun Pharma’s subsidiary Taro has entered into an all-share purchase agreement with Epirus for its subsidiary Zalicus, which is developing a pain management drug. Cipla has entered into a deal with Serum Institute of India to supply its vaccines to South Africa. Cipla Medpro will be responsible for obtaining regulatory approvals and marketing the vaccines. In its quest to expand the diabetology portfolio, Lupin has formed a strategic alliance with German MNC Boehringer Ingelheim to co-market an anti-diabetic drug Linagliptin in India. On the domestic front, The Indian pharmaceutical market (IPM) registered growth of 9.9% YoY to | 7852 crore for September. In Q2FY16, growth was at 11.7% YoY to | 25218 crore in Q2FY16. Among our covered companies, Glenmark registered highest growth of 23.2% YoY in Q2FY16 followed by Lupin, Torrent, Dr Reddy’s and Alembic clocking growth of 19.4%, 18.6%, 15.9% and 14.1%, respectively. On a MAT basis, IPM growth was at 13.7% YoY to | 93021 crore. Q2 numbers, product approvals, currency tailwinds, M&As to weigh With a marked improvement on the USFDA approvals front (82 approvals YTD FY16 including new acquisitions vs. 85 approvals in the whole of FY15), buying activity has resumed in most US focused pharma stocks. Similarly, the rupee has weakened vis-à-vis the US$ and is likely to stay at the higher level, which is likely to nullify the currency impact in Europe and RoW. We continue to maintain our long term bullish view on the sector despite premium valuations on the back of earning visibility, consistent operating cash flows and strong balance sheets. Lupin and Dr Reddy’s are our top picks from the large cap pharma space whereas Cadila, Torrent and Ajanta are our preferred picks from the midcap space among others. Health Check Sector View Outperformer Index Performance as on October 14, 2015 Return (%) 1M 3M YTD 1Y CNX 500 4 -3 1 8 Nifty 4 -4 -1 4 CNX Pharma 5 2 20 29 Return (%) Stocks Performance Mcap Company 1M 3M YTD 1Y 14-Oct Sun Pharma.Inds. 4 -3 7 11 213692 Lupin 11 7 43 54 92202 Dr Reddy's Labs 4 12 30 44 71839 Cipla 2 1 7 16 53953 Aurobindo Pharma 11 4 39 70 46139 Cadila Health. 17 10 32 57 43151 Glaxosmit Pharma 0 -3 4 21 28077 Glenmark Pharma. -2 -4 31 37 28484 Divi's Lab. -2 14 25 22 28535 Torrent Pharma. 4 15 35 80 25752 Apollo Hospitals 6 7 28 35 20161 Wockhardt 10 3 53 104 17056 Ajanta Pharma 6 -6 61 122 13199 Pfizer 3 13 11 52 10920 Biocon -2 -7 3 -8 8782 Ipca Labs. -1 7 1 3 9327 Natco Pharma 20 17 74 89 9294 Strides Arcolab 6 1 31 81 7483 Indoco Remedies -5 -11 3 11 2968 Jubilant Life 23 99 224 163 6260 Unichem Labs. 11 36 28 38 2820 Return (%) Mcap: Market cap in | crore Price movement 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 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
October 15, 2015
Monthly Update
US windfalls, rupee depreciation to drive Q2 Companies under the I-direct healthcare coverage (ex-Sun, Ajanta Pharma) in Q2FY16 are expected to post growth of 19.1% YoY to | 28085.4 crore. US sales from the select pack are expected to grow 36.5% to | 7303.6 crore on the back of 1) rupee depreciation (~7% YoY), 2) exclusivity launches (gAbilify by Torrent, Alembic), 3) market share gains (Aurobindo, Cadila) and 4) Natrol acquisition by Aurobindo. Similarly, Cipla through gNexium supply to Teva and Alembic through gAbilify exclusivity are also likely to register strong growth in the US. On the domestic front, Indian formulations from the select pack are likely to grow 14.6% YoY to | 5993.4 crore driven by strong growth in the chronic segment and a recovery in the acute segment. On the flip side, currency headwinds in other geographies like Europe, Japan and emerging economies such as Russia, Brazil and Venezuela are likely to impact the overall performance negatively. On the companies’ front, we expect Alembic, Cipla, Cadila, Aurobindo and Torrent 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 the domestic market. On the other hand, Lupin and Glenmark are likely to deliver a weak set of numbers due to lack of meaningful US launches while Ipca’s numbers are likely to be impacted due to ongoing cGMP issues. Restructuring at Sun is likely to continue in Q2 also. Biocon has acquired the USFDA approved API unit from Vizag-based Acacia Life sciences. Sun Pharma’s subsidiary Taro has entered into an all-share purchase agreement with Epirus for its subsidiary Zalicus, which is developing a pain management drug. Cipla has entered into a deal with Serum Institute of India to supply its vaccines to South Africa. Cipla Medpro will be responsible for obtaining regulatory approvals and marketing the vaccines. In its quest to expand the diabetology portfolio, Lupin has formed a strategic alliance with German MNC Boehringer Ingelheim to co-market an anti-diabetic drug Linagliptin in India. On the domestic front, The Indian pharmaceutical market (IPM) registered growth of 9.9% YoY to | 7852 crore for September. In Q2FY16, growth was at 11.7% YoY to | 25218 crore in Q2FY16. Among our covered companies, Glenmark registered highest growth of 23.2% YoY in Q2FY16 followed by Lupin, Torrent, Dr Reddy’s and Alembic clocking growth of 19.4%, 18.6%, 15.9% and 14.1%, respectively. On a MAT basis, IPM growth was at 13.7% YoY to | 93021 crore. Q2 numbers, product approvals, currency tailwinds, M&As to weigh With a marked improvement on the USFDA approvals front (82 approvals YTD FY16 including new acquisitions vs. 85 approvals in the whole of FY15), buying activity has resumed in most US focused pharma stocks. Similarly, the rupee has weakened vis-à-vis the US$ and is likely to stay at the higher level, which is likely to nullify the currency impact in Europe and RoW. We continue to maintain our long term bullish view on the sector despite premium valuations on the back of earning visibility, consistent operating cash flows and strong balance sheets. Lupin and Dr Reddy’s are our top picks from the large cap pharma space whereas Cadila, Torrent and Ajanta are our preferred picks from the midcap space among others.
Exhibit 1: Summary of USFDA approvals for September 2015
[5
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeAurobindo Pharma Gemfibrozil CVS Pfizer Lopid US$ 44 millionAurobindo Pharma Telmisartan CVS Boehringer Ingelheim Micardis US$ 250 millionAurobindo Pharma Caffeine Citrate CNS Eurohlth Intl Sarl Cafcit NAAlembic Pharma Zolmitriptan CNS IPR Zomig US$ 152.8 millionDr. Reddy's Labs Esomeprazole Magnesium GI Astrazeneca Pharma Nexium US$ 7.3 billionGlenmark Pharma Voriconazole Anti-Infection PF Prism CV Vfend US$ 800 millionJubilant Life Sciences Zolmitriptan CNS Astrazeneca Zomig US$ 152.8 millionLupin Clarithromycin Antibiotic Abbvie Biaxin NASun Pharma Dexmethylphenidate Hydrochloride CNS Novartis Focalin US$ 683 million
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeNatco Pharma Lapatinib Anti-Cancer Glaxo Smith Kline Tykerb US$ 362.5 millionStrides Acrolab Rilpivirine HIV Janssen Prods Edurant NA
Final Approvals
Tentative Approvals
CNS: Central Nervous System; CVS: Cardiovascular, NA: Not available; Source: USFDA, ICICIdirect.com Research
M&As, demergers and JVs
DRL to buy IP rights of Alchemia’s fondaparinux Dr Reddy’s entered into an agreement with Australian bio-pharmaceutical company Alchemia Ltd to acquire exclusive global intellectual property rights for its anti-coagulant drug fondaparinux sodium for the equivalent of | 116 crore. Under the terms of the sale, Alchemia will receive US$17.5 million in cash from Dr Reddy’s at the close of the transaction. In addition, the company received a payment of US$1.15 million for its share of net profit from US-only sales of fondaparinux for Q1FY16. Torrent Pharma Board approves Zyg Pharma amalgamation The Board of Directors of Torrent Pharma has approved the scheme of amalgamation of Zyg Pharma. In May 2015, Torrent Pharma had acquired a 100% stake in Encore Group’s Zyg Pharma Pvt Ltd. Biocon acquires USFDA approved API facility Biocon acquired the manufacturing unit from Vizag-based Acacia Lifesciences. The USFDA approved unit is currently manufacturing advanced intermediates of potent APIs useful to the company's business as well as for supply to third-party customers. Cipla to supply Serum Institute’s vaccines in South Africa Cipla has entered into a deal with Serum Institute of India to supply its vaccines to South Africa. Cipla Medpro will be responsible for obtaining regulatory approvals and marketing the vaccines. Taro Pharma acquires Zalicus Pharmaceuticals of Canada Taro has entered into an all-share purchase agreement with US based Epirus for its subsidiary Zalicus, which is developing a pain management drug candidate coded Z944. Taro will pay cash of US$3.8 million in addition to issuing a non-interest bearing, limited recourse promissory note of an equal amount with maturity date of July 1, 2017. Z944 has successfully completed phase one clinical trials and was poised to enter phase two trials. Lupin, Boehringer to co-market anti-diabetes drug in India Lupin and German firm Boehringer Ingelheim have formed a strategic alliance for co-marketing an anti-diabetic drug Linagliptin, a novel dipeptidylpeptidase-4 (DPP-4) inhibitor in India. According to the
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agreement, Lupin will market and sell linagliptin under a separate brand name Ondero (monotherapy) and Ondero Met (fixed-dose combination with Metformin). Boehringer will continue to sell its linagliptin under the brand names Trajenta (monotherapy) and TrajentaDuo (fixed-dose combination with Metformin).
Capex, investments, fund raising
Sun Pharma to raise up to | 12000 crore Sun Pharma has sought shareholders approval to raise up to | 12,000 crore through convertible debentures or a qualified institutional placement (QIP). The funds raised will be used for expansion and acquisitions. Aurobindo Pharma to raise US$ 300 million through QIP Aurobindo Pharma is set to launch a share sale to institutional investors to raise US$ 300 million. In January, Aurobindo's board gave approval to raise up to US$ 350 million via 'issue of shares to qualified institutional buyers under qualified institutional placement'. AHLL to invest | 500 crore to fund growth Apollo Health and Lifestyle (AHLL) is planning to invest up to | 500 crore to fund the growth of its business, going forward. Apollo Health & Lifestyle also plans to invite private equity investors to participate in this growth opportunity. AHLL operates a network of primary care and specialty care formats across India. In the primary care space, it currently has five formats - Apollo Clinics, Apollo Sugar, Apollo Diagnostics, Apollo White and Apollo Dialysis. Lawsuits, court rulings, settlements
Sun Pharma withdraws lawsuit filed by Ranbaxy Sun Pharmaceutical has withdrawn its appeal in the lawsuit filed by Ranbaxy against the US health regulator challenging FDA's decision to revoke approvals for generic versions of Nexium (Gastro intestinal) and Valcyte (antiviral). HC restrains Glenmark from manufacturing, selling Zita, Zita-Met The Delhi High Court has restrained Glenmark Pharma from manufacturing and selling its anti-diabetes drugs Zita and Zita-Met, saying it has infringed the patent of the Merck Sharp and Dohme. Price cuts, new launches, recalls
Glenmark launches Anti Diabetic Agent Teneligliptin in India Glenmark Pharma has launched generic Teneligliptin, a new third-generation oral anti-diabetic drug, at a substantially lower price compared to other Gliptins available in India. Only 10.5 lakh out of the 6.5 crore diabetic patients in India use Gliptins as they are relatively expensive. Gliptins account for ~19% i.e. | 1,200 crore of the | 6,600 crore diabetic market in India.
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Exhibit 2: Patent litigations in last 12 months [5
Month Innovator ANDA Filer Brand Name API Used for Sep-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 CNSNov-14 Otsuka Pharma Alembic Pharma Abilify Aripiprazole CNS
Sep-15 Bayer Pharma Alembic Pharma Staxyn Vardenafil Hydrochloride Sex Stimulant
Source: Bloomberg, ICICIdirect.com Research
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IPM grows 10% in September… • The Indian pharmaceutical market (IPM) registered growth of 9.9% YoY
to | 7852 crore for September. The growth was mainly driven by price hikes – 4.7%, volume growth – 2.3% and new product launches – 3.1%
• Drugs under the NLEM list witnessed growth of 2.8% YoY to | 1078 crore while non-NLEM drugs posted growth of 10.9% to | 7179 crore. Volume growth in NLEM, non-NLEM was 1.2% and 1.1%, respectively
• Among our covered companies, Torrent registered highest growth of 16.0% YoY followed by Glenmark, Ajanta, Cadila, Lupin and Sun registering growth of 13.1%, 12.6%, 12.6%, 12.4% and 11.8%, respectively
• Therapy wise, 12 therapies have outpaced IPM growth. Notable among them with growth rates- anti-diabetic – 18.1%, CNS- 15.2%, gynaecology – 13.4%, dermatology – 12.9% and gastro intestinal 12.8%. Anti-infective and respiratory segments grew just 3.2% and 4.1%, respectively
• In all, 253 new brands were launched in September 2015 • On a MAT basis, IPM growth was at 13.7% YoY to | 93021 crore • Domestic companies have grown 9.6% while MNC companies have
grown 10.7% in September 2015
Exhibit 3: Domestic formulations - growth trend
20.6
8.1
12.8 15
.3
14.0
19.9
12.8
21.8
18.5
20
15.5
13.0
9.9
-5
0
5
10
15
20
25
Sep-
14
Oct-1
4
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-1
5
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
(%)
Indian Pharma Market[
Source: AIOCD data base, ICICIdirect.com Research
Exhibit 4: Companies growth in domestic market in September, 2015
Top brands in Indian pharma market Brand Company Therapy Sep'15 Sep'14 Gr. (%)Augmentin GSK Anti-Infectives 328.3 276.3 18.8Corex Pfizer Respiratory 270.3 221.0 22.3Becosules Pfizer Vitamins 253.9 238.3 6.5Spasmo Prox Wockhardt GI 251.8 151.3 66.4Lantus Sanofi Anti Diabetic 244.0 192.7 26.6Clavam Alkem Anti-Infectives 222.8 222.1 0.3Galvus Met Novartis Anti Diabetic 222.7 165.6 34.5Volini Ranbaxy Pain 202.5 219.1 -7.6Shelcal Torrent Vitamins 195.1 111.0 75.7Skinlite Cadila Derma 192.6 158.8 21.3
Source: AIOCD data base; Date as per MAT Sep15 & Sep 14 Industry acute to chronic therapy ratio percentage…
Acute, 44790.5,
48.2%
Chronic, 29123.9,
31.3%
Sub-Chronic, 19107.1,
20.5%
Source: AIOCD data base ; As per AIOCD MAT Sep 2015
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IPM grows 11.7% in Q2FY16 • The Indian pharmaceutical market (IPM) has registered growth of 11.7%
YoY to | 25218 crore in Q2FY16 • The growth was mainly driven by price hikes – 4.6% followed by volume
growth of 4.2% and new product launches – 2.9% • Drugs under NLEM list witnessed growth of 3.7% YoY to | 2989.2 crore
while non-NLEM drugs posted growth of 13.1% to | 18581.0 crore • Among our covered companies Glenmark registered highest growth of
23.2% YoY followed by Lupin, Torrent, Dr Reddy’s and Alembic clocking growth of 19.4%, 18.6%, 15.9% and 14.1%, respectively
• Therapy wise, 12 therapies have outpaced IPM growth. Notable among them with growth rates- anti-diabetic – 22.9%, dermatology- 16.9%, gastro intestinal – 14.8% CNS – 16.4% and respiratory – 15.7%. Anti-infective and respiratory segments registered just 2.1% and 4.8% growth, respectively, in Q2FY16
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