Please refer to Disclosures and Disclaimers at the end of the Research Report. Pharmaceuticals Value growth ahead 27 November 2013 PhillipCapital (India) Pvt. Ltd. US generics to remain as important driver as earlier The Indian Pharma delivered a stellar growth performance led by robust US generics sales (>40% CAGR, 33% CAGR on constant currency) supported by the patent cliff and Rupee depreciation (18%) over last three years. Going ahead, the low market share of Indian pharma (~10%) in US generics despite dominant share in US fillings (~35% in DMFs and ~30% in ANDAs), improving prescription share and quality fillings will drive future growth. We estimate the US revenue (~ 36% of total sales) of our covered generics peers to see 24% CAGR over FY13‐15E. Qualitative upgrade in US fillings is the key Post the patent cliff in 2012, we believe the enhanced R&D (22% CAGR in R&D spend over last three years by our covered stocks) focus of Indian peers towards differentiated generics and technology driven drugs covering – specialty/complex injectables, hormones, inhalers, biosimilars etc would ensure sustainable value growth in US generics. Domestic formulations to maintain resilience We believe the adverse impact of new pricing policy on domestic formulations is momentary and would temporarily depress the growth momentum in FY14. However, we expect domestic formulations to show resilience Q4FY14 onwards and deliver an annual growth momentum of 15‐18% which will be led by a continued trend of new product introductions, enhanced focus towards chronic portfolio and therapeutic focused market. Opportunities in pharma CRAMS seems robust for Indian Pharma As per the study of Italy based Chemical Pharmaceutical Generic Association (CPA), the global pharma out sourcing to grow at 14% CAGR over FY12‐17 to $136bn and India to see maximum ramp up at >35% CAGR to $29bn (21% market share) in 2017 from $6 bn(8% Market share) in 2012. Divis, Dr Reddy and Biocon with a strong clientele are well placed to grab the benefits of this huge opportunity ahead. Premium valuations for Indian Pharma to sustain led by value growth ahead Indian Pharma (BSE Healthcare index) currently trades at its historic average 1 year PE multiple of ~20x and ~40% premium to benchmark index. We believe the sector will continue to maintain its premium valuations led by continued visibility for healthy formulation exports growth, robust free cash flow generation and qualitative upgrade in R&D capabilities for product/service offerings. Mid caps to outperform Sector leaders While we maintain our optimism on Indian Pharma Leaders backed by their expanded qualitative drug pipeline and balance sheet strength, multiple earning surprises in the recent past have stretched their valuations. Hence, we prefer Midcaps delivering steady progress in operational as well as financial performance. Our sector top picks are Dr Reddy (+16%), Aurobindo Pharma (+55%) and Biocon (+28%). Other buy recommendations are Glenmark (+27%) and Divs (20%). Companies Covered Aurobindo Pharma CMP Rs293 Reco BUY Target Price Rs455 Biocon CMP Rs372 Reco BUY Target Price Rs475 Cadila Healthcare CMP Rs742 Reco NEUTRAL Target Price Rs761 Divi’s Lab CMP Rs1163 Reco BUY Target Price Rs1390 Dr Reddy CMP Rs2407 Reco BUY Target Price Rs2800 Glenmark Pharma CMP Rs504 Reco BUY Target Price Rs641 IPCA Lab CMP Rs681 Reco NEUTRAL Target Price Rs752 Lupin CMP Rs864 Reco NEUTRAL Target Price Rs923 Sun Pharma CMP Rs573 Reco NEUTRAL Target Price Rs605 Report priced as of 26 November 2013 Surya Patra (+ 9122 6667 9768) [email protected]
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Please refer to Disclosures and Disclaimers at the end of the Research Report.
Pharmaceuticals Value growth ahead
27 November 2013PhillipCapital (India) Pvt. Ltd.
US generics to remain as important driver as earlier The Indian Pharma delivered a stellar growth performance led by robust US generics sales (>40% CAGR, 33% CAGR on constant currency) supported by the patent cliff and Rupee depreciation (18%) over last three years. Going ahead, the low market share of Indian pharma (~10%) in US generics despite dominant share in US fillings (~35% in DMFs and ~30% in ANDAs), improving prescription share and quality fillings will drive future growth. We estimate the US revenue (~ 36% of total sales) of our covered generics peers to see 24% CAGR over FY13‐15E.
Qualitative upgrade in US fillings is the key Post the patent cliff in 2012, we believe the enhanced R&D (22% CAGR in R&D spend over last three years by our covered stocks) focus of Indian peers towards differentiated generics and technology driven drugs covering – specialty/complex injectables, hormones, inhalers, biosimilars etc would ensure sustainable value growth in US generics.
Domestic formulations to maintain resilience We believe the adverse impact of new pricing policy on domestic formulations is momentary and would temporarily depress the growth momentum in FY14. However, we expect domestic formulations to show resilience Q4FY14 onwards and deliver an annual growth momentum of 15‐18% which will be led by a continued trend of new product introductions, enhanced focus towards chronic portfolio and therapeutic focused market.
Opportunities in pharma CRAMS seems robust for Indian Pharma As per the study of Italy based Chemical Pharmaceutical Generic Association (CPA), the global pharma out sourcing to grow at 14% CAGR over FY12‐17 to $136bn and India to see maximum ramp up at >35% CAGR to $29bn (21% market share) in 2017 from $6 bn(8% Market share) in 2012. Divis, Dr Reddy and Biocon with a strong clientele are well placed to grab the benefits of this huge opportunity ahead.
Premium valuations for Indian Pharma to sustain led by value growth ahead Indian Pharma (BSE Healthcare index) currently trades at its historic average 1 year PE multiple of ~20x and ~40% premium to benchmark index. We believe the sector will continue to maintain its premium valuations led by continued visibility for healthy formulation exports growth, robust free cash flow generation and qualitative upgrade in R&D capabilities for product/service offerings.
Mid caps to outperform Sector leaders While we maintain our optimism on Indian Pharma Leaders backed by their expanded qualitative drug pipeline and balance sheet strength, multiple earning surprises in the recent past have stretched their valuations. Hence, we prefer Midcaps delivering steady progress in operational as well as financial performance.
Our sector top picks are Dr Reddy (+16%), Aurobindo Pharma (+55%) and Biocon (+28%). Other buy recommendations are Glenmark (+27%) and Divs (20%).
Sun Pharma ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 60
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US Generics to remain key growth driver as earlier Indian Pharma delivered a stellar growth performance led by robust US generics sales supported by the patent cliff over last three years. Additionally, the depreciating Rupee against US Dollar has further facilitated the growth momentum. In fact, our coverage stocks delivered a compounded annual growth of 40% over FY11‐FY13 to Rs 188bn.
Patent cliff coupled with Rupee depreciation strengthened Indian Pharma performance
64.1 68.192.6
128.9
188.5
0
40
80
120
160
200
FY2009 FY2010 FY2011 FY2012 FY2013
Gross US Generic Sales of our covered stocks (Rs Bn)
40%
4.3
40.8
30.7 30.4
6.2
36.039.2
46.2
‐10
0
10
20
30
40
50
FY2010 FY2011 FY2012 FY2013
% Growth in US Generic Sales in $ mn% Growth in US Generic Sales in Rs mn% of Re depreciation
Source: PhillipCapital India Research
US generics to remain a key growth driver despite Patent cliff: US Patent cliff during 2012 has certainly overpowered the growth of Indian Pharma in over last three years and there may be moderation in the patent expiry cycle. However, the relatively low share of Indian companies in the US generics market implies good long‐term potential. Patent Expiry trend of blockbuster drugs in US
1916
19 20
35
15
1922
17
0
5
10
15
20
25
30
35
40
2008 2009 2010 2011 2012 2013 2014 2015 2016
Gross value of patents expiries ($ bn)
Linear (Gross value of patents expiries ($ bn) )
Source: Company, USFDA
Despite having a dominant share in US DMFs fillings (~35%) and ANDA fillings (~30%) and most cost effective generic offering, the generic market share of Indian pharma is still low at ~10%.
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Steady rising dominance of Indian Pharma in US generics space both in terms of drug fillings and prescription market share
308.7
381.3450.1
534.2
644
0
100
200
300
400
500
600
700
2008 2009 2010 2011 2012
0
2
4
6
8
10
12
14
16
18
Cumulative Prescription count by top 8 Indian peers in US (M n Nos)
Share of top 8 Indian Peers in to tal Rx in US
425 433 437490
311
105 94 103 11484
0
100
200
300
400
500
600
2009 2010 2011 2012 YTD 2013
15
17
19
21
23
25
27
29
Total ANDA Approvals (Nos.)ANDA approvals for Indian peers(Nos.)% Share of India (RHS)
Source: USFDA, IMS Health, PhillipCapital India Research
Going ahead, we expect the strong ANDA pipeline as well as enhanced focus towards development and filling of niche/complex/differentiated generics by leading Indian pharma peers and increased demand for cost effective generics (forte of Indian peers) will drive increased generic market share and ultimate growth for Indian Pharma. Positioning of US generic players in terms of pending ANDA pipeline
325
190172
143 133110 99 91
72 62 53 44 41
0
50
100
150
200
250
300
350
Mylan
Actavis
Sandoz
Teva Su
n
Aurobindo
Cadila
Lupin
Par
Dr Reddy
Glenmark
Impax
Apotex
Source: Hikma presentation, PhillipCapital India Research
Strong Pipeline of ANDAs by Indian Peers Pending ANDA fillings Total ANDA Pending Para IV Target ANDA p.a. Remarks
Sun Pharma 453 133 30 25‐30 Majority of future pipeline is differentiated and technology driven drugs Dr Reddy 201 65 38 20 70% of future generic is differentiated Lupin 177 91 86 ~25 Majority of current and future pipeline is niche generics Cadila 160 89 12 30 ~20% of the pending fillings are differentiated Glenmark 140 53 26 20 Key focus being limited completion drugs in hormones, derma, Oncology Aurobindo 281 110 10 30‐35 30% of pending ANDAs are injectables and over 50% of future filling would
be injectables covering opthalmics, oncology and penems IPCA 37 20 0 12‐15 Complete backward integration & optimal process development is key
Source: Company, PhillipCapital India Research
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Strategic Shift in Fillings to improve the quality of income Seeing the moderation in the number of big ticket patent expiry opportunities in US, Indian peers has aptly shifted their ANDA filling focus towards differentiated generics including – complex drugs to develop/manufacture, limited competition drugs, drugs with improved delivery systems or led by better technology platforms, etc. In our view such uplift in product development and filling will drive the value growth for Indian pharma in medium to longer term. We believe that the enhanced investments in R&D by Indian pharma peers over the last three years to build a differentiated and valuable product pipeline will pay rich dividends in the form of high revenue visibility for the next 2‐3 years at least. . Thanks to the multiple exclusive supply opportunities led by patent expiry of many blockbuster drugs in US during last few years, which helped Indian pharma to enhance its R&D focus and spend (up at CAGR of 22% during last 3 year period).
Aggressive scale up in R&D spend enlightens the qualitative growth of Indian Pharma in US generics Figures in Rs Mn FY13 % of Sales R&D spend 3yr CAGRSun Pharma 6249 6% 44%Dr Reddy's Lab 7674 6.60% 25%Lupin 7708 7.50% 23%Ranbaxy 4490 4% ‐3%Cadila 4927 13% 31%Glenmark 986 4.90% 24%Aurobindo Pharma 2062 4% 27%IPCA Lab 1007 4% 21%Biocon 1860 10% 27%Total 36964 22%
Source: Company, PhillipCapital India Research
While Dr Reddy and Lupin continued to maintain their larger focus towards developing limited competition product basket and higher R&D spend, Sun Pharma saw rapid stride in its R&D initiatives to develop various complex technology plat forms over last three year. Additionally, mid‐size players like Cadila, Aurobindo & Biocon also scaled up their R&D efforts meaningfully. Improving product development capability of Indian Pharma
Biologics ‐ Biocon, Dr Reddy(DRL)
Respiratory/Insulin analogs ‐ Biocon, Cipla, Sun Pharma, Cadila
Complex injectables‐ DRL, Sun Pharma, Cadila
Dermatologicals ‐ Sun Pharma, DRL, Ranbaxy
Injectables and ophthalmics ‐ Aurobindo, DRL, Sun, Cadila
Modified‐release dosage
Delivery system complexity ‐ DRL, Sun Pharma
High potency ‐ Sun, DRL
Traditional generics ‐ ALL
Delivery System
Com
plexity
Source: Company, PhillipCapital India Research
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
FY09 FY10 FY11 FY12 FY13
Sun Pharma Dr Reddy's LabLupin RanbaxyCadila GlenmarkAurobindo Pharma IPCA LabBiocon
R&D Spend Rs Mn
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Implementation of GDUFA in US could result in volume growth; Could lead to intense price competition for plain vanilla generics: US Food and Drug Administration has implemented the Generic Drug User Fee Act (GDUFA) On Oct. 1, 2012 with an objective of clearing the clearing the backlog of pending ANDA/drug approvals of over 2700 ANDAs and expediting the approval (both drug and facility) timeline.
Steady rising backlog of pending ANDAs… …extended ANDA Approval timeline beyond 30 months
891
1216 13091441
16301912
2500
29333054
0
500
1000
1500
2000
2500
3000
3500
2005 2006 2007 2008 2009 2010 2011 2012 2013
No of ANDAs
16 1719
22
27 2830
0
5
10
15
20
25
30
35
2006 2007 2008 2009 2010 2011 2012
Months
Source: USFDA
The set goal of GDUFA relating to ANDA backlog clearing Period of filling No of ANDAs Goal
Backlog till 1st Oct 2012 ~2700 90% (i.e.~ 2340)of backlog to be reviewed & approved by end of FY17
Filling during FY13 1013
Filling during FY14 1063
Focus is to expedite review of 1) Paragraph IV filed on the day 1 of NCE exclusivity,
2) Shortage based drugs applications
Filling during FY15 1063 60% (i.e. ~600) to be reviewed & approved in 15months period of submission
Filling during FY16 1010 75% (i.e. ~750) to be reviewed & approved in 15months period of submission
Filling during FY17 959 90% (i.e.~850) to be reviewed & approved in 10 months period of submission
Source: USFDA
As per the set GDUFA target, USFDA to clear 90% of pending ANDAs as of 1st Oct 2012 (i.e about 2700) and a majority of ANDA fillings over FY13‐17 will be reviewed and approved by FY17. This indicates over 5000 ANDAs will be reviewed and approved over a period of 5 years (i.e FY13 to FY17), which implys about over 1000 ANDAs per annum compared to about 450 annual ANDA approval over last five years. Thus the doubling rate of ANDA approvals could result in a substantial volume growth in plain vanilla US generics as we believe a major chunk of current ANDA back log is plain vanilla. This could result in more price competition. However, we believe the GDUFA implementation will favour Indian Pharma on two grounds like 1) it will reduce approval timeline of recently filled complex and limited competition drugs basket and 2) helps Indian pharma to grab better market share due to its cost competency and dominance in the share of fillings. Finally, We estimate our covered stocks would maintain a steady constant currency growth of 18% over FY13‐15 led by strong ANDA pipeline coupled with rising share of complex and differentiated generics despite a significantly high base. More specifically, we believe Sun Pharma, Dr Reddy, Lupin and Aurobindo would outpace the industry growth.
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US patent cliff is behind us but peak patent expiry opportunities in advanced markets yet to follow US generics market witnessed the peak value of patent expiry worth $35bn in 2012, since when the genericisation opportunities have moderated. However, as per Evaluate Pharma the peak opportunity of patent expiry in various advanced markets will be observed in 2015, which enlightens the generic opportunities for Indian pharma (led by their better in the near‐ medium term. Patent expiration opportunities worth US$ 168bn over the next 3‐4 years strengthens earning upside for key players Likely peak cumulative generic opportunities in global markets during 2015 sustains formulation exports growth visibility for Indian Pharma
16
2630 31
55
3134
65
38
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013 2014 2015 2016
Gross value of global pharma patents expiries ($ bn)
Linear (Gross value of global pharma patents expiries ($ bn) )
Source: Evaluate Pharma
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Domestic formulations to remain resilient Domestic formulation market with annual sales of Rs 720bn in FY13 has been ranked third in terms of volume and tenth in terms of value, globally. It maintained a steady growth at a CAGR of ~12.5% during the past five years despite the sluggish economic conditions. In fact, the branded focus of domestic formulation market has helped it deliver steady profitable growth over last five years despite the fact of highly fragmented nature and intense price competition in recent past. Domestic formulations growth v/s Indian GDP growth
17.5
14.8
10.1
17.7
15.3
18
9.8
0
5
10
15
20
FY07 FY08 FY09 FY10 FY11 FY12 FY13
Domestic formulation growth % Indian GDP growth %
Source: RBI, Industry
So far as performance and positioning of Indian Peers in domestic formulation are concerned, Cipla is the undisputed leader but Sun Pharma is the most profitable leader of the space led by its leadership in chronic therapies (57%) and better than industry growth. However, Lupin and Glenmark delivered best growth over last three years led by their enhanced and therapy focused marketing in domestic formulation space. Lupin, Glenmark and Sun outpaced Indian Pharma growth Company (Fig. In Rs mn) Domestic formulation
Of Late, the uncertainty around the implementation of new pricing policy at the fag‐end of FY13 and trade issues related to margins and price reduction after the implementation in early FY14 has certainly moderated the domestic formulation growth. Moreover, we believe the full impact of trade issues (destocking of incrementally added product basket into NELM) on domestic formulations is yet to be seen in Q3FY14. The adverse impact of new NELM introduction on the profitability of various companies are displayed below.
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Impact of new pricing policy on Indian Pharma Company Domestic formulation
In our view, Cipla and Cadila due to their relatively larger share of revenue from domestic formulation and that too from acute therapies would see maximum adverse impact on their profitability. Given the fact and relatively slow growth in acute therapy drug basket, we believe Cipla and Cadila might underperform the domestic formulation industry growth in near future. Chronic therapies outpace acute therapies in growth
18.9
15.814.5
12.9 12.7 12.6 12.6 11.6 11 10.4 9.9
02468
101214161820
Diabetes
Cardiac
Neuropathy
Derma
Gynaecology
Industry
Gastro
Anti invective
Pain Mgt.
Respiratory
Vitamins
Growth (%
)
Source: Sun Pharma AR
Sun leads in domestic pharma in terms of prescription share
Source: Sun Pharma AR
However, we believe the above mentioned adverse impact of new pricing policy is just a momentary for just FY14 and would depress the growth momentum of Indian Pharma in FY14. More specifically, we expect domestic formulations to show its resilience Q4FY14 onwards and deliver an annual growth momentum of 15‐18% which will be led by continued trend of new product introductions, enhanced focus towards chronic portfolio, therapeutic focused market. Also, the Indian macro factors like – 1) rising healthcare spend, 2) rising income levels, 3) rapid urbanisation and 4) steady progressing health insurance penetration would maintain the continued growth momentum.
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Emerging markets ‐ Offers growth visibility albeit diverse complexities While the developed pharma markets seem matured led by series of patent expires and generic penetration reaching almost peak beyond 75%, the developing markets emerged as the key growth engine for global pharma. As per IMS Health, the pharmerging economies (including ‐ Brazil, Russia, China, India, Mexico and South Africa) are expected to deliver highest growth at a CAGR of 12‐15% to reach US$ 345‐375 billion in 2016 from US$ 193.6 billion in 2011. The market size is expected to almost double during 2012‐16. In fact, about 75% of incremental growth in global pharma during 2012‐16 to be driven by emerging markets. The key growth drivers for these markets are ‐ rising income levels, increased access to medicines, high out of pocket spending and government focus on generics. Also the branded generic nature of the market ensures better value growth. Given the fact of rapid progress in the emerging markets, Indian pharma peers led by their strong cost advantage, better understanding of these markets( due to similarity to Indian market), rapid progress in product registrations are well placed to exploit the highest growth in the emerging markets. Selective Indian peers like – Ranbaxy, Dr Reddy, Cipla, Glenmark etc have already achieved meaningful foothold in various emerging markets including – Russia, South Africa, Latin American markets. Typically Out‐of‐pocket expenditure in the emerging markets is high in comparison to developed markets
46% 39% 32% 29%11% 13%
11%16%
13%6% 43%
15%
43% 45%55%
65%46%
72%
0%
20%
40%
60%
80%
100%
120%
APAC LatAm ME & Africa Europe EM USA EUS
General government expenditureOther private health expenditureOut‐of‐pocket
Pharmerging 193.6 345‐375 12‐15 China 66.7 155‐165 15‐18 Tier 2 59.9 100‐110 12‐15 Brazil 29.9 42‐52 12‐15 Russia 15.7 23‐33 10‐13 India 14.3 24‐34 14‐17 Tier 3 67 90‐100 7‐10l
Source: IMS Health
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While there is strong growth visibility for emerging markets, the varying business dynamics of different markets are the key challenge for pharma peers. Though, the local conditions vary by country, the core challenges remain broadly comparable: • understanding stakeholders and their changing needs • political, economic, and intellectual property risk • immature regulatory frameworks • launching new products • finding the right partners/distributors Hence, in order to tackle the unknown challenges and to capture the maximum growth opportunity in the emerging markets most of Indian peers have adopted partnership model. The key emerging market alliances by India pharma peers are – Dr Reddy‐Glaxo, Sun Pharma‐Merck, Cipla‐Dr Reddy, Cadila Healthcare – Abbott etc. Going ahead, we expect Indian pharma peers led by their cost competitiveness, rapid drug registrations and alliances to outpace industry growth and grow in the range on 18‐20% in near future.
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CRAMS offers strong growth visibility
2000 2012 2017
Contract Research (CRO)
Contract Manufacturing (CMO)
4.5
7.0
5.5
30.0
Contract Manufacturing of APIs/Intmd.
Packaging/labeling and other services
Development of FormulationsContract Manufacturing of Formulations
India to see maximum ramp up at >35% CAGR to $29 bn (21% market share) in 2017 from $6 bn(8% Market share) in 2012.
62924.3
348.8
26.1
32.9
46.9
0
20
40
60
80
100
120
140
160
2012 2017
India share US' Share
China' Share Others
Figures in $bn
Notes: Figures in parentheses indicates % share
Source: Chemical Pharmaceutical Generic Association (CPA), Italy,
While pharma outsourcing (on the backdrop of mounting R&D cost pressure, declining productivity on the drug discovery front, impending patent expirations, escalating pricing pressures and the ultimate falling profitability) has become the inevitable option for global pharma innovators, India (led by driven by its intrinsic competitive advantages like – low cost manufacturing, enough pool of research talent and adequate research capability) has already proved to be an one of the most preferred outsourcing destinations for pharma outsourcing. Despite the given fact, the share of Indina pharma in global pharma outsourcing remained mere at $6bn (i.e.8%) in 2012, primarily due to the larger focus on contract manufacturing.
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However, with the improved focus on building R&D capability, enhanced and quality service offerings at competitive cost, Indian Pharma is well placed to grab a meaningful chunk of huge global pharma outsourcing opportunity. As per the study of Italy based Chemical Pharmaceutical Generic Association (CPA), the global pharma out sourcing to grow at 14% CAGR over FY12‐17 to $136bn and India to see maximum ramp up at >35% CAGR to $29 bn (21% market share) in 2017 from $6 bn(8% Market share) in 2012. Given the fact, we believe Indian peers like – Divi’s Lab, Dr Reddy, Biocon etc led by their research capability and strong clientele base are well positioned to make the maximum out of the huge foreseeable pharma outsourcing opportunity. Additionally, better execution track record by Indian pharma peers in contract manufacturing and recent quality concerns around Chinese (key competitor of Indian Pharma) pharma operation coupled with relatively higher service charges to lead Indian pharma outpace China.
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Indian Pharma trades at historic average valuation multiples Indian Pharma represented by BSE Healthcare Index saw its dream run and has grossly outperformed the benchmark index – SENSEX over last three year period. It has gradually raised its premium valuation to about 40% currently over SENSEX during the said period. In our view, 1) strong visibility of formulation exports especially to US led by patent cliff resulting in multiple exclusive supply opportunities, 2) powering free cashflow generation and 3) investment favour due to defensive nature helped Indian pharma to outbid the benchmark index. Additionally, the favouring Rupee depreciation against US Dollar further powered the earnings growth as the exports account over 50% of the gross Indian Pharma revenue.
Indian Pharma currently trades at historic average PE BSE Healthcare index trades at over 40% premium to SENSEX
10
15
20
25
30
35
Apr‐08Jul‐08
Oct‐08
Jan‐09
Apr‐09Jul‐09
Oct‐09
Jan‐10
Apr‐10Jul‐10
Oct‐10
Jan‐11
Apr‐11Jul‐11
Oct‐11
Jan‐12
Apr‐12Jul‐12
Oct‐12
Jan‐13
Apr‐13Jul‐13
Oct‐13
HC Index 1yr fwd PE Historic Avg PE
19.2x
‐
50
100
150
200
250
Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13
BSE_SENSEX BSE HC Index
Source: BSE, PhillipCapital India Research
At the current level the pharma index is trading at its historic average 1 year PE multiple of ~20x. We believe the sector should command its premium valuation multiples led by continued visibility for healthy formulation exports growth, robust free cash flow generation and enhanced build up in R&D capability over last couple of years. Thanks to the multiple exclusive supply opportunities led by patent expiry of many blockbuster drugs in US during last few years, which helped Indian pharma to enhance its R&D focus and spend.
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Strong operational performance backed by rapid exports led by patent cliff and resilient domestic formulations enhanced the investment interest in the sector
2.5
3.4
4.1
5.2
2.4 2.5
‐1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
FY08 FY09 FY10 FY11 FY12 FY13
Weightage
in Nifty (%)
Cipla Dr ReddyLupin RanbaxySun Pharma Total Phartma
235 251
389 399
568
892
170239
321 307 337295
0
200
400
600
800
1000
Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13
FIIs' Investment (Rs Bn) DIIs' Investment (Rs Bn)
Source: BSE, PhillipCapital India Research
Series of patent expiry of block buster oral generics in advanced markets specifically in US has helped almost all participants in US generics to deliver strong growth in last few years. Now with the limited available generic opportunities and rising competition/complexity, we believe the era of me‐too fillings and easy generics is over. Going ahead, we expect the quality parameters in terms of – 1) R&D capability to develop and file complex/differentiated drugs, 2) quality standards of facility & processes, 3) R&D productivity, 4) positioning in the high growth emerging markets etc would assign premium or discount to company valuations. Based on the said parameters we believe Indian leaders like Sun Pharma, Dr Reddy and Lupin have already positioned themselves well in global generic space. However, the valuations of Sun Pharma (led by unique limited period opportunity of Doxil and Doxycycline shortage in US and multiple price hike in Taro products) and Lupin (led by strongest visible pipeline for US generics for 2014‐15) have already got stretched and offer limited upside. Hence, considering higher visible upside potential amongst Indian Pharma leaders and likely positive surprises from its complex drug fillings in US, we initiate our coverage on Dr Reddy with a BUY rating and target price of Rs 2800
Dr Reddy, Aurobindo Pharma and Biocon offers maximum valuation gap in against their respective comparable peers
Sun Pharma
Dr Reddy
IPCA
Divis Lab
Biocon
LupinCadila
Glenmark
Aurobindo Pharma
6
8
10
12
14
16
10.0 20.0 30.0 40.0
EBITDA CAGR FY13‐15 %
EV/EBITD
A (x)
Sun Pharma
Divis Lab
Biocon
Dr Reddy
Lupin
Cadila
GlenmarkIPCA
Aurobindo Pharma
7
10
13
16
19
22
25
10 20 30 40 50
EPS CAGR FY13‐15 %
P/E (X) FY15E
Note: Green DOTS suggest our BUY Recommendation. Source: PhillipCapital India Research Estimates
16 of 66
27 November 2013 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR
On the other hand, we believe steady progress in operational as well financial performance of Midcaps to outperform industry leaders. Specifically, Aurobindo pharma (led by its rapid progress into specialty/complex injectables and best ever execution in US generics) and Biocon (supported by its strongest biosimilar pipeline, enhanced prospects in core business and healthy balance sheet) are expected to deliver relatively better growth amongst it midcap peers. Hence our top pick amongst midcap pharma are – Aurobindo Pharma (target price of Rs 455, 55% upside) and Biocon (target price of Rs 475, 28% upside). We also remain optimist on Glenmark pharma (led by its quality US fillings, healthy domestic formulation and monetization potential of its discovery research pipeline) and initiate BUY with target price of Rs 641, 27% upside. On the global pharma outsourcing space, Divi’s Lab maintains its leadership position led by its superior chemistry skill and successful track record of project execution for global innovator. Considering the improving outlook for global pharma outsourcing (PCRAMS) and anticipated upsurge in the share (from 8% in CY2012 to 21% in CY17E) of India, we believe Divis with its timely facility expansion is well placed to deliver stronger earning growth. Hence, we initiate our coverage on Divi’s Lab with a BUY rating and target price of Rs 1390, an upside of 20%.
27 November 2013 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR
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27 November 2013 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR
Compa
nies Section
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Aurobindo Pharma Gaining ground in US generics
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Best ever execution powered US generics Strong flow of ANDA approvals (almost about 8‐10 per quarter over last few quarters) and improved execution helped Aurobindo to report strong 30% constant currency growth (48% on the Rupee terms) in its US sales to $320mn (50% of its consolidated formulations sales) during FY13. The US execution was primarily led by the induction Mr Ronald Quadrel (with >35 years of exp. in generic injectable business of Baxter, GSK, Roche, etc.) to look after US hospital/institutional business and Mr Bob Cunard (with >20 years experience in Teva, Mylan, etc.) to manage oral generics.
US generics at inflection point; Rapid injectable fillings is the key Despite being a late entrant to the injectables, Aurobindo has shown its aggression in injectables by filling ~40 ANDAs (just ~7 are in market) in last two years. The company expects to file cumulative 100 injectable (including complex injectables covering Opthalmic, Penems and Oncology) ANDAs by FY16. Given its rapid expanding injectable portfolio and continued shortage of basket of injectables, we expect Aurobindo to report 34% CAGR in its US generics sales over FY13‐15e to Rs 31.48bn. Aurobindo’s first set of shortage based injectables with cumulative size of >$80mn should drive near term growth.
Improving product mix and rising asset utilization to result in value growth Aurobindo’s enhanced focus towards high value NPNCs (accounting for >70% DMF filings and ANDA approvals) and improving asset utilization (of its injectable Units and likely ramp up in Aurolife facility) would drive earnings growth for the company in the near future. We estimate Aurobindo’s EBITDA margin will expand 470bps over FY13‐15E to 19.9% in FY15E, resulting in >36% and >47% CAGR in operating profit and net profit during FY13‐15E to to Rs 16.4bn and Rs 9.4bn, respectively.
Key concerns addressed well With the improving execution in US generics and free cash flow turning positive in FY14, Aurobindo has addressed well the key concerns of 1) higher debt and 2) sustainability of long term growth. Aurobindo has already repaid debt worth $ 64mn (out of gross ~$ 600mn) in H1FY4 and expects to payback $15mn more in H2FY14. The management guides for a focused debt reduction in subsequent period. We estimate the D/E to improve from 1.3x in FY13 to 0.8x in FY15. Also, over long term, we expect sustained growth on the back of ‐ 1) Aurobindo’s investment into complex injectables including oncology drugs, steroids, penems, peptides, etc, 2) ramp up in controlled substance and OTC operation, and 3) final approval of multiple ARVs in the advanced markets.
Re‐rating led by strengthening earnings visibility; Initiate “BUY” with TP 455/share At CMP of Rs 293, the company trades at 9x FY15E EPS and 7x FY15E EV/EBITDA, which are ~40% and ~30% discount to its comparable peers’ averages. Considering the bullish growth outlook, free cash flows turning positive and guided reduction of debt, we expect steady re‐rating for the stock to 14x (from current 12x) and value at Rs455/share. We believe Aurobindo could be the sector outperformer in the near term. We initiate our ‘BUY’ rating on Aurobindo Pharma with a Target Price of Rs 455, implying an upside of 55%.
BUY ARBP IN | CMP RS 293
TARGET RS 455 (+55%) Company Data
O/S SHARES (MN) : 291MARKET CAP (RSBN) : 85MARKET CAP (USDBN) : 1.452 ‐ WK HI/LO (RS) : 294 / 347LIQUIDITY 3M (USDMN) : 10.1FACE VALUE (RS) : 1
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Enhanced growth momentum in core Biopharma Biocon’s core Biopharma business (62% of total sales) including – statins, insulin, immunosuppressant, Orlistat etc has already delivered strong growth of ~20% in FY13 (v/s historical growth trend of ~12‐15%) to Rs 14.9bn. Going forward, 1) the ramp up in insulin in emerging markets (led by capacity expansion effective from mid‐Q2FY14 and deeper geographic penetration into 45 emerging markets) and 2) continued limited competition in Tacrolimus coupled with likely launch of Sirolimus (company already has multiple supply tie‐ups) in Q3FY14 would drive steady growth of >18% CAGR over FY13‐15, despite the flattening sales of statins.
Herceptin launch could drive value growth in branded sales Biocon’s strategic focus on complex formulations, brand positioning and very selective product portfolio has helped its branded formulations (14% of sales) to report 37% CAGR over last five years. Going ahead, its continued focus on differentiated drugs and brand promotion will sustain its growth momentum. Also, the likely launch of world’s first biosimilar version of generic herceptin in India during Q4FY14 (Already got DCGI approval) could drive value growth for Biocon. We believe Biocon would be the only generic player for herceptin (Indian market size Rs 1300mn) for ~15‐18 months after its launch in India and estimate it to generate incremental domestic sales of Rs 600mn (PAT of Rs 160mn) in FY15. In Addition, the huge demand for biosimilar herceptin in emerging markets (valued >$ 2bn) would be the key opportunity for Biocon in medium term. We estimate domestic formulation to report 30% CAGR over FY13‐15 to Rs 5.9bn.
Fresh stream of manufacturing revenue powers Syngene growth Biocon’s Research services operation (Syngene) is the largest Indian CRO with 1500+ Scientists working for 16 of top 20 global innovators. With its continued client expansion (to about 150 now) and improving outlook of global pharma outsourcing, we expect the company to report a growth of 28% CAGR FY13‐15 to Rs 9.13bn. Additionally, a fresh high margin revenue stream of clinical material supply (for 6 Phase III compounds of its partners) commencing from H2FY14 would drive value growth for Syngene.
Harmonised dossier filling for Rh‐insulin in Europe and US seems strategically best as 1) the company expects to file from the new state of art facility of Malaysia (which is expected to commence in 2014 earlier than previously guided 2015), 2) the existing old facility can focus on meeting emerging market demand and 3) small delay in product launch in Europe will not erode the product opportunity like in any chemical based generic drug.
Unique biologic/biosimilar pipeline brightens longterm growth Biocon holds the strongest pipeline of of biosimilars (including Rh‐insulin, insulin analogues and five monoclonal antobodies) and biologics (including Itolizumab and IN‐105) amongst Indian peers. The said pipeline projects are in various stages of development and all of them are developed from internal accruals. We believe this pipeline could upgrade Biocon’s financial profile substantially FY16 onwards. In fact, the target opportunities for Biocon’s biosimilar insulin and MAB pipeline are $ 20bn and $35bn respectively.
We expect Biocon to see gradual re‐rating with improved core operating performance and rising visibility of biosimilars in advanced markets going forward. We initiate our coverage on Biocon with BUY rating and a price target of Rs 475 (17x FY15E).
BUY BIOS IN | CMP RS 372
TARGET RS 475 (+28%) Company Data
O/S SHARES (MN) : 200MARKET CAP (RSBN) : 74MARKET CAP (USDBN) : 1.252 ‐ WK HI/LO (RS) : 387 / 253LIQUIDITY 3M (USDMN) : 3.2FACE VALUE (RS) : 5
Net Sales 24,263 29,824 36,446EBIDTA 5,701 6,875 8,513Net Profit 3,483 4,371 5,605EPS, Rs 17.4 21.9 28.0PER, x 21.4 17.0 13.3EV/EBIDTA, x 12.3 10.4 8.5P/BV, x 2.8 2.4 2.1ROE, % 18.9 14.3 15.8Debt/Equity (%) 9.9 11.6 12.9Source: Phillip Capital India Research Surya Patra (+ 9122 6667 9768) [email protected]
– 25 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / BIOCON INITIATING
Valuations Expect gradual re‐rating with improved core operating performance and rising visibility of biosimilars in advanced markets We estimate Biocon to deliver sales and profit growth at a CAGR of 21% and 26% over FY13‐15E to Rs 36.6bn and Rs 5.5bn, respectively in FY15. We expect the margins to be maintained in the narrow range of 22‐23% despite higher commitment towards discovery pipeline. At CMP of Rs 372, the company trades at 13.3x FY15E EPS and 8.5x FY15E EV/EBITDA, which are ~20% discount to its comparable peers’ averages. We we value Biocon at 17x (in line with historic valuation multiple) it’s FY15 EPS of Rs 28.0, which yields us our target price of Rs 475/share (implying an upside of 28%). We initiate our coverage on Biocon with BUY rating and a price target of Rs 475. Considering its enhanced growth profile in core operations, robust pipeline of biologi/biosimilar products, likely value unlocking in Syngene by listing it separately, out‐licensing of Rh insulin for advanced markets and strong Balance Sheet position, we expect Biocon to see further re‐rating going forward. However, any substantial delay in the development of its biologic/biosimilar pipeline and any regulatory hurdle in terms of delay in clinical development or facility issues could pose as key risk to our investment thesis.
1 yr forward band
P/E
6x
12x
18x
24x
0
100
200
300
400
500
600
700
800
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
Rs
EV/EBITDA
5x
8x
11x
14x
0
20000
40000
60000
80000
100000
120000
140000
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
Rs mn
Source: Bloomberg, PhillipCapital India Research
– 26 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / BIOCON INITIATING
Enhanced growth momentum in core biopharma
3077
.25
3244
.87
3070 3485
3400
3140
3060 3809
3544
3720
4000
3780 4319
4440
0
1000
2000
3000
4000
5000
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
‐10.0
0.0
10.0
20.0
30.0
40.0
Core Biopharma Sales (Rs mn)% YoY Growth (rhs)
Temporary shutdown of Insulin plant for expansion impacted growth in Q4FY13
Source: Company, PhillipCapital India Research
Rapid Progress in Branded Formulation Herceptin launch in Emerging markets offer huge opportunity, as they command > 30% of Roche’s global sales
980 1333 1813 25
94
3474
4343
5883
0.0
10.0
20.0
30.0
40.0
50.0
0
1000
2000
3000
4000
5000
6000
7000
FY09 FY10 FY11 FY12 FY13 FY14e FY15e
Branded Formulation Sales (Rs Mn)% growth (rhs)% of total sales (rhs)
1279
2167
371
2111
5928
0
1000
2000
3000
4000
5000
6000
7000
UnitedStates(28%)
WesternEurope(33%)
Japan (6%) ROW (33%) Total sales
Source: Company, PhillipCapital India Research Source: Roche’s AR
Continued healthy growth in Research services
2250 2807 3175 41
01
5572
7312
9139
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
FY09 FY10 FY11 FY12 FY13 FY14e FY15e
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Research Services Sales (Rs Mn)
% growth (rhs)
Source: Company, PhillipCapital India Research
– 27 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / BIOCON INITIATING
Robust pipeline of Biosimilas
Source: Company
The Biosimilar opportunity seems robust
Total Insulins market ~USD 20bn*
35%
13%23%
9%
2%
18%
Glargine ~7bn
Lispro ~2bn
Aspart ~5bn
Detemir ~2bn
Glulisine ~0.3bn
rh‐Insulin ~3bn
Opportunity ~USD35bn
18%
18%
23%
12%
28% Herceptin ~68bn
Avastin ~6bn
Enbrel ~8bn
Neulasta ~4bn
Humira ~10bn
* Market size of innovator product MAT June 2013, All figures rounded off to nearest USD bn, %ages on absolute numbers
Source: Company
Revenue Mix (%) Rs mn FY11 FY12 FY13 FY14 FY15
Licensing Income 1525 1266 246 250 250Branded Formulation 1813 2594 3474 4343 5883% of total sales 6.5 12.7 14.3 14.6 16.1 Core BioPharma Sales 11496 12529 14985 17920 21175% of total sales 41.5 61.1 61.7 60.1 58.1 Research Servies income 3175 4101 5572 7312 9139% of total sales 11.5 20.0 23.0 24.5 25.1 Axicorp 9705 0 0 0 0% of total sales 35.0 Total Consolidated income 27714 20490 24277 29824 36446Gr Y‐o‐Y % 17.0 ‐24.7 19.1 22.4 22.2Like to like growth% 23.2 13.8 19.1 22.4 22.2
Source: Company, PhillipCapital India Research
0114
20
1010
23
22Revenue Mix FY13
Licensing Income
Branded Formulation
Statin
Insulin
Immunosuppressant
Research Servies income
other
– 28 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / BIOCON INITIATING
Healthy progress in revenue and earnings over FY13‐15E 27
709
2086
5
2485
3
3042
0
3717
50.0
5.0
10.0
15.0
20.0
25.0
0
5000
10000
15000
20000
25000
30000
35000
40000
FY11 FY12 FY13 FY14 FY15
Net Sales (Rs mn)
% growth (Like to like) (rhs)
3756
3131
3483 43
71 5605
0
1000
2000
3000
4000
5000
6000
FY11 FY12 FY13 FY14 FY15
‐10
‐5
0
5
10
15
20
25
30
Adj. Net Profit (Rs mn)
% growth (Like to like) (rhs)
Source: Company, PhillipCapital India Research
Robust cash position despite rising R&D spend
‐569
‐567
6
‐822
5
‐992
2
2591
6723
2284 4046
2082
2429
‐107
54
‐119
23
‐15000
‐10000
‐5000
0
5000
10000
FY10 FY11 FY12 FY13 FY14 FY15
Rs m
n
Net Debt Free Cash flow
10.0
12.0
14.0
16.0
18.0
20.0
FY10 FY11 FY12 FY13 FY14 FY15
ROCE% ROE%
Source: Company, PhillipCapital India Research
– 29 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / BIOCON INITIATING
Financials
Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E
Cadila Healthcare US generics seems only sweet spot
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Improving visibility on ANDA approvals brightens FY15 US growth Cadila’s quality and cost effective generic drug offerings have made it the 10th largest US generic players and helped it deliver 40% revenue CAGR over the last five years to Rs 15.1bn in FY13. At the same time, the slowing ANDA approvals despite improved ANDA fillings has been the key concern for Cadila in recent past. However, the improved visibility on drug approvals after receipt of complete response from the FDA has brightened the US growth prospects in medium term. The management expects to launch more than 20 products (v/s 7 in FY13) over the next 12‐15 months in the US. We estimate Cadila’s US generics to deliver a compounded annual growth of 21% over FY13‐15 to Rs 22.2bn. Complex technology Initiatives ensures strong future growth but lacks visibility Cadila has rapidly increased it R&D spend at ~70% CAGR over last three years to Rs 4.7bn (7.4% of sales) in FY13, in order to upgrade its drug portfolio to complex technology class including – transdermal, inhalers, controlled release drugs, biologic/biosimilars and NCEs. Such initiatives has certainly enhanced the future growth visibility of Cadila but all those lacks commercial visibility. Domestic formulations to moderated growth despite Lipaglyn launch Cadila, with a strategy to widen its foot hold in domestic formulations acquired Biochem during late FY12, which sharply reduced the share of its chronic therapy from 58% of sales in FY11 to 31% in FY13. Given the fact of lower chronic sales contribution and adverse impact of new pricing policy (~Rs 900mn) we expect moderate revenue growth of 12% CAGR over FY13‐15 (v/s 16% CAGR over FY09‐13) to Rs 29.4bn in FY15. The launch of innovative drug Lipaglyn may not have any major play in near to medium term. Reducing profitability of JVs remain as a concern Super operational excellence and high profitability of its Hospira and Nycomed JV has certainly made Cadila a preffered partner for JVs. But the progressive decline in the cumulative profitability of its JVs, due to increased competition has been a a concern for Cadila in recent past. The cumulative EBITDA margin of its all JVs has, infact, declined from ~60% in FY11 to 45% in FY13. Moreover, the likely muted growth in the JV sales during FY13‐15 is further worrisome. Lacks key earning triggers in near term; Initiate with Neutral rating and target price of Rs 761 Despite improved visibility in US generic launches, we estimate Cadila’s revenue and profits to grow at a moderate CAGR of 15% and 14% over FY13‐15E. Our EPS estimates for FY14E and FY15E stands at Rs 32.5 and Rs 42.2 (against Rs 31.9 in FY13), respectively. At CMP of Rs 742, the stock trades at 17.6x FY15E EPS and 12.5x FY15E EV/EBITDA, which is ~10% discount to its peers. We believe the discount is justified considering no major earnings trigger and concerns over profitability in near term. We value Cadila at 18x FY15 EPS, giving us a price target of Rs 761, implying 3% upside from current levels. We initiate with a Neutral rating and target price of Rs 761/share.
NEUTRAL CDH IN | CMP RS 742
TARGET RS 761 (+3%) Company Data
O/S SHARES (MN) : 205MARKET CAP (RSBN) : 152MARKET CAP (USDBN) : 2.452 ‐ WK HI/LO (RS) : 925 / 631LIQUIDITY 3M (USDMN) : 1.5FACE VALUE (RS) : 5
Divi’s Laboratories Well set to ride on soaring pharma outsourcing
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Custom Synthesis to show resilience with 25% growth in FY15 Divis, led by its strong track record of project executions and long standing associations with the top‐20 global innovators (45% of revenue flows from 5 key customers), commands the largest custom synthesis pipeline from India. As per Chemical Pharmaceutical Generic Association,Italy, the global pharma outsourcing is expected to grow at 14% CAGR over FY12‐17 to $136bn and India is expected to see maximum ramp up at >35% CAGR to $29 bn (21% market share) from $6 bn(8% Market share) in 2012. Hence, with the improving outlook on pharma outsourcing and Divi’s timely facility expansion would drive sustainable growth for its custom synthesis operation. Factoring the moderated growth (15%) in FY14 due to capacity constraints, we estimate 20% CAGR in its custom synthesis revenue over FY13‐15 to Rs 14.9bn in FY15.
Optimal process efficiency to maintain steady Generics growth Divis, led by its focus on complex intermediates/ active ingradients, selective product approach and continuous focus on process optimisation & production efficiencies, has positioned itself as the global leader in certain products (though the company entered the market much later than the patent expiry). Similarly, it has attained market leadership in various products like Naproxen, Diltiazem and Dextromethorphan, which together contribute over 30% to the generics sales. Going ahead, we believe its continued focus on optimal process development and cost leadership will play a pivotal role in driving growth for its generics. In addition, the series of patent expires in recent past and upcoming ones enhance the growth visibility. We expect Divi’s generic sales to report >18% CAGR to Rs 14.1bn in FY15E.
Approval of Carotenoid plant for pharma application drives growth Divi’s Nutraceuticals production site in Vizag was been awarded the FSSC 22000 food safety certification during Aug 2013, which is essential for using its nutraceuticals in pharmaceuticals application. Till now its nutraceuticals products were allowed to be applied in foods and beverages. With this development, the management guides for a healthy growth in its nutraceuticals sales to Rs 1800mn by FY15E from Rs 919mn in FY13.
Expansion led growth in FY15 Divis has set up a greenfield facility with 5 production units at an investment of Rs 3500mn in Vizag DSN‐SEZ. It received USFDA approval for 2 units and expects the to commissioning and FDA inspection of 3 more units in Q4FY14. We believe the timely capacity expansion with a revenue potential of Rs 7000mn (2x Capex) just ahead of improving global CRAMS outlook, would enhance growth momentum for Divis in the medium term.
Initiate Buy with target price of Rs 1390 We expect 24% earnings CAGR for Divis over FY13‐15E, mainly led by increased order flows and ramp up in its new facility at Vizag DSN SEZ. Looking at its debt free balance sheet, strong return ratios and controlled capex enabling healthy cash flows, we value Divis at 20x (in line with its historic average), which yields our target price of Rs 1390. We initiate coverage with BUY rating.
BUY DIVI IN | CMP RS 1163
TARGET RS 1390 (+20%) Company Data
O/S SHARES (MN) : 133MARKET CAP (RSBN) : 154MARKET CAP (USDBN) : 2.552 ‐ WK HI/LO (RS) : 1233 / 905LIQUIDITY 3M (USDMN) : 3.9FACE VALUE (RS) : 2
Dr Reddy’s Laboratories Focus on complex chemistry
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Strong growth in US generics Dr Reddy’s Laboratories (DRL), by leveraging its superior chemistry skills, early focus on complex/differentiated generics and strategic vertical integration (75% of APIs sourced internally), has powered its US generic sales at a CAGR of 37% to Rs 37.8bn over FY08‐FY13. Additionally,the recent launch of niche oncology injectables with limited competition like – Decitabine & azacitidine have supported its strong growth momentum with US generic sales to Rs 24.1bn in H1FY14, a growth of 40%. Going ahead, we estimate DRL’s US generics sales, excluding FTFs, to grow at CAGR of 33% over FY13‐15.
Technology Platforms to aid complex generics and value growth in US More than the steady US generic growth, it is the increasing share of limited competition drug sales and focused build up of technology platforms enhances the visibility for future value growth. The management believes a good chunk of its current 62 pending ANDAs (including 39 Para IVs and 9 FTFs) and 70% of future fillings are differentiated generics or technology led drugs, which will drive value growth. The key technology platforms include – Mpegs, Chiral, Biocatalysis and Polimer Technology.
India, Russia and Emerging markets to maintain steady growth In H1FY14, the domestic formulation business saw a moderated growth of 5%, mainly due to the uncertainties of new NELM introduction and related trade issues. We believe the full impact of new NELM is yet to be felt in Q3FY14 (though momentary) and DRL estimates the adverse impact to be ~550mn in FY14. However, We expect DRL, led by its enhanced focus on domestic formulation in recent past, would maintain a steady growth of over 15% Q4FY14 onward. On the other hand, we expect Russia (one of its fastest growth engine) and ROW markets to maintain healthy growth led by expanded product basket and ramp up in DRL‐Glaxo alliance, respectively.
PSAI business to steady progress in margins despite tapering growth The pharma Services and Active Ingredient business (26% of total sales) saw ~25% compounded annual growth over FY11‐13 to Rs 30.7bn led by multiple patent expirations. Going ahead, we expect moderated growth of ~10% due to limited generic opportunities but expect improving profitability led by enhanced service offerings (supported by Octoplus) and growing pharma outsourcing.
Biosimilars: Shaping well to drive long‐term growth DRL has already proved its leadership in biosimilars by launching first ever generic monoclonal anti‐body (Rituximab) and darbepoetin alfa. With a biosimilar portfolio of four drugs, DRL has delivered a sales growth of 36% CAGR over FY09‐13 to Rs 1100mn. We foresee great long term prospects for DRL’s biosimilar business led by its MAB development and commercialization pact with Merck Serono and continued penetration into emerging markets.
Offers highest valuation gap compared to peers; Initiate BUY with Target Price Rs 2800 strong and predictable US sales with rising share of limited completion and differentiated generics, we value Dr Reddy’s at 20x (in line with the sector average) March 2015e EPS of Rs 140 to arrive at our target price of Rs 2800. Hence, we initiate coverage on DRL with a ‘BUY’ rating and a target price of Rs 2800/share.
BUY DRRD IN | CMP RS 2407
TARGET RS 2800 (+16%) Company Data
O/S SHARES (MN) : 170MARKET CAP (RSBN) : 409MARKET CAP (USDBN) : 6.652 ‐ WK HI/LO (RS) : 2545 / 1721LIQUIDITY 3M (USDMN) : 11.5FACE VALUE (RS) : 5
Net Sales 116,266 134,903 156,764EBIDTA 26,818 30,488 36,683Net Profit 16,916 19,315 23,777EPS, Rs 99.6 113.8 140.0PER, x 24.2 21.2 17.2EV/EBIDTA, x 16.4 14.2 11.5P/BV, x 5.6 4.5 3.7ROE, % 22.9 21.5 21.4Debt/Equity (%) 50.2 33.5 22.6Source: Phillip Capital India Research Surya Patra (+ 9122 6667 9768) [email protected]
– 40 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / DR REDDY’S INITIATING
Valuations Offers highest valuation gap compared to peers Powered by the robust US generic business, we estimate DRL’s revenue and earnings to grow by CAGR of 16% and 19% over FY13‐15 to Rs155bn and Rs 23.7bn, respectively. Further, DRL’s strong free cash flow generation of Rs33bn over FY13‐15E powers its balance sheet profile and brightens the visibility for inorganic growth. At CMP of Rs 2407, the stock trades at 17.2x its FY15EPS and 11.5x its FY15EV/EBITDA, which are at ~20% discount to its domestic peers. Maintaining our optimism on DRL’s strong and predictable US sales with rising share of limited completion and differentiated generics, we value Dr Reddy’s at 20x (in line with the sector average) March 2015e EPS of Rs 140 to arrive at our target price of Rs 2800. Key risks to our estimates and valuations are – 1) rising interventions of regulatory agencies, 2) currency fluctuations and 3) Russian Govt’s plant for 50% import substitution by 2020. We initiate coverage on DRL with a ‘BUY’ rating and a target price of Rs 2800/share. We also rate it as our top pick in the sector, on the back of the highest upside potential in our coverage universe.
1yr forward band
P/E
10x
15x
20x
25x
0
500
1000
1500
2000
2500
3000
3500
4000
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
RsEV/EBITDA
4x
8x
12x
16x
0
100000
200000
300000
400000
500000
600000
700000
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
Rs mn
Source: PhillipCapital India Research
– 41 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / DR REDDY’S INITIATING
Strong US sales; Limited dependence on One‐off sales ensures sustainable US growth
Sales from One-off oprtunities (Rs Bn)US Base business sales (Rs Bn)
0
50
100
150
200
250
UptoFY05
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 YTDFY14
Cumulative ANDA fillings ANDA fillings
Source: Company, PhillipCapital India Research
Strong visibility about future US pipeline Potential Generics Mkt Size
(US $mn) Likely Launch Remarks
Duloxetine Hcl(Cymbalta) 3200.0 11‐Dec‐13 multiple filling >10, Shared FTF with several players Sirolimus(Rapamune) 200.0 No likely exclusivity and limited competition Esomeprazole magnesium(Nexium) 2272.0 27‐May‐14 Dr Reddy and Teva settled to launch on on 27 May 2014 Paricalcitol(Zemplar) 115.0 30‐Mar‐14 Limited Competition.. launch after teva's 180days exclusivity in 30th Mar 2014 Memantine (Namenda) 1750.0 11‐Jan‐15 Settled with Amneal, Watson, Dr. Reddy's, Lupin, Mylan, Orchid, Sun, Teva,
Upsher‐Smith, and Wockhardt Valganciclovir(Valcyte) 561.0 FY15 Ranbaxy is FTF, likely launch post exclusivity Dexlansoprazole(Dexilant) 300.0 takeda Glatiramer Acetate(Copaxone) 3500.0 FY16 Likely launch post exclusivity; likely limited competition Bivalirudin(Angiomax) 1‐Jun‐19 Settled with Teva to launch in Jun 2019 Palonosetron intravenous(Aloxi) 500.0 FY16 Limited Competition. ZOLPIDEM TARTRATE(INTERMEZZO) Limited Competition. OMEPRAZOLE‐SODIUM BICARBONATE (ZEGERID) July 2016 Cadila FTF Ixabepilone(IXEMPRA) 150.0 Nov 2018 DRL is FTF and expected to be limited competition DESVENLAFAXINE ER(Pristiq) 493.0 FY16 Moxifloxacin Tab(Avelox) 300.0 Esomeprazole/naproxen(Vimovo) 40.0 NA Litigation on
Source: Company, PhillipCapital India Research
Steady progress in Indian formulations depite NELM concerns Healthy growth in Russian branded business
3.17 3.31 3.85 4.35 5.14 5.50 5.66 6.46
8.06 8.4710.15
11.6912.93 14.55 15.29
17.59
0
5
10
15
20
25
30
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
sales from Other brands (Rs bn)sales from Top 10 Brands (Rs bn)
3.8 5.6 6.6 8.09.9
12.715.7
18.8
0.30.2
0.60.9
1.1
1.3
1.6
1.9
0
5
10
15
20
25
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E
sales from Other brands (Rs bn)sales from Top 10 Brands (Rs bn)
Source: Company, PhillipCapital India Research
– 42 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / DR REDDY’S INITIATING
Glenmark Pharma Right blend of innovative R&D and global generics
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Quality fillings ensures US generics growth Glenmark’s focus on complex generics and limited competition helped it deliver 23% CAGR in its US generics sales to 16.9bn (34% of total sales) in FY13. Going ahead, we expect Glenmark’s quality ANDA pipeline (53 pending approvals including 17 Para IVs) covering hormones, derma, oncology injectables etc to drive 24% revenue CAGR over FY13‐15 to Rs 25.9bn. The key product opportunities in US include – generic Locoid Lipocream, fluocinonide and Lunesta. Also, the likely launch of multiple Para IV opportunities (including – Welchol, Coreg CR & Orthotri‐Cyclen) in FY16 provides enough US generic visibility.
Sustained growth in domestic formulations Glenmark’s domestic formulations business (26% of total sales) with 21% CAGR over last five years has outpaced Indian pharma growth of 14%. We believe Glenmarks’s focused marketing of Derma, respiratory, Cardiac and gynaecology drugs would help it grow ahead of industry growth. We estimate the domestic formulation sales of Glenmark to report a compounded annual growth of 17% over FY13‐15 to Rs 17.9bn. We expect marginal impact of new pricing policy in FY14 on the company.
Monetisation of R&D pipeline could provide further upside Glenmark has already set a strong track record of monetizing its R&D pipeline by signing 7 out‐licensing deals, which have earned cumulative milestone receipts worth $ 206mn since 2004. Currently it stands at the forefront of discovery research in India with a promising R&D pipeline of 5 novel molecules (3 NCEs and 2 NBEs) at various stages of development and any progress in its R&D pipeline could potentially trigger further milestone receipts in near to medium term.
Steady progress in financial health Glenmark reported a healthy growth of 24% and 33% CAGR in its sales and net earnings over last five years to Rs 50.14bn and Rs 6.3bn respectively in FY13. We expect the company to post revenue CAGR of 19% and PAT CAGR of 20% over FY13‐15E on the back of quality ANDA pipeline and sustained growth in the domestic formulations. At the same time, we expect FCF generation from the core business to continue to increase over FY13E‐FY15E, given limited capex and sustained profit growth.
Initiate BUY with target price of Rs 641 At the CMP of RS 504, the stock trades at 15.0x its FY15E EPS and 10.1x its FY15 EV/EBITDA, which was about >15% discount to its peers. We believe the discount is largely due to limited visibility of big ticket US launches and milestone from R&D pipeline.
However, considering its continued focus on quality product pipeline (over 60% of its pending ANDAs are differentiated generics) we value Glenmark’s core business at Rs 604 (18x its FY15 EPS) and its R&D pipeline of Crofelemer and GRC 15300 at Rs 37/share. Our target price of Rs 641 implyes upside of 27% from current levels. Additionally, any out‐licensing development of its R&D pipeline would enhance the upside further.
BUY GNP IN | CMP RS 504
TARGET RS 641 (+27%) Company Data
O/S SHARES (MN) : 271MARKET CAP (RSBN) : 137MARKET CAP (USDBN) : 2.252 ‐ WK HI/LO (RS) : 612 / 418LIQUIDITY 3M (USDMN) : 5.1FACE VALUE (RS) : 1
Net Sales 50,123 60,033 70,941EBIDTA 10,620 12,190 14,830Net Profit 6,349 7,047 9,089EPS, Rs 23.4 26.0 33.6PER, x 21.5 19.4 15.0EV/EBIDTA, x 14.9 12.7 10.1P/BV, x 4.9 4.0 3.2ROE, % 23.0 20.7 21.4Debt/Equity (%) 100.1 68.1 46.3Source: Phillip Capital India Research Surya Patra (+ 9122 6667 9768) [email protected]
– 45 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING
Healthy US Sales Performance Qualitative mix of US ANDA pipeline
7.3
7.2 8.4 12
.1 16.9 21
.8 25.9
0
5
10
15
20
25
30
FY09 FY10 FY11 FY12 FY13 FY14 FY15
‐10
0
10
20
30
40
50US Sales (Rs Bn)% of total sales (rhs)% Growth (rhs)
23
12
55
53
53
0
10
20
30
40
50
60
Para IV
Immediate Resease
Hormones
modified Release
Dermatology
Oncology Injectables
Total Pending ANDAs
Source: Company, PhillipCapital India Research
Para IV filling of Glenmark Potential Generics Mkt Size
(US $mn) Likely Launch Remarks
Locoid Lipocream 34.0 Dec‐13 Settled with Triax and Astellas to launch near end of 2013. Holds 180 days exclusivity
fluocinonide(Vanos) 40.0 Dec‐13 limited competion among Sun, Perrigo and Nycomed
Eszopiclone(Lunesta) 800.0 30‐May‐14 multiple settlement by glenmark, sun…Sun n Mylan has already got FA
Trandolapril + Verapamil(Tarka) 58.0 24‐Feb‐15 Glenmark is FTF
Colesevelam(Welchol) 378 2‐Sep‐15 Glenmark/Impax already settled. Impax is FTF. Watson n Lupin r litigating, late entry after exclusivity expiry on 2nd Sep 2015
Ambien CR (Coreg CR) 233.0 Dec‐15 URL is ftf n limited to 3(Lupin n Anchen),
ORTHOTRI‐CYCLEN 397 31‐Dec‐15 settled with Janssen Pharma to market and distribute its copy drug under a royalty bearing license from Janssen on Dec 31, 2015,
Ezetimibe(Zetia) 1400.0 12‐Dec‐16 GPL can launch on Dec 12, 2016 with a 180D excl. Glenmark Generics and Par Pharmaceutical entered into an exclusive licensing agreement for marketing the generic version of Merck & Co's `Zetia'
azelaic acid(Finacea) 18‐Nov‐18 Glenmark is FTF
Source: Company, PhillipCapital India Research Domestic formulation Sales Performance
6.1 7.5 8.4 10.013.1
14.917.9
0
2
4
6
8
10
12
14
16
18
20
FY09 FY10 FY11 FY12 FY13 FY14 FY15
0
5
10
15
20
25
30
35
Domestic Formulation Sales (Rs Bn) % of total sales (rhs)
% Growth (rhs)
Source: Company, PhillipCapital India Research
– 46 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING
Revenue Mix (Rs bn) FY11 FY12 FY13 FY14e FY15e
India 8.45 10.02 13.10 14.93 17.92 Semiregulated Market 4.07 5.93 8.12 9.34 11.21 Latin America 1.92 2.87 3.28 3.94 4.72 Europe 1.53 1.98 2.02 2.22 2.44 Out‐Licensing Revenue 0.90 2.54 0.49 0.45 0.45Total Speciality Business 16.86 23.33 27.01 30.87 36.74% of Total Revenue 57.2 58.0 53.9 51.4 51.8% Ch. YoY 17.5 38.4 15.8 14.3 19.0 US (Rs mn) 8.35 12.14 16.89 21.84 25.94 Europe 0.54 1.03 1.71 2.13 2.56 Latin America(oncology) 0.97 0.14 0.19 0.24 0.28 API 2.77 3.09 3.98 4.57 5.03Total Generic Business 12.63 16.41 22.76 28.78 33.81% of Total Revenue 42.8 40.8 45.4 47.9 47.7% Ch. YoY 20.3 29.9 38.7 26.5 17.5Other 0.00 0.47 0.36 0.37 0.39Gross Revenue 29.49 40.21 50.12 60.03 70.94% Ch. YoY 18.7 36.3 24.7 19.8 18.2
Source: Company, PhillipCapital India Research
Best model of discovery research from India Year Molecule out‐licensed Deal with Milestone received
Glenmark expects multiple Monetization activity over 12‐18 months from its R&D Pipeline NCE Indication licensed Current Status Remarks
Crofelemer Anti‐diarrheal Partner Salix got USFDA approval and launched in US. Glenmark progresses its filling in 140 emerging markets.
Expect launch in emerging market during early FY15
GRC 15300 Osteoarthritis pain, Neuropathic pain
Sanofi‐Aventis Completed Phase I trials in the UK, A PhIIa proof of concept study in neuropathic pain, initiated in Q1 FY 2013, has completed recruitment.
Globally, this is the only reported TRPV3 specific antagonist molecule to enter clinical trials
GRC 17536 Neuropathic pain, Respiratory disorders
Glenmark is currently recruiting patients for a Phase II proof of concept study in pain indication in Europe and India. Additionally, Glenmark has completed recruitment for a Phase I/IIa study for respiratory indications in the UK (MHRA) and expects topline data in Q3 FY 2014. Glenmark has also obtained regulatory approval from MHRA, UK, for the conduct of a Phase IIa study in patients with chronic cough.
Sanofi‐Aventis Phase I studies completed in US. A PhII proof of concept study in ulcerative colitis has been initiated in Q2 FY 2012‐13 and is currently ongoing.
Expect data outcomes in Q1FY15
GBR 900 Pain Phase 1 enabling toxicity studies for GBR 900 have been completed successfully. Plans to file for a Phase I study in the current financial year.
m‐PGES‐1 inhibitor
Chronic inflammatory conditions including pain
Forest Lab Glenmark has identified clinical candidates and is currently conducting pre‐clinical studies and other development activities required to support the initiation of first‐in‐human dosing
Source: Company
– 47 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING
Financial Performance
21.2
25.0
29.5 40.2 50.1 60.0 71.0
0
10
20
30
40
50
60
70
80
FY09 FY10 FY11 FY12 FY13 FY14 FY15
0
5
10
15
20
25
30
35
40
Total Income(Rs Bn)% Growth (rhs)
2.0 3.3
2.8
5.2 6.3 7.0
9.1
0
2
4
6
8
10
FY09 FY10 FY11 FY12 FY13 FY14 FY15
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35APAT(Rs Bn)
33% CAGR
20% CAGR
Source: Company, PhillipCapital India Research
Steady Improvement in Balance Sheet health
347
334
338
229
205
199
195
0
50
100
150
200
250
300
350
400
FY09 FY10 FY11 FY12 FY13 FY14 FY15
Working Capital Days
‐10.1
‐1.9
3.6
2.5
1.5 3.7 5.2
‐12
‐10
‐8
‐6
‐4
‐2
0
2
4
6
FY09 FY10 FY11 FY12 FY13 FY14 FY15
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4Free Cash Flow(Rs Bn)Net Debt/Equity (rhs)
Source: Company, PhillipCapital India Research
1 yr forward band
P/E
10x
20x
30x
40x
0
200
400
600
800
1000
1200
1400
1600
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
Rs
EV/EBITDA
10x
15x
20x
25x
0
40000
80000
120000
160000
200000
240000
280000
320000
360000
400000
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
Rs mn
Source: Bloomberg, PhillipCapital India Research
– 48 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / GLENMARK PHARMA INITIATING
Financials
Income Statement Y/E Mar, Rs mn FY12 FY13 FY14E FY15E
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Steady growth in domestic formulations despite concerns of new pricing policy IPCA’s Domestic formulations operation (33% of total sales) holds leadership in anti‐malarial (34% market share) and rheumatoid arthritis. Over last five years, it has outpaced industry growth by delivering 16.6% CAGR over FY09‐13 to Rs 8.8bn in FY13 vs. industry growth rate of 14.1% over the same period. Going ahead, we expect this segment to continue its formulation growth momentum led by deeper market penetration, new product introduction, and improvement in field force productivity. We expect minimal impact of pricing policy on IPCA as it has already taken price hike in non‐NELM products and weexpect it to maintain better than industry growth. Factoring the momentary impact of NELM introduction in FY14, we estimate >14% CAGR for IPCA domestic formulations over FY13‐FY15 to Rs 11.5bn.
FDA clearance of its green field Indore facility to boost US generics IPCA’s US generic sales, led by its complete vertical integration and optimal cost offerings, jumped 8‐fold over last five years to Rs1.91bn in FY13, despite its partnership model. Now, with the approval of its its greenfield Indore facility (with peak potential of Rs 4.0bn) by USFDA and expanded ANDA pipeline (pending ANDA of 20 v/s currently marketed 9 ANDAs), we forecast US generics sales to grow at 32% CAGR to Rs3.35bn over FY13‐15E. In fact, the management expects first shipment from Indore facility in Q4FY14 (for 3 approved drugs) and 6‐7 more drug launches in FY15. Additionally, the company has guided for aggressive ANDA filing plans of 12‐15 ANDAs per annum.
Anti‐malarial business: strong visibility despite concerns of declined funding IPCA is one of the top five suppliers of anti‐malaria drugs in the world having WHO pre‐qualification for Artemether‐Lumfantrine (AL) and Artemether‐Amodiquine (AA). Supported by its vertically integrated operation, the company has rapidly enhanced its market share to ~20% for AL with sales of Rs 3.6bn in FY13, implying a CAGR 60% over FY09‐13. Going ahead, we believe IPCA will grab 25% market share led by its cost leadership and ramp up in AA (market potential of $50mn). Also the company’s initiatives to develop malaria injectable will help it grow further. We estimate IPCA’s anti‐malarial institutional business to deliver a CAGR of 18% over FY13‐15 to Rs 5.05bn
Limited valuation gap; Initiate with Neutral rating and Target Price of Rs 752 With steadily progressive and predictable financial performance (sales CAGR 22% and profit CAGR 25%), cash flow turning positive, healthy balance sheet and strong return ratios, IPCA valuations have seen gradual re‐rating over last three years from 8x 1‐year forward earnings in FY11 to the current 15x.
At CMP of Rs 681, IPCA trades at 14.6x FY15E EPS, which we believe factors almost all visible earning triggers and we don’t expect further re‐rating in near future. However, considering its sound operational and financial performance track record, we are valuing IPCA at Rs 752 (16x its FY15E EPS), implying a limited upside of 10%. Hence, we initiate coverage on IPCA with a ‘Neutral’ rating and a one‐year Target Price of Rs 752.
NEUTRAL IPCA IN | CMP RS 681
TARGET RS 752 (+10%) Company Data
O/S SHARES (MN) : 126MARKET CAP (RSBN) : 86MARKET CAP (USDBN) : 1.452 ‐ WK HI/LO (RS) : 744 / 443LIQUIDITY 3M (USDMN) : 2.1FACE VALUE (RS) : 2
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Best US generic execution amongst Indian peers Lupin, supported by its strategic branded generics play, aggressive filling of limited competition ANDAs and superior execution by its integrated operation, has emerged as the 5th largest US generic player and leading Indian player in US generics with US prescription market share of over 4%. With the larger mix of limited competition ANDA launches coupled with strong growth in US prescription generation (26% CAGR), Lupin delivered healthy growth of 28% CAGR on constant currency (33% CAGR in Rupee terms) over last five years to $693mn in FY13. The average US generic revenue per ANDA of ~$7mn for Lupin is the best amongst Indian peers. Superior drug pipeline to drive 20% CAGR in US sales Going ahead, we expect Lupin’s strongest ANDA pipeline amongst its Indian peers (in terms of no of Para IV fillings i.e 86 out of total filling of 177 including 91 pending) and continued aggressive future fillings (about >25 ANDAs p.a.) with prime focus on differentiated generics to sustain US generics growth. We estimate 20% CAGR in its US generics sales over FY13‐15e to Rs 54.5bn despite a muted growth in branded generic business. The US sales growth would primarily be led by its rich drug pipeline awaiting launch through 2014. Emerged 2nd best in domestic formulations With the increasing share of chronic drug sales from 31% in FY08 to 51% in FY13 and deep domestic penetration (with doubling of field force to 5200 in FY13 over last 5 years), Lupin has emerged as the second best domestic formulation player in terms of market share in its covered market. Over last five years Lupin’s domestic formulations business has delivered 20% CAGR to Rs 23.64bn in FY13 (25% of total sales). Going forward, we believe the implementation of new pricing policy will have no material impact on its domestic business. On the contrary, the focused therapy marketing coupled with continued momentum of new product launches (including the inlicensed) would help it to outpace industry growth and deliver 18% CAGR over FY13‐15e to Rs 31.78bn. Strong foothold & rising genericisation in Japan ensures future growth Lupin’s strategic acquisition of Kyowa Pharma in FY08 has already placed itself amongst top 10 generic pharma companies in Japan. Its recent acquisition of I’rom Pharma has further strengthened its position in Japan’s hospital segment (valued $8bn). The Japanese Govt. has set a target to enhance generic penetration from current 26.5% (in $110bn valued Japan pharma market) in FY13 to 35% by FY17, which makes us view Japan as a long term growth driver for Lupin. We estimate 15% CAGR in Japanese sales over FY13‐15 to Rs 15.7bn (12% of sales.) Streched valuation: Initiate with a Neutral rating and target price of Rs 923 Considering Lupin’s strong US outlook and improving domestic formulation mix, we value Lupin at 22x (10% premium to peers average) FY15E EPS of Rs 42.1 to arrive at our target price of Rs 923. At CMP of 864, the stock already trades at 20.5x its FY15E EPS and offers limited upside of ~7%. Hence, we initiate our coverage on Lupin with a Neutral rating and target price of Rs 923.
NEUTRAL LPC IN | CMP RS 864
TARGET RS 923 (+7%) Company Data
O/S SHARES (MN) : 448MARKET CAP (RSBN) : 387MARKET CAP (USDBN) : 6.252 ‐ WK HI/LO (RS) : 946 / 560LIQUIDITY 3M (USDMN) : 13.1FACE VALUE (RS) : 2
Net Sales 94,616 108,211 128,739EBIDTA 22,943 25,802 31,616Net Profit 13,269 15,413 18,846EPS, Rs 29.6 34.4 42.1PER, x 29.1 25.1 20.5EV/EBIDTA, x 17.2 15.0 12.0P/BV, x 7.4 5.9 4.8ROE, % 25.3 23.7 23.2Debt/Equity (%) 22.4 15.6 13.7Source: Phillip Capital India Research Surya Patra (+ 9122 6667 9768) [email protected]
– 55 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / LUPIN INITIATING
Strong visibility of US pipeline for FY15 stretched Valuations Supported by its aggressive US fillings coupled with continued focus on branded play and rising contribution from domestic chronic segments, Lupin has delivered compounded annual growth of 26% and 27% in sales and net profits over last five years to Rs 96.4bn and Rs 13.27bn, respectively in FY13. Going ahead, we expect Lupin’s strengthening US pipeline (despite the high base of US operation), its continued steady progress in domestic formulation and the Japanese generics will drive 17% and 19% CAGR in sales and net earnings over FY13‐15E to Rs131.2bn and Rs 18.8bn, respectively. Considering Lupin’s strong US outlook and improving domestic formulation mix, we value Lupin at 22x (10% premium to peers average) FY15E EPS of Rs 42.1 to arrive at our target price of Rs 923. At CMP of 864, the stock trades at 20.5x FY15E EPS and offers limited upside of ~7%. We initiate our coverage on Lupin with a Neutral rating and target price of Rs 923. Key downside risk to our estimates include – 1) early generic competition in Suprax, 2) regulatory hurdles in terms of delay in approvals and facility issues and 3)adverse currency fluctuation. However, the continued inorganic efforts of the company in US branded business and ROW market supported by strong free cash flow generation (estimated to Rs 38.6bn over FY13‐15) and healthy 0.2x D/E position pose an upside risk to our estimates.
Strongest pipeline of ANDAs amongst Indian Peers Potential Generics Mkt Size
(US $mn) Likely Launch Remarks
Duloxetine Hcl(Cymbalta) 3200.0 11‐Dec‐13 multiple filling >10, Shared FTF with several players
Choline fenofibrate(Triplix) 549.0 1‐Jan‐14 Mylan launched in 15th July 2013 n Impax was Authorised generic but will be limited competion
Telmisartan; amlodipine(Twynsta) NA 16‐Jan‐14
Niacin(Niaspan) 1120.0 16‐Mar‐14 Competative launch after teva's 180days exclusivity in 16th Mar 2014
Esomeprazole magnesium(Nexium) 2272.0 27‐May‐14 Ranbaxy is FTF,Dr Reddy and Teva settled to launch on on 27 May 2014
Eszopiclone(Lunesta) 800.0 30‐May‐14 multiple settlement by glenmark, sun…Sun n Mylan has already got FA
YAZ 347.0 30‐Jun‐14 Likely competing launch by Watson, Sandoz, Lupin, Sun n Femycare on patent expiry in Jun 2014.
Bimatoprost (Lumigan) 400 19‐Aug‐14 LPC is sole FTF for 0.01% formulation
Memantine (Namenda) 1750.0 11‐Jan‐15 Settled with Amneal, Watson, Dr. Reddy's, Lupin, Mylan, Orchid, Sun, Teva, Upsher‐Smith, and Wockhardt
Colesevelam(Welchol) 378 2‐Sep‐15 Glenmark/Impax already settled. Impax is FTF. Watson n Lupin r litigating, late entry after exclusivity expiry on 2nd Sep 2015
Sun Pharma Rich Business Model Ensured Rich Valuation
PHARMACEUTICALS: Initiating Coverage 27 November 2013
PhillipCapital (India) Pvt. Ltd.
Unique opportunity of Doxil and Doxycycline overpowers FY14 US sales Sun Pharma’s (Sun) US business (54% of total sales) delivered compounded annual growth of 35% on constant currency (Rupee growth was 41% CAGR) over FY09‐13 to $1132mn. Primarily, the growth was led by its strategic focus on chronic therapies, inherent capability of developing technically complex products and its successful acquisitions & integration of Taro Pharma. Of late the unique opportunity of Doxil (led by supply issues at the sole supplier J&J) and Doxycycline (led by supply issues at competitors resulting in over 10x price jump) coupled with multiple price hike taken by Taro Pharma for various product have overpowered the H1FY14US sales to $803mn, up by 52%. Expect a modest US growth in FY15 While we expect Sun’s base US sales to maintain a steady annual growth ~12% over FY13‐15 led by its strong US ANDA pipeline, its overall US revenue is expected to report a modest 7% growth led by rising concern of price competition in Doxycycline and Taro’s derma products in US. However, we believe the Doxil revenue from US remain stable in foreseeable future. Our estimate for Sun’s US sales stands at $ 1573mn and $1677mn for FY14E and FY15E, respectively. Strategic chronic therapy focus to drive domestic formulation growth Being a leader in chronic segments, Sun Pharma delivered a compounded annual growth of 15% over last five years in its domestic formulations business to Rs 29.65bn (26% of total sales) in FY13. Going ahead, we expect Sun to outpace industry growth and deliver 22% CAGR over FY13‐15 led by its continued focus on chronic therapeutics (57% of domestic sales), one of the most productive field force and new product launches. High base effect to mar FY15 earnings growth… With the multiple earnings surprises in terms of 1) enhanced opportunity in Doxil due to supply issue at J&J, 2) continued pricing power at Taro and 3) strong Doxycycline sales despite fresh supply by Mylan, we estimate strong 45% and 76% growth in FY14 Sales and earnings, respectively. However, the likely rise in competition for Doxil & Taro product basket and lack of any big ticket exclusivity would result in margin contraction (by 180bps to 42.2%) in FY15 upon a modest sales growth of 9% resulting in flat net earnings. … Yet financial health to remain robust Despite tapering earnings growth in FY15, we estimate Sun to generate free cash flow of Rs 63bn over FY13‐15E. That coupled with the cash balance of Rs 64bn in FY13 is expected to keep the financial health of the company robust and provides strong warchest for inorganic growth. Earning surprises stretched valuations; Initiate Neutral with Target Price of Rs 605 We value Sun Pharma at 24x (maintaining 20% premium to its peers) March 2015e EPS of Rs 25.1 to arrive at our target price of Rs 605 (implying a no meaningful upside from CMP). Hence, we initiate coverage on Sun Pharma with a ‘Neutral’ rating and a target price of Rs 605/share.
NEUTRAL SUNP IN | CMP RS 573
TARGET RS 605 (+6%) Company Data
O/S SHARES (MN) : 2071MARKET CAP (RSBN) : 1187MARKET CAP (USDBN) : 1952 ‐ WK HI/LO (RS) : 650 / 347LIQUIDITY 3M (USDMN) : 18.3FACE VALUE (RS) : 1
Net Sales 112,389 159,192 177,877EBIDTA 50,402 70,308 75,317Net Profit 36,337 50,831 52,050EPS, Rs 17.5 24.5 25.1PER, x 32.7 23.3 22.8EV/EBIDTA, x 11.0 16.2 14.7P/BV, x 7.9 6.1 5.0ROE, % 23.8 26.3 22.0Debt/Equity (%) 1.7 17.9 14.3Source: Phillip Capital India Research Surya Patra (+ 9122 6667 9768) [email protected]
– 61 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / SUN PHARMA INITIATING
Sun Pharma to command premium valuation At CMP of Rs 573, Sun Pharma trades at 22.8x its FY15EPS and 14.7x its FY15EV/EBITDA, which are at ~20% premium to its domestic peers. We expect Sun Pharma to sustain its premium valuation multiples (despite moderated earnings growth in FY15) on the back of its strong US pipeline with potential positive surprises, dominance in the domestic chronic segment, industry leading margin profile and superior earning track record. Additionally, its superb acquisition track record coupled with the available cash surplus of Rs 64bn and estimated free cash generation of Rs 63bn over FY13‐15E provides enough visibility for inorganic growth initiatives. Hence, we value Sun Pharma at 24x (maintaining 20% premium to its peers) March 2015e EPS of Rs 25.1 to arrive at our target price of Rs 605, implying limited upside (6%) from CMP. We initiate coverage on Sun Pharma with a ‘Neutral’ rating and a target price of Rs 605/share. Doxil & Doxycycline overpowered earnings but sustainability is the concern Figures in $ Mn FY12 FY13 FY14 FY15
Key risks to our estimates and valuations are – 1) Higher than expected price competition in US operation, specifically in Doxil, Doxycycline and Taro’s drug portfolio 2) Regulatory obstructions currency fluctuations and 3) Russian Govt’s plant for 50% import substitution by 2020.
1 yr forward band
P/E
14x
18x
22x
26x
0
100
200
300
400
500
600
700
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
Rs
EV/EBITDA
9x
12x
15x
18x
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13
Rs mn
Source: Bloomberg, PhillipCapital India Research
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27 November 2013 / INDIA EQUITY RESEARCH / SUN PHARMA INITIATING
Inorganic move coupled with unique opportunity of Doxil & Doxycycline overpowered US performance
337 234 320 269494 557 621
175457
588617
64818
6575
33
338334
0
200
400
600
800
1000
1200
1400
1600
1800
FY09 FY10 FY11 FY12 FY13 FY14e FY15e
US$
mn
Sun's own US sales Taro's US salesDUSA US sales URL's US sales
35% CAGR
337 234495
692989
1298 1402
00
0
33
129
140150
00
0
0
15
140126
0
200
400
600
800
1000
1200
1400
1600
1800
FY09 FY10 FY11 FY12 FY13 FY14e FY15e
US$
mn
5
7
9
11
13
15
17
19
Doxicycline salesDoxil SalesOther US Sales Share of Doxil & Doxycycline in Over US sales %
Source: Company, PhillipCapital India Research
Strong product pipeline for US generics Potential Generics Mkt Size
(US $mn) Likely Launch Remarks
Duloxetine Hcl(Cymbalta) 3200.0 11‐Dec‐13 multiple filling >10, Shared FTF with several players Nexium IV 45.4 1‐Jan‐14 Settled with AstraZencea Temozolomide(Temodar) 425.0 12‐Feb‐14 Limited Competition.. launch after teva's 180days exclusivity in 12th Mar 2014 Niacin(Niaspan) 1120.0 16‐Mar‐14 Competative launch after teva's 180days exclusivity in 16th Mar 2014 Paricalcitol(Zemplar) 115.0 30‐Mar‐14 Limited Competition.. launch after teva's 180days exclusivity in 30th Mar 2014 Esomeprazole magnesium(Nexium) 2272.0 27‐May‐14 Dr Reddy and Teva settled to launch on on 27 May 2014 Eszopiclone(Lunesta) 800.0 30‐May‐14 multiple settlement by glenmark, sun…Sun n Mylan has already got FA risedronate sodium(Actonel) 1030.0 10‐Dec‐14 Competative launch after teva's 180days exclusivity in Dec 2014 Memantine (Namenda) 1750.0 11‐Jan‐15 Settled with Amneal, Watson, Dr. Reddy's, Lupin, Mylan, Orchid, Sun, Teva, Upsher‐Smith,
and Wockhardt Aripiprazole(Abilify) 3900.0 20‐Oct‐15 Competative launch after teva's 180days exclusivity rosuvastatin calcium(Crestor) 3500.0 1‐Jan‐16 competative launch Imatinib mesylate(Gleevec) 1698.0 Jul‐15 Sun is the FTF n already have TA Atomoxetine(Strattera) 580.0 May‐17 Sun has FTF with multiple players‐ all have approvals from FDA Ambien CR (Coreg CR) 233.0 Dec‐15 URL is ftf n limited to 3(Lupin n Anchen),
Source: Bloomberg, Company, PhillipCapital India Research
Revenue Matrix of Sun Pharma (Rs mn) FY10 FY11 FY12 FY13 FY14e FY15e
Sun's Own US sales 10750 14581 12862 26836 34003 37852Taro's US sales 7957 21854 31956 37652 39534DUSA US sales 977 3988 4586URL's US sales 1769 20598 20350Gross US sales 10750 22538 34716 61537 96240 102322% YoY growth ‐28.4 103.7 54.0 77.3 56.4 6.3% of total sales 27.0 38.8 42.8 53.9 59.9 56.9
No. 1, C‐Block, 2nd Floor, Modern Center , Jacob Circle, K. K. Marg, Mahalaxmi Mumbai 400011 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in
– 66 of 66 –
27 November 2013 / INDIA EQUITY RESEARCH / PHARMACEUTICALS SECTOR
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