ICICI Securities Ltd. | Retail Equity Research August 13, 2015 Annual Update Steeplechase run continues amid new hurdles Pharma stocks had an eventful FY15 with handsome gains on the back of a re-rating (contrary to our expectation), few M&A deals and scores of compliance issues involving the USFDA. In this report, we have tried to summarise events that influenced stock returns in FY15. We have also highlighted major events to watch in FY16 that may influence the returns for each company. The sector maintained its outperformance over the Nifty as well as broader indices in FY15. After remaining a laggard till the first quarter of FY15, pharma stocks staged a comeback in the remaining fiscal on the back of rejuvenated buying, contrary to our expectations. There are two notable aspects to this shift - 1) Consolidation in the cyclical space after the swift rally on hopes of progressive steps towards ground changing reforms by the newly elected government and 2) consensus beating numbers by most pharma players in H1FY15 on the back of US traction and a recovery in domestic formulations. The earnings momentum was lost in the second half, however, with the slowdown in approvals in the US, increased instances of adverse USFDA scrutiny and currency headwinds in the emerging markets. On the regulatory front, some players from the universe faced increased USFDA scrutiny with Ipca receiving as many as three import alerts. Established players such as Sun, DRL, Lupin and Cadila also received Form 483 observations. The fiscal also witnessed Sun’s acquisition of Ranbaxy in an all-stock transaction and scores of other M&A deals. Notable among them were the Strides-Shasun merger and Aurobindo’s acquisition of US based Natrol. On the financial front (ex-Sun), the I-Direct healthcare universe turnover grew ~15% YoY to | 95469 crore whereas the EBITDA and adjusted PAT grew 9% and 8% to | 20630 crore and | 12111 crore, respectively. Overall EBITDA margins were at 21.6%, declining 130 bps YoY due to higher remedial expenses, incremental R&D spend, currency fluctuation in the emerging markets, high base and absence of high value product launches in the US. Aggregate US sales (ex-Sun) for the select pack of the universe grew ~24% YoY in FY15. With very few approvals and absence of big ticket launches, the growth was mainly driven by the base business. Aggregated domestic formulations (ex-Sun) for the select pack of the universe grew ~15% YoY. As per the secondary sales data released by AIOCD, IPM, as a whole, grew ~13% in FY15 vs. 6.2% growth recorded in FY14. Healthcare Sector Sector View Outperformer Stocks Performance (% returns as on March 31, 2015) Company 1Y 2Y 3Y 5Y FY16 (YTD) Strides Arcolab 254 264 442 846 22 Ajanta Pharma 211 623 1958 5267 64 Natco Pharma 165 396 507 1543 42 Indoco Remedies 161 541 603 631 21 Aurobindo Pharma 140 748 957 563 22 Torrent Pharma. 124 248 288 365 19 Lupin 116 223 286 536 25 Cipla 87 89 137 117 0 Sun Pharma.Inds. 78 152 264 487 4 Cadila Health. 71 139 136 229 11 CNX Pharma 68 116 155 220 9 Apollo Hospitals 50 65 118 288 14 Glenmark Pharma. 40 71 157 197 30 Dr Reddy's Labs 37 100 102 184 6 CNX 500 34 57 65 62 2 Divi's Lab. 32 86 143 180 6 Nifty 27 49 60 62 1 Biocon 12 78 108 79 10 Jubilant Life -2 -6 -18 -50 43 Unichem Labs. -10 25 65 30 -23 Ipca Labs. -25 21 93 145 -7 YTD: till 10 August, 2015 Currency Movement 70 80 90 100 110 120 130 140 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 USDINR GBPINR EUROINR INRJPY Quotes have been indexed to 100 with base as March 28, 2014 [ Price movement 100 120 140 160 180 200 220 240 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 CNX Pharma Nifty Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Nandan Kamat [email protected]
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ICICI Securities Ltd. | Retail Equity Research
August 13, 2015
Annual Update
Steeplechase run continues amid new hurdles Pharma stocks had an eventful FY15 with handsome gains on the back of a re-rating (contrary to our expectation), few M&A deals and scores of compliance issues involving the USFDA. In this report, we have tried to summarise events that influenced stock returns in FY15. We have also highlighted major events to watch in FY16 that may influence the returns for each company. The sector maintained its outperformance over the Nifty as well as broader indices in FY15. After remaining a laggard till the first quarter of FY15, pharma stocks staged a comeback in the remaining fiscal on the back of rejuvenated buying, contrary to our expectations. There are two notable aspects to this shift - 1) Consolidation in the cyclical space after the swift rally on hopes of progressive steps towards ground changing reforms by the newly elected government and 2) consensus beating numbers by most pharma players in H1FY15 on the back of US traction and a recovery in domestic formulations. The earnings momentum was lost in the second half, however, with the slowdown in approvals in the US, increased instances of adverse USFDA scrutiny and currency headwinds in the emerging markets. On the regulatory front, some players from the universe faced increased USFDA scrutiny with Ipca receiving as many as three import alerts. Established players such as Sun, DRL, Lupin and Cadila also received Form 483 observations. The fiscal also witnessed Sun’s acquisition of Ranbaxy in an all-stock transaction and scores of other M&A deals. Notable among them were the Strides-Shasun merger and Aurobindo’s acquisition of US based Natrol. On the financial front (ex-Sun), the I-Direct healthcare universe turnover grew ~15% YoY to | 95469 crore whereas the EBITDA and adjusted PAT grew 9% and 8% to | 20630 crore and | 12111 crore, respectively. Overall EBITDA margins were at 21.6%, declining 130 bps YoY due to higher remedial expenses, incremental R&D spend, currency fluctuation in the emerging markets, high base and absence of high value product launches in the US. Aggregate US sales (ex-Sun) for the select pack of the universe grew ~24% YoY in FY15. With very few approvals and absence of big ticket launches, the growth was mainly driven by the base business. Aggregated domestic formulations (ex-Sun) for the select pack of the universe grew ~15% YoY. As per the secondary sales data released by AIOCD, IPM, as a whole, grew ~13% in FY15 vs. 6.2% growth recorded in FY14.
Healthcare SectorSector View
Outperformer
Stocks Performance (% returns as on March 31, 2015) Company 1Y 2Y 3Y 5Y FY16 (YTD)
Strides Arcolab 254 264 442 846 22
Ajanta Pharma 211 623 1958 5267 64
Natco Pharma 165 396 507 1543 42
Indoco Remedies 161 541 603 631 21
Aurobindo Pharma 140 748 957 563 22
Torrent Pharma. 124 248 288 365 19
Lupin 116 223 286 536 25
Cipla 87 89 137 117 0
Sun Pharma.Inds. 78 152 264 487 4
Cadila Health. 71 139 136 229 11
CNX Pharma 68 116 155 220 9
Apollo Hospitals 50 65 118 288 14
Glenmark Pharma. 40 71 157 197 30
Dr Reddy's Labs 37 100 102 184 6
CNX 500 34 57 65 62 2
Divi's Lab. 32 86 143 180 6
Nifty 27 49 60 62 1
Biocon 12 78 108 79 10
Jubilant Life -2 -6 -18 -50 43
Unichem Labs. -10 25 65 30 -23
Ipca Labs. -25 21 93 145 -7YTD: till 10 August, 2015 Currency Movement
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Quotes have been indexed to 100 with base as March 28, 2014 [
After re-rating, product approvals, execution key for sustainability
The benchmark CNX Pharma gained 68% in FY15, reflecting a re-rating wave across the sector. Note that in FY09-14, prices were driven mainly by strong earnings momentum. FY15 witnessed adjustment of forward PE multiple from a historical range of ~18-20x to 23x. This, we believe, was a culmination of conviction based on earning consistency, adaptability to the changes, conducive business environment, especially in the US and resilience to structural challenges both in India and abroad. We have seen a marked improvement in balance sheets for most players attributable to an improvement in performance and consistent generation of free cash flows. Hence, higher valuations and higher premium vis-à-vis the benchmark has become a ‘’new normal’’ phenomenon.
In FY16, we have seen some consolidation in the pharma space as after a relentless run-up in FY15, which drove some stocks way ahead of valuations (higher adjusted), prices have started adjusting to their intrinsic values. The CNX Pharma index has corrected ~10% from the peak. Going ahead, the expected slowdown in Q1 and, to some extent, Q2 numbers is likely to keep the rally in check even as the focus shifts to the USFDA approvals pace and the consolidation exercise.
Major areas of concerns, going ahead, include increased and sudden scrutiny of the USFDA that is likely to keep most pharma players on the tenterhooks. Although managements of most companies have sounded confident regarding the cGMP compliance the ball will always be in the USFDA’s court as the agency tries to balance between expedition of approvals to achieve its own target of ~90% clearance of the approvals backlog by September 2017 and maintaining the quality standards adherence. Another developing concern is the sharp depreciation of some currencies in some emerging economies. These markets comprise ~26% of the overall universe turnover and have witnessed 15-40% depreciation vis-à-vis the US$, thus converting into translation losses for most players. In the near future, no respite is expected in the currency issues of these economies.
To conclude, US and Indian formulations remain the main growth drivers for the sector on the back of a strong pipeline and incremental product launches. In general, healthy operating margins, relatively low leverage and strong return ratios are some of the other attributes for most pharma players. Lupin and DRL are our top picks from the large cap pharma space whereas Cadila, Aurobindo, Torrent and Ajanta are our picks from the midcap pharma space.
Exhibit 1: One year forward PE of CNX pharma and Sensex
Biocon Dr Reddy's Labs Glenmark Pharma Lupin Sun Pharma
Source: Company, ICICIdirect.com Research
Exhibit 9: US market performance of select companies in FY15 (growth %)
40
56
17
1
16
37
0
10
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30
40
50
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Aurobindo Cadila Dr Reddy's Glenmark Lupin Sun Pharma TorrentPharma
(%)
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd. | Retail Equity Research
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Apollo Hospitals
Profitability of new hospitals key for overall margin improvement
FY15 Highlights • Revenues grew 18% YoY in FY15 driven by 13% growth in
hospital segment and 31% growth in the pharmacy segment • However, higher growth in the low margin pharmacy business
led to a contraction in EBITDA margin by 114 ps YoY • Apollo has acquired Nova Specialty Hospitals, which owns a
chain of 11 facilities across eight cities, and will add to Apollo's network of 45 modular operation theatres. Also, it acquired Hetero Med Solutions, which added 320 pharmacy stores to the company’s pharmacy business from Q1FY16
• In addition to this, it has tied up with Sanofi India to launch 50 Apollo Sugar Clinics
• The company has added only 510 beds in FY15 against planned beds addition of 1000. This was due to a delay in construction work and clearances
• Inpatient average length of stay improved to 4.43 days in FY15 vs. 4.54 days in FY14) while average revenue per occupied bed improved to | 25381 per day vs. | 23684 per day
• Newly commissioned hospitals reported a | 7.5 crore loss at the EBITDA level affecting overall margins. On the other hand, hospitals that were commissioned in FY13 (Vanagaram & Jayanagar) reported EBITDA of | 6.8 crore during the year
• It added 242 stores and closed 52 stores taking total net addition to 190 stores. As on March 31 2014, total stores count was 1822
What to Watch • The company is planning to add 875 beds in FY16 including
among others- North Bangalore 180, Chennai Main 30, Navi Mumbai 350, Indore 65 and Vizag 250
• We expect the company to add ~415 standalone pharmacy stores including addition of 320 stores of Hetero
• We expect robust revenue growth of ~ 24% YoY in FY16E due to volume increase on new hospitals and pharmacy stores addition
• Even on the EBITDA margins front, we expect at least 150 bps improvements as the pressure on margins due to 1) newly commissioned hospitals and 2) higher growth in the low margin pharmacy space is likely to be outweighed by incremental contribution from earlier hospitals and pharmacies
Ajanta Pharma
FMCG attributes in pharma mould justify high valuation
FY15 Highlights • The company has maintained its strong growth trajectory in
FY15. Revenues grew 23% YoY driven by both exports (23% growth) and the domestic formulations (25% growth).
• The growth was driven by 74 new product launches in India and other exports markets including 12 for the first time in India.
• EBITDA margins also improved ~300 bps to 34% on the back of an improved product mix
• The global field force strength has gone up from 450 to 572 in FY15
• R&D spend was ~5% of revenues in FY15 • Total 25 ANDAs have been filed in the US market, out of which
two have been approved. Sales in FY15 accounted for | 4 crore
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ICICI Securities Ltd. | Retail Equity Research
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What to watch • The company has guided for 32-34% EBITDA margins for FY16
with 16-18% revenue growth. In the domestic market, it expects ~25% YoY growth while in exports APL expects 14-15% growth on a higher base
• The company plans to file at least six ANDAs in FY16 • Capex guidance for FY16 - | 180-200 crore • We expect higher US traction on the back of recent approval for
three respiratory products from the USFDA Aurobindo Pharma
Robust product basket bodes well for future
FY15 Highlights • The company registered yet another strong yearly performance
backed by strong US growth (42% YoY) besides Actavis European acquisition. Revenues increased 50% YoY in FY15
• Despite the loss making Actavis integration, EBIDTA margins were at ~21% mainly on the back of robust US traction
• The company has also forayed into the US nutritional supplement segment by acquiring US based bankrupted company Natrol Inc
• During the year, the company filed 40 ANDAs in the US and received approvals for eight. Cumulatively, Aurobindo has filed 376 ANDAs, of which 166 are final approvals, 27 tentative approvals and is awaiting approvals for 183 ANDAs. Also, 43 injectable filings are under review
• Gross debt stood at US$714 million (~98% forex debt) in FY15 with cash of ~US$75 million
What to watch • The company expects a bottomline break-even at the Actavis
European business in FY16. It also expects to transfer 50% of Actavis products to India in the next 12-18 months
• Actavis sales were US$400 million in FY15 and are expected to grow at mid-single digits
• It expects gross margins to remain at current level of ~54% • We expect initial margin pressure, on account of Actavis and
Natrol, to ease further on the back of incremental high margin US launches
• We expect continued traction in the US, backed by robust product pipeline (183 pending approvals) and niche launches.
Exhibit 10: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder ANDA Filer Date
FY15 Highlights • The company initiated steps for the Syngene listing (which was
eventually concluded recently). In September 2014, Biocon bought back the 7.69% stake held by GE Equity International Mauritius in Syngene at | 2800 crore. In January 2015, the company sold a 10% stake in Syngene to Silver Leaf Oak at a valuation of | 3800 crore
• Its insulin Glargine was approved by COFEPRIS, the Mexican health authority, through its partner PiSA Farmacéutica (Pisa). The combined market for Insulin Glargine in Mexico is estimated to be in excess of US$40 million
• Operationally, the bio-pharmaceutical segment continues to struggle for one reason or the other. Even the branded formulations segment is witnessing a structural slowdown due to portfolio restructuring
• The revenues grew just 7% YoY in FY15 mainly due to portfolio rationalisation in the branded business and capacity constraints/pricing pressure in its bio pharmaceutical business
• Margins also contracted ~147 bps mainly due to increase in R&D
What to watch • The unlocking of Syngene and the management’s commentary
towards utilisation of funds from unlocking • The company expects five biosimilars in Phase III clinical trials by
the end of FY16 • The Malaysian insulin facility is likely to start shipments to
emerging markets from FY17 • The company plans to foray into ~| 330 crore Indian disposable
insulin device segment in FY16
Cadila Healthcare
US growth trajectory key for overall growth
FY15 Highlights • Cadila’s cumulative ANDAs stood at 260, of which, it has
received approvals for 99. In FY15, the company launched nine products, received eight approvals and filed 38 ANDAs.
• Revenue was increased 20% YoY mainly on the back of a steep US growth trajectory driven by aggressive filings and launches in the last few quarters. Margins expanded sharply by ~360 bps in FY15 mainly due to a better product mix
• The company launched a biosimilar drug of Adalimumab in India for the treatment of auto immune disorders. The drug will be marketed under the brand name 'Exemptia' at a cost that will be one-fifth of the innovator product Humira by US based AbbVie. It expects to clock sales of | 100-150 crore in three to five years.
What to watch • The management has given a sales guidance of | 10,000 crore
with EBITDA margin of 21% • It expects to file 40 ANDAs with the USFDA and launch ~20
products in FY16 including niche launches like gAsacol HT and gPrevacid
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ICICI Securities Ltd. | Retail Equity Research
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Exhibit 11: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder Filing Date
Strattera attention-deficit hyperact atomoxetine hydrochloride Eli Lilly and Co. 27-Oct-10 [
Source: Bloomberg, ICICIdirect.com Research
Cipla
Next 18-24 months crucial for scalability
FY15 Highlights • Cipla was the first company to launch Salmeterol Fluticasone
inhaler (Advair) in the European markets • The company has started supplying Nexium formulations to
Teva, which the latter launched under exclusivity in the US. Cipla has cost plus profit sharing arrangement with Teva for this product
• It has launched generic version of Gilead’s hepatitis C drug Sovaldi (Sofosbuvir) in India under the brand name ‘Hepcvir’. It has also entered into an In-licensing agreement with Gilead for manufacture and distribution of Sofosbuvir, Ledipasvir and GS-5816 in 91 countries for the treatment of hepatitis C
• The company has launched its own products (Amlodipine, Meloxicam, Lamotrigine, Topiramate, Valacyclovir and Doxycycline) in the US
• In its endeavour to de-risk the business model by focusing more on front-end it has built its own front-end presence in 17 new markets including Iran, Sri Lanka, Myanmar, Morocco and Algeria.
• Cipla won the Global Fund ARV tender worth US$189 million to be executed over three years starting from January 1, 2015.
• On the financial front, Cipla struggled in FY15 on account of apparent margin pressure, most of which was self inflicted. The dent on margins was on mainly on account of 1) higher R&D spends, 2) higher global level recruitments, and 3) expenses related to transformation from back-end model to front-end model.
• The company’s ANDAs stood at 147 of which it is awaiting 68 approvals (including tentative approvals). It has launched 50 products in the US.
What to watch • The company expects to launch five to six own label generic
products in the US every year for the next three years • Expect strong cash flows to continue from Nexium supply to
Teva in H1FY16 • Cipla has won first gSerroflo (inhaler) tender in Germany. The
company expects to file all tenders for gSerroflo across EU markets in next 18 months.
• The company has done out-licensing deal with Salix for Rifaximin complexes. It expects milestone payment and profit sharing post launch
• Cipla expects respiratory launches in the US market post FY18
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ICICI Securities Ltd. | Retail Equity Research
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• The company expects to start European filing for paediatrics vaccine from FY16 in a partnership with Serum Institute. It plans to commercialise these vaccines in India in the next couple of months
• It expects R&D spend to be in the range of 6-8% for the next three years and capex at ~8% of sales (6% in FY15). Higher capex will be mainly for capacity addition in FY16 across segments
Exhibit 12: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder ANDA Filer Date
Emtriva HIV emtricitabine Gilead Sciences Cipla 20-Aug-12
Pataday allergic or inflammatory eye co olopatadine hydrocholric solutioAlcon Research Cipla 29-Jan-14
Prezista HIV darunavir Tibotec Inc. Cipla 13-Aug-14
Sustiva HIV rivastigmine tartrate Merck Cipla 27-Jun-13[
Source: Bloomberg, ICICIdirect.com Research
Divi’s Laboratories
Capacity additions to hold key
FY15 Highlights • Carotenoids business witnessed robust growth of 38% in FY15. • The company’s operations were affected for a brief period during
October, 2014 on account of cyclone Hudhud in Vishakhapatnam • During the year, the company has capitalized Fixed Assets
amounted to | 230 crore • Revenue growth of 23% was on account strong traction in the
API business. However, it affected overall margins, which declined ~270 bps due to high growth in low margin API business
What to Watch • Carotenoids business is expected to garner sales of ~| 220 crore • Capex for | 500 crore in the next two years for facility at
Kakinada. The facility will be used for both APIs and CS • DSN capacity utilisation likely to peak by FY16
Dr Reddy’s Laboratories
US, India remain strong; to compensate for slowdown in others
FY15 Highlights • The company received nine USFDA 483 observations for its
Srikakulam API facility in Andhra Pradesh • The company has filed three new drug applications (NDAs) DFD-
01, DFD-09 and DFN-11 with USFDA. These proprietary products are focused on developing therapies in dermatology and neurology
• It acquired Novartis‘ Habitrol brand (an over-the-counter nicotine replacement therapy transdermal patch) in the US
• Till date, the company is awaiting 68 ANDA approvals, which includes 43 Para IV filings comprising 13 products with FTF status. Total ANDA filings stood at 220. Global cumulative DMF filings have reached 735
• The company has initiated the acquisition of select rands of UCB India in India, Nepal, Sri Lanka and Maldives for €118 million (| 800 crore) to strengthen its presence in the dermatology, respiratory and paediatric segments. The transaction includes
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ICICI Securities Ltd. | Retail Equity Research
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approximately 350 employees engaged in India operations. The revenues of the acquired business are ~| 150 crore
• It launched Valganciclovir tablets (anti-viral), a therapeutic equivalent generic version of Valcyte tablets under exclusivity in the US. Annual sales of this drug were ~US$440 million
• It entered into an agreement with Hetero Drugs under which Dr Reddy's has been licensed to distribute and market Sofosbuvir tablets (gSovaldi) in 400 mg strength in India. The drug, to be sold under the Resof brand, is indicated for the treatment of chronic Hepatitis C
• On the financial front, lack of major US launches and problems in Russia and Venezuela (macroeconomic and currency related) affected FY15 growth (~12%). The EBITDA margins contracted by 160 bps due to higher R&D spend and forex losses
What to Watch • Clearance for Srikakulam API facility from the USFDA will be
keenly watched • Sharp currency depreciation in Russia and Europe had dented
the company’s FY15 growth. We expect the Russia, Europe business to continue to pose challenges for being lumpy & volatile
• We expect US and India to together hold the key for DRL’s overall growth
• The company expects four or five meaningful USFDA approvals in FY16
• The company expects highest ever R&D cost (~12% of sales) in FY16 to support its innovative pipeline and complex ANDA filings
ICICI Securities Ltd. | Retail Equity Research
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Exhibit 13: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder ANDA Filer Date
Aloxi prevention of acute nausea and palonosetron hydrochloride Roche Dr. Reddy 8-Jul-11
Angiomax anticoagulant for patients underbivalirudin Medicis Pharma Dr. Reddy 28-Apr-11
Copaxone multiple sclerosis glatiramer acetate Teva Pharma Dr. Reddy 11-Sep-14
Dexilant erosive esophagitis, heartburn dexlansoprazole Takeda Pharma Dr. Reddy 31-Mar-11
Diprivan delirium, agitation prpofol Fresenius Kabi Dr. Reddy 25-May-13
Effient acute coronary syndrome prasugrel hydrochloride Eli Lilly Dr. Reddy 12-Mar-14
Folotyn Lymphoma Pralatrexate Allos Therapeutics Dr. Reddy 19-Jun-14
Gleevec leukemia imatinib mesylate Novartis Dr. Reddy 6-Feb-14
Intermezzo insomnia zolpidem tartrate Purdue Pharma Dr. Reddy 2-Apr-13
Ixempra breast cancer epothilone Bristol-Myers Squibb Dr. Reddy 21-Dec-12
Jevtana Kit prostate cancer Cabazitaxel Sanofi-Aventis Dr. Reddy 6-Apr-15
Kuvan Phenylketonuria Sapropterin Dihydrochloride Biomarin Pharma Dr. Reddy 17-Nov-14
Mozobil non-Hodgkin's lymphoma plerixafor Sanofi Dr. Reddy 29-Aug-13
Mucinex bronchial congestion pseudoephedrine hydrochloride Reckitt Benckiser Inc. Dr. Reddy 26-Jun-15
Nexium treatment of acid reflux] esomeprazole sodium AstraZeneca AB Dr. Reddy 17-Jan-08
Pristiq depression desvenlafaxine Pfizer Dr. Reddy 4-Jun-13
Reclast osteoporosis and Paget's Disea zolendronic acid Novartis Pharma Dr. Reddy 20-Feb-13
Treanda chronic lymphocytic leukemia bendamustine Cephalon Inc. Dr. Reddy 20-Dec-13
Uloric febuxostat hyperuricemia Takeda Dr. Reddy 30-Oct-13
Velcade cancer bortezomib Millennium Dr. Reddy 25-Jun-15
Zegerid gastroesophageal reflux diseas omeprazole/sodium bicarbonateSantarus, Inc. Dr. Reddy 15-Aug-12 [
Source: Bloomberg, ICICIdirect.com Research
Glenmark Pharma
Upbeat management guidance based on expected US traction
FY15 Highlights • The company’s US growth was muted on the back of a
slowdown in product approvals while domestic growth remained strong owing to market share gains across therapies
• The RoW business was impacted due to currency devaluation and subdued business environment in Russia
• Revenues grew ~11% YoY. EBITDA margins contracted 337 bps in FY15 due to an adverse product mix, forex losses and higher R&D expenses
• Total USFDA filings as on date are 170. So far, the company has received approvals for 95. From the pending ANDAs, 33 are Para IV applications
• Dahej and Ankaleshwar facilities were successfully inspected by the USFDA in FY15
• The Delhi High Court has restrained Glenmark from manufacturing and marketing anti-diabetes drugs Zita and Zita-Met due to infringement of MSD’s patent. The drug contributes ~| 94 crore (5% of domestic sales and 1.4% of overall sales) to the company.
• Glenmark’s US subsidiary firm will pay US$25 million under a settlement reached with the Texas State’s Attorney General over the pricing investigation case under the Texas Medicaid Fraud Prevention Act
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• Glenmark has drawn up plans to set up a new manufacturing facility at Monroe Corporate Center, North Carolina, US. This facility will be spread over a 100,000 sq ft plot. Glenmark will first begin work on an oral solid unit and, thereafter, set up manufacturing units for injectables and topicals
• Gross debt and cash stood at ~| 3800 crore and ~| 768 crore respectively in FY15
What to watch
• The management expects revenue to grow at 18-20% in FY16 with EBITDA of ~ | 1750 crore
• It expects US to grow at ~20% on the back of 10-12 products approvals. It also expects sales growth of more than 20% in the European market for the next three years on account of the launches, new approvals and specialty products
• It expects its employee cost to increase 15% in FY16 • GRT 17536 is likely to be out licensed. Its phase 2b will start in
Q3FY16 and would be completed by the end of CY16 • Net debt is expected at ~| 2400 crore for FY16. The company
has given net debt/EBITDA guidance of 1.2-1.5x. Exhibit 14: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder ANDA Filer Date
Alimta Cancer pemetrexed disodium Eli Lilly Glenmark 23-Jan-14
Jevtana Kit prostate cancer Cabazitaxel Sanofi-Aventis Glenmark 6-Apr-15
Onglyza type II diabetes Saxagliptin Astrazeneca Glenmark 23-May-14 [
Source: Bloomberg, ICICIdirect.com Research
Indoco Remedies
Domestic growth, Watson deal main catalysts for earnings
FY15 Highlights • The visibility improved substantially after the approvals - EIR for
plant II and first-time approval for plant III. • The growth in the regulated markets was driven by growth in the
US, UK and South Africa. German Metformin tenders also contributed to growth in the regulated markets.
• The company has filed 28 ANDAs with the USFDA and received approval for 11 products. Of the 28 ANDAs, 16 were filed under the Watson deal
• Under the Aspen deal, the company registered | 20 crore of revenues in FY15. A delay in shipments was mainly due to a delay in product approvals in South Africa
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ICICI Securities Ltd. | Retail Equity Research
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• With the acquisition of contract research organisation (CRO) business from Piramal the company has made its maiden foray in the CRO business
What to watch
• Indoco has guided for 20% revenue growth (excluding Watson revenues) with overall margins in the range of 20-21%. It expects 18-20% growth in the domestic market and18-20% growth in European markets.
• The company expects to file five to six products with the USFDA in FY16 on its own and four products under the Watson deal.
• Regarding Watson execution, we expect the company to generate | 90 crore in FY16.
• It expects capex of | 125 crore in FY16 mainly for capacity addition.
Ipca Laboratories
Remedial measures likely to delay normal functioning
FY15 Highlights • The USFDA has put an import alert on two of Ipca’s facilities in
Pithampur (Madhya Pradesh) and Piparia (Silvassa) as they failed to maintain good manufacturing practices. Ipca’s Ratlam facility has already been under import alert since January
• The Ratlam facility also received observations from WHO Geneva subsequent to which the dispatches for institutional tender business were halted for some time. This adversely affected the tender business in FY15
• The company acquired a manufacturing facility from Alpa Laboratories in Pithampur, Indore, for | 72 crore. Alpa owns a wide range of products including a wide variety of over the counter (OTC) drugs in various finished dosage forms for both human and veterinary use. The unit has been approved by the WHO
• Overall financials were affected adversely on account of these cGMP issues. Revenues declined ~4% YoY whereas EBITDA margins contracted 830 bps to 17%
• The Ratlam facility received the cGMP certificate from the UKMHRA. UKMHRA also inspected the Pithampur facility recently without any major observations
What to watch • The company has given a revenue guidance of 7-8% (including
US shipments) with EBITDA margins expected to be around 17-18%. Domestic formulations growth expected to be 12% in FY16
• Normalisation of institutional business is expected from H2FY16 • Updates on remedial measures post receiving the compliance
enhancement plan from consultants, the company will approach the USFDA for re-inspection
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ICICI Securities Ltd. | Retail Equity Research
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Jubilant Life Sciences
Sustainability of pharma important for overall improvement
FY15 Highlights • The company continued to struggle on both fronts - pharma
segments and life science ingredients (LSI) segment. The impact was more severe on EBITDA margins. While revenues were flat YoY, EBITDA margins plunged ~510 bps YoY to 12.6%
• The pharma segment was affected by a decline in the contract manufacturing business (owing to the warning letter at US based Spokane facility) and decline in finished dosage formulations (generics business) owing to slower approvals from the USFDA.
• The LSI segment was affected due to regulatory changes in China and pricing pressure in some sub-segments
• Till FY15, cumulative ANDA filings stood at 72 including 38 approvals. Globally, it has launched 48 products including more than 20 products in the US, 29 in Europe and 25 in RoW markets. The company has 38 pending ANDAs till date.
• The company acquired the remaining stake (82%) in Cadista Holding for ~| 170 crore
• No respite was on the gross debt level as well, which increased to | 4790 crore from | 4390 crore in FY14
What to watch • After the cGMP clearance of Spokane facility by the USFDA, we
expect some recovery in the CMO business (comprises 12% revenues on a normalized basis) in FY16
• The generics business is expected to witness higher traction on account of incremental ANDA approvals and launches
• The LSI segment is expected to see some traction from nutritional products on account of volume improvement
• The company has guided at ~| 350 crore of capex for FY16. The capex has been earmarked for debottlenecking in the pharma segment
• Overall, with a likely improvement in the pharma segment, we expect a recovery in EBITDA margins and on the debt front
Lupin
Gavis acquisition optically bold move; to provide major thrust for US growth
FY15 Highlights • The company registered ~13% YoY revenues growth driven by
~16% growth in the US and ~20% growth in domestic formulations. The Japanese business, on the other hand, grew just ~2% YoY
• An improved product mix and operational efficiency resulted into 250 bps improvement in EBITDA margins to 28.7%
• On the cGMP front, Lupin’s manufacturing facility at Pithampur, near Indore had received six USFDA observations (483s). The facility was audited by USFDA in January, 2015. Despite observations, the company has been continuously receiving USFDA product approval and site-transfer approvals from this facility
• The company acquired a Mexican company Laboratories Grin, which owns ophthalmic portfolio in the Mexican market
• Lupin launched InspiraChamber, an anti-static valved holding chamber (VHC) in the US under a licensing agreement with
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ICICI Securities Ltd. | Retail Equity Research
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InspiRX Inc. The agreement grants Lupin exclusive rights to promote, distribute and market InspiraChamber VHC in the US
• Lupin forayed into the Canadian market by entering into an agreement with Salix Pharma to market GI drugs
• The product pipeline in the US (210 ANDAs filed, 111 approved and 77 launches) includes some limited competition products and Para IV/FTF opportunities
• Lupin has entered into a long term strategic partnership with Merck for implementation of Merck’s general medicines portfolio expansion initiative in emerging markets
• Lupin forays into Brazilian market with the acquisition of a company called Medquimica. This company registered sales of US$31 million in CY14
What to watch • The company expects revenue growth to be a tad below the
earlier guidance of 10-15% with EBITDA margins at 26-28% • Integration of US based Gavis Pharma, which it acquired recently
and raising of debt for the same • Resolution of cGMP Form 483 observations, which the company
received for the Goa facility • Lupin expects 20 ANDA filings in FY16 and 15-20 product
approvals • It expects to receive dermatology ANDA approvals post FY17
and injectable and respiratory approvals post FY18 • The company expects to get gNexium approval by H2FY16 • Lupin and Celon Pharma SA (Celon) will jointly develop a
fluticasone/salmeterol dry powder inhaler (DPI) product, which is a generic version of GSK's Advair Diskus. Lupin will be responsible for commercialisation of the product. Celon will supply the product to Lupin for its commercialisation in the US, Canada, Mexico, and other key markets
ICICI Securities Ltd. | Retail Equity Research
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Exhibit 15: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder Date
Axiron testosterone hypogonadism Eli Lilly 6-Jul-15
Celebrex pain and inflammation benzenesulfonamide Pfizer 5-Mar-13
Detrol LA overactive bladder tolterodine tartrate Pfizer 21-Mar-13
Lyrica diabetic peripheral neuropathy; pregabalin Pfizer Inc. 29-Apr-09
Multaq prevention of cardiovascular hodronedarone hydrochloride Sanofi 21-May-15
Namenda treatment of Alzheimer’s Diseasmemantine hydrochloride Forest Laboratories, Inc 28-Jan-08
Natazia oral contraceptive estradiol valerate and dienoges Bayer 28-Nov-12
Nexium acid reflux esomeprazole magnesium AstraZeneca AB 21-Oct-09
Aloxi prevention of acute nausea and palonosetron hydrochloride Roche 13-Feb-15
Phoslo kidney disease calcium acetate Fresenius Medical 17-Jul-15[
Source: Bloomberg, ICICIdirect.com Research; Included Subsidiaries filings
ICICI Securities Ltd. | Retail Equity Research
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Natco Pharmaceuticals
Copaxone, gSovaldi, domestic oncology and a unique product pipeline
FY15 Highlights • The company tied up with Gilead Sciences to launch Hepatitis C
drug gSovaldi in 91 countries • Revenues increased 12% YoY mainly due to 26% growth in the
domestic oncology segment and 29% growth in the API segment. However, due to the absence of Venezuelan tenders, export formulation growth was muted
• EBITDA expanded ~160 bps YoY to 26% mainly due to lower raw material cost led by a better product mix.
• US ANDAs filings stood at 35 including 19 pending approvals. In FY15, it filed five ANDAs and received two approvals
• Out of the eight companies having Sovaldi tie up with Gilead Sciences for 91 emerging markets, only Natco and Hetero have Sovaldi API manufacturing approvals
What to Watch • We expect the company to launch gCopaxone 20 mg (US$3
billion) in Q3FY16. Sandoz has launched gCopaxone 20 mg in the US and gained ~28% market share (Source: Bloomberg)
• The company also expects to receive USFDA approvals for gEntocort (US$400 million) & gTracleer (US$585 million) in FY16
• Due to first mover and low cost competitive advantage (backed by own API), we expect the company to rake in ~| 120 core in FY16E and ~| 200 crore in FY17E from Sovaldi
• The management expects | 350-400 crore from domestic formulation sales (including more than | 100 crore sales from Sovaldi)
• It plans to file six to seven ANDAs in FY16. Sun Pharmaceuticals
Short term pains to remain but long term story in tact
FY15 Highlights • In a landmark deal, the company acquired Ranbaxy in a shares
swap deal. Under the terms of the agreed deal, Ranbaxy shareholders had received 0.8 Sun Pharma share for each share of Ranbaxy. The deal was closed on April 6, 2015
• The company’s Halol facility received 23 USFDA observations. This facility has contributed 55-60% of the company’s US sales (ex-Taro) in FY14
• Due to Ranbaxy’s acquisition and supply constraint in the US due to USFDA observations for its Halol Facility, FY15 revenue was muted while EBITDA margins contracted to 29.4% in FY15 from 44.7% in FY14
• Taro registered ~14% YoY growth in revenues driven by price hikes even as volumes declined. Operating profit margins improved 440 bps to 61.1% on the back of improved product mix
• The company acquired the opiates business of GlaxoSmithKline (GSK) in Australia including manufacturing sites in Latrobe (Tasmania) and Port Fairy (Victoria) and its portfolio of opiates products (for Analgesics) with annual sales of ~US$70 million
• Sun and Merck entered into an exclusive worldwide licensing agreement for Merck’s investigational therapeutic antibody candidate, Tildrakizumab, (MK-3222), which is currently being evaluated in phase III registration trials for the treatment of
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chronic plaque psoriasis, a skin ailment. Under the terms of the agreement, Sun Pharma will acquire the worldwide rights to Tildrakizumab for use in all human indications from Merck in exchange for an upfront payment of US$80 million
• The company has settled the patent litigation case of Gleevec (Imatinib Mesylate), which is used for the treatment of chronic myeloid leukaemia, with Novartis in the US. Under the settlement agreement, Sun Pharma’s subsidiary may launch its generic version in the US market on February 1, 2016
• The company closed its manufacturing plant in Detroit in an effort to trim a few of its manufacturing facilities in the US. The plant is operated by Sun Pharma’s subsidiary Caraco Laboratories. The plant is one of eight manufacturing facilities that the company owns in the US
• The US product basket remains robust - 597 ANDAs filed, 438 approvals received; some niche launches include Lipodox/ Doxil, Doxycycline, Nystatin, etc. besides complex/limited competition products and plain vanilla generics
What to Watch
• USFDA clearance of Halol and Karkhadi manufacturing facilitations in FY16
• We expect FY16 numbers to be subdued due to Ranbaxy consolidation and remedial measures at Halol and other plants
• Launch of gGleevec in Q4FY16
ICICI Securities Ltd. | Retail Equity Research
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Exhibit 16: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder ANDA Filer Date
FY15 Highlights • Revenues grew 11% mainly due to consolidation of Elder’s
domestic portfolio. The US remained in good shape despite the exclusivity sunset of gCymbalta
• Acquired dermatology arm of Encore Group’s Zyg Pharma. The company has USFDA approved facility in Pithampur (Indore). Torrent expects to start monetising its portfolio within two years
• In the US, Torrent owns a healthy product pipeline (67 filed ANDAs, 48 approvals). It has received six ANDA approvals during the year
• The company has also entered into an exclusive licensing agreement with Reliance Life Sciences for marketing three biosimilars in India
• The company has completed the acquisition of minocycline tablets and capsules from Sun Pharma in April 2015
What to watch • Expects gNexium and gDetrol approval from USFDA in FY16. It
has already launched gAbilify in April 2015. Overall, it is planning 15-18 ANDA filings in the US and eight to 10 product launches
• Commercialisation of the Dahej facility, which was approved by the USFDA will start by the end of FY16
• The company expects the Elder portfolio to be EPS accretive by the second year of acquisition i.e. in FY16
• Expects double digit constant currency growth in Brazil in FY16 • The MR strength is expected to come down by 300 to 3000 by
the end of FY16 in accordance with the rationalisation of the Elder portfolio
• FY16 R&D spend is expected to be more than 6% of sales. The company also plans to add ~400 scientists to its existing R&D team of 600 scientists
Exhibit 17: Notable Para IV Filings Brand Name Indicator Generic Name NDA holder ANDA Filer Date
FY15 Highlights • Revenues of the company grew just ~7% on the back of
formulation exports. Domestic formulations, on the other hand, continued to remain under pressure due to ongoing rationalisation at the distribution level. EBITDA margins dropped to a record low level at ~9% due to pressure in domestic formulations, which fetches high margins
• Domestic formulations struggled during FY15 as the company initiated a portfolio realignment exercise as Unichem had
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initiated conversion from a distribution-driven model to C&F driven model for better working capital management. According to the management’s own admission, ~50% of the domestic portfolio is mature and declining. Similarly, close to 20% of the domestic portfolio is under NLEM
• NLEM impact on two of its major drugs i.e. Losar and Trika led to a | 10.8 crore loss in FY15
• Total ANDA filing till FY15 stood at 34 of which, it has launched 12 products and is awaiting approvals for 17 ANDAs (including two tentative approvals)
• R&D spend for FY15 was 5% of revenues
What to watch • The company has guided for 9-10% YoY growth in FY16 in
domestic formulation sales • The company has guided for | 150 crore capex mainly for
debottlenecking at its Pithampur (API) and Goa plant • It plans to file five to six ANDAs in the US • It is expecting four to six approvals in Brazil
ICICI Securities Ltd. | Retail Equity Research
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Exhibit 18: USFDA approvals for companies under I-Direct coverage in FY15 Date Company Drug Name Therapeutic Area Innovator company Generic Version of Market Size
Jun-14 Alembic Pharms Lamotrigine tablets Anti-epileptic GlaxoSmithKline Lamictal NA
Apr-14 Sun Pharma Oxaliplatin injection Anti-Cancer Sanofi Eloxatin US$1.4billion
Source: USFDA website, ICICIdirect.com Research; * Subsidiary of Sun Pharma
ICICI Securities Ltd. | Retail Equity Research
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Exhibit 19: USFDA approvals for companies under I-Direct coverage in FY15 Date Company Drug Name Therapeutic Area Innovator company Generic Version of Market Size
Jun-14 Sun Pharma Risedronate Sodium tablets (75 mg and 150 mg) Osteoporosis Warner Chilcott Actonel US$ 180 million
Jul-14 Sun Pharma Clonidine Hydrochloride Tablets Hypertension Boehringer Ingelheim PharCatapres US$ 72 million
Aug-14 Sun Pharma Clonazepam Tablets CNS Roche Clonazeepam NA
Sep-14 Sun Pharma Opcicon One Step Anti-Contraceptive Bayer Healthcare Mirena US$81.1 million
Nov-14 Sun Pharma Zolmitriptan CNS IPR Zomig US$ 149 million
Dec-14 Sun Pharma Bupropion Hydrochloride 150mg Tablet Anti-depressant GSK Wellbutrin US$ 268 million
Jan-15 Sun Pharma fexofenadine HCL and pseudoephedrine HCL Anti-allergic Sanofi Allegra-D (OTC) US$ 49.8 million
Apr-14 Sun Pharma Global Niacin tablets CVS Abbvie Niaspan US$ 1.2 billion
Apr-14 Taro Pharma Phenytoin Anti-Epileptic Parke Davis Dilantin US$ 125 million
Source: USFDA, ICICIdirect.com Research; * subsidiaries of Sun Pharma
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Exhibit 20: Tentative USFDA approvals received by companies under I-Direct Universe in FY15 Date Company Drug Name Therapeutic Area Innovator company Generic Version of Market Size
Apr-14 Alembic Memantine Hydrochloride tablets CNS Forest Labs Nameda NA
Mar-15 Aurobindo Pharma Lacosamide Epilepsy USB Inc. Vimpat US$ 365 million
Mar-15 Cadila Ritonavir HIV Abbvie Norvir US$ 400 million
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