ICICI Securities Ltd. | Retail Equity Research July 15, 2016 Monthly Update USFDA plant clearances on the rise… In the last two or three months, there was a marked increase in the receipt of Establishment Inspection Reports (EIR) from the USFDA. EIR receipt indicates that the facility is in compliance with cGMP standards required by the USFDA. Among our covered companies, Cadila‘s Moraiya manufacturing facility received EIR from the USFDA. Lupin’s Goa facility also received EIR with respect to the July 2015 inspection. However, the March 2016 inspection observations (483) are still pending. Alembic also received EIR for Karakahadi API III plant, which was inspected in April 2015. On the Q1FY17 earnings front, we expect companies under I-Direct healthcare to deliver YoY growth of 12.4% on a consolidated basis to | 38162 crore. US sales from the select pack are expected to grow 27.6% to | 12750 crore on the back of 1) rupee depreciation vis-à-vis US$ (5.5% YoY), 2) exclusivity launches (gGleevec by Sun, gGlumetza by Lupin) 3) consolidation of acquisitions and 4) incremental product launches & price hikes (gFortamet by Lupin). However, increased competition in existing products, especially in gAbilify and price erosions, elsewhere, have partly offset overall US growth. Domestic formulations from the select pack are likely to grow ~5.2% YoY to | 7770 crore. NLEM and FDC related issues are likely to impact domestic growth in Q1. Also, currency headwinds in emerging economies such as Russia, Brazil, Venezuela and some African countries will impact the overall performance negatively. We expect the EBITDA of the I-direct healthcare coverage to grow ~14% YoY to | 10017 crore. EBITDA margins are likely to remain strong at ~26% YoY due to a better product mix. We expect the net profit of the I-direct healthcare coverage to grow 19.9% YoY to | 6267 crore mainly due to a strong operational performance and lower taxation. The Indian pharmaceutical market (IPM) grew 7.7% in June 2016. The growth was mainly driven by price hikes – 5.0%, and new product launches – 2.9%, while volumes declined 4.4%. The lower growth was mainly attributable to channel disturbances on account of 1) Fixed Dosage Combinations (FDC) ban imposed by the government on 344 drugs as despite stay by the Delhi HC, some state governments continued with the order, 2) New price list for NLEM drugs based on WPI, which was negative in FY16 and 3) new additions in NLEM 2015 list. Pharma in metamorphosis mode; valuations reflect near term headwinds After enjoying a near seamless journey in the US, thanks to the patent cliff ride, the companies are facing headwinds not only in the US but also in India and some important emerging markets as discussed earlier. By virtue of this, most stocks are down 20-40% from their FY16 peaks. The companies are bracing for the ‘’new normal’’ whereby frequent and random USFDA audits will be common, so will be the cost on remediation and improvement besides capex for alternate arrangements. Secondly, the R&D spend is likely to spike as companies prepare for complex launches in the US such as oncology injectables, respiratory, derma, ophthalmic and biosimilars to mitigate the pricing impact and consolidation. However, this metamorphosis is fraught with front-loaded costs and longer gestation periods. We prefer companies that are best placed to tackle new challenges. Our top picks are Lupin, Dr Reddy’s, Aurobindo, Torrent Pharma, Natco and Syngene. Although there was a rise in EIRs recently, we believe USFDA, NLEM and FDCs related issues are likely to weigh in the near term. Health Check Sector View Neutral Index Performance as on July 13, 2016 Return (%) 1M 3M YTD 1Y CNX 500 6 9 7 2 Nifty 5 9 7 1 NSE Pharma 7 3 -3 -9 Return (%) Stocks Performance Mcap Company 1M 3M YTD 1Y 13-Jul Sun Pharma.Inds. 2 -8 -6 -16 185436 Lupin 14 7 -10 -14 74521 Dr Reddy's Labs 15 15 15 -5 60903 Aurobindo Pharma 3 -1 -12 2 45324 Cipla 6 0 -21 -23 41271 Cadila Health. 15 14 12 -4 37515 Divi's Lab. 5 14 1 24 31027 Glaxosmit Pharma 0 -6 6 3 29688 Torrent Pharma. 6 -3 -1 9 24134 Glenmark Pharma. 10 9 -8 -19 23967 Apollo Hospitals 4 2 -6 2 19146 Biocon 1 30 39 52 14377 Ajanta Pharma 3 9 21 1 14168 Alembic Pharma 8 5 -15 -23 11161 Wockhardt 3 -8 -38 -36 10515 Strides Arcolab 4 6 -10 -7 10391 Natco Pharma 13 30 0 28 10120 Pfizer 5 12 -18 -8 8875 Syngene Int. 6 18 1 NA 8430 Ipca Labs. 1 -5 -37 -32 5919 Jubilant Life -12 -22 -25 56 4904 Unichem Labs. 19 31 11 30 2692 Unichem Labs. 19 31 11 30 2692 Indoco Remedies 2 5 -12 -21 2645 Return (%) M Market cap in | crore Price movement 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 4000 6000 8000 10000 12000 CNX Pharma Nifty (RHS) Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]
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ICICI Securities Ltd. | Retail Equity Research
July 15, 2016
Monthly Update
USFDA plant clearances on the rise… In the last two or three months, there was a marked increase in the receipt of Establishment Inspection Reports (EIR) from the USFDA. EIR receipt indicates that the facility is in compliance with cGMP standards required by the USFDA. Among our covered companies, Cadila‘s Moraiya manufacturing facility received EIR from the USFDA. Lupin’s Goa facility also received EIR with respect to the July 2015 inspection. However, the March 2016 inspection observations (483) are still pending. Alembic also received EIR for Karakahadi API III plant, which was inspected in April 2015. On the Q1FY17 earnings front, we expect companies under I-Direct healthcare to deliver YoY growth of 12.4% on a consolidated basis to | 38162 crore. US sales from the select pack are expected to grow 27.6% to | 12750 crore on the back of 1) rupee depreciation vis-à-vis US$ (5.5% YoY), 2) exclusivity launches (gGleevec by Sun, gGlumetza by Lupin) 3) consolidation of acquisitions and 4) incremental product launches & price hikes (gFortamet by Lupin). However, increased competition in existing products, especially in gAbilify and price erosions, elsewhere, have partly offset overall US growth. Domestic formulations from the select pack are likely to grow ~5.2% YoY to | 7770 crore. NLEM and FDC related issues are likely to impact domestic growth in Q1. Also, currency headwinds in emerging economies such as Russia, Brazil, Venezuela and some African countries will impact the overall performance negatively. We expect the EBITDA of the I-direct healthcare coverage to grow ~14% YoY to | 10017 crore. EBITDA margins are likely to remain strong at ~26% YoY due to a better product mix. We expect the net profit of the I-direct healthcare coverage to grow 19.9% YoY to | 6267 crore mainly due to a strong operational performance and lower taxation. The Indian pharmaceutical market (IPM) grew 7.7% in June 2016. The growth was mainly driven by price hikes – 5.0%, and new product launches – 2.9%, while volumes declined 4.4%. The lower growth was mainly attributable to channel disturbances on account of 1) Fixed Dosage Combinations (FDC) ban imposed by the government on 344 drugs as despite stay by the Delhi HC, some state governments continued with the order, 2) New price list for NLEM drugs based on WPI, which was negative in FY16 and 3) new additions in NLEM 2015 list. Pharma in metamorphosis mode; valuations reflect near term headwinds After enjoying a near seamless journey in the US, thanks to the patent cliff ride, the companies are facing headwinds not only in the US but also in India and some important emerging markets as discussed earlier. By virtue of this, most stocks are down 20-40% from their FY16 peaks. The companies are bracing for the ‘’new normal’’ whereby frequent and random USFDA audits will be common, so will be the cost on remediation and improvement besides capex for alternate arrangements. Secondly, the R&D spend is likely to spike as companies prepare for complex launches in the US such as oncology injectables, respiratory, derma, ophthalmic and biosimilars to mitigate the pricing impact and consolidation. However, this metamorphosis is fraught with front-loaded costs and longer gestation periods. We prefer companies that are best placed to tackle new challenges. Our top picks are Lupin, Dr Reddy’s, Aurobindo, Torrent Pharma, Natco and Syngene. Although there was a rise in EIRs recently, we believe USFDA, NLEM and FDCs related issues are likely to weigh in the near term.
Exhibit 1: Summary of USFDA approvals for June, 2016
[5
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeAurobindo Pharma Hydrocodone Bitartrate And Ibuprofen Pain Management Abbvie Vicoprofen NAJubilant Life Levetiracetam Epilepsy Ucb Keppra NAAurobindo Pharma Amiodarone Hydrochloride CVS Wyeth Pharms Cordarone NAAurobindo Pharma Minocycline Hydrochloride Anti-biotic Medicis Solodyn NACadila Healthcare Gemfibrozil CVS Pfizer Lopid US$ 44 millionNatco Pharma Glycopyrrolate tablets Anti-Ulcerent Merz Pharms Cuvposa NALupin Estradiol and Norethindrone Acetate OC Amneal Pharma Activella US$ 95.6 millionUnichem Donepezil Hydrochloride CNS Eisai Inc. Aricept US$ 52.3 millionGlenmark Pharma Nystatin; Triamcinolone Acetonide Derma G And W Labs Mykacet US$ 37.5 millionTaro Pharma Adapalene gel Derma Galderma Lab Differin NA
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeTaro Pharma BETAMETHASONE VALERATE Dermatology G And W Labs BETA-VAL NAAurobindo Pharma Pregabalin tablets CNS Forest Lyrica NAAurobindo Pharma Omeprazole Gastro Intestinal Astrazeneca Prilosec US$ 185 millionAurobindo Pharma Efavirenz Antivirtal Bristol Myers Squibb Sustiva US$ 150 millionSun Pharma Dalfampridine Multiple Sclerosis Acorda Ampyra NAGlenmark Pharma Olmesartan Medoxomil CVS Daiichi Sankyo Benicar NA
Final Approvals
Tentative Approvals
CNS: Central Nervous System; CVS: Cardiovascular,GI: Gastro Intestinal, NA: Not available; Source: USFDA, ICICIdirect.com Research
M&As, demergers, tie-ups and JVs
Cipla in pact with Russian firm for HIV, Hepatitis C drugs Cipla has inked a pact with Russia's National Immunobiological Company (Nacimbio) to collaborate on HIV and Hepatitis C drugs, entailing an investment of 2.8 billion roubles (~| 290 crore). As per Nacimbio, the company will finalise construction and validation of the manufacturing plant in 2017 and products will start to get commercialised from 2018. Cadila Healthcare acquires two ANDAs from Teva Cadila Healthcare has acquired two ANDAs from Teva that are being divested as a pre-condition to its acquisition of Allergan's generic business. The acquisition would be financed through internal accruals. One product has already been commercialised while the other is in the pipeline (Transdermal patch). The market size of the two ANDAs is ~US$200 million. Apollo Hospitals ties up with HESCG to develop hospital in China Apollo Hospitals has signed an agreement with Chinese infrastructure firm Hainan Ecological Smart City Group (HESCG) to jointly develop an integrated modern healthcare services facility and systems China. HESCG will provide land and funding for the construction, commissioning and equipping the hospital while Apollo will be responsible for planning and commissioning, besides handling the operations and management of the hospital and other related facilities. Torrent Pharma to acquire Glochem's Vizag-based API unit Torrent Pharma will acquire the Vizag API manufacturing facility of Glochem Industries along with a few DMFs as a slump sale on a going concern basis. The API unit was approved by USFDA and European regulatory authorities and will be used by Torrent Pharma for vertical integration of its ANDA filings in the future. The facility currently has three blocks for advanced intermediates manufacturing and four blocks for API manufacturing.
ICICI Securities Ltd. | Retail Equity Research
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Aurobindo Pharma said to enter fray for $1.5 billion Teva portfolio As per media sources, Aurobindo Pharma is considering joining the race to buy assets of over US$1 billion from Teva that are being divested by the Israel-based company in the UK, Ireland and Iceland as a precondition to Teva’s acquisition of Allergan generic business. Price cuts, new launches, recalls, approvals
NPPA cuts prices of 42 drugs NPPA has fixed/revised ceiling prices of 45 scheduled formulations of Schedule-I under Drugs (Price Control) Amendment Order, 2016. Out of the 45, it has capped the prices of 42 essential medicines by reducing their cost by ~15%. The capped drugs are used in the treatment of various ailments including tuberculosis, cancer, cardiac diseases, tuberculosis, asthma, epilepsy, rheumatoid arthritis and depression. Lupin, DRL recall drugs in US over deviated results Lupin Pharma is recalling 59,520 bottles of Lisinopril and Hydrochlorothiazid tablets from US due to deviation from current good manufacturing practice (CGMP). DRL is also recalling 84,240 bottles of Famotidine 10 mg tablets due to an out of specification results has been determined for an individual related substance during stability testing. As per the report, all the recalls are fall under a class III recall category. DRL recalls 9,330 bottles of Sirolimus tablets in US DRL is recalling 9,330 bottles of Sirolimus tablets, used for prevention of organ rejection after kidney transplant, in the US due to presence of impurities. This recalls is fall under a class III recall category. Cadila to launch AG of Asacol HD in US Cadila Healthcare will start selling authorised generic (AG) of Asacol HD (mesalamine delayed release) in the US from August 1, 2016. This drug is used to treat a certain bowel disease (ulcerative colitis). Biocon’s Insulin Glargine Launched in Japan Biocon’s Japanese partner Fujufilm Pharma (FFP) has launched Insulin Glargine in Japan. The company has received approval for its Insulin Glargine from the Japanese regulator in March 2016. Insulin Glargine BS Injection Kit (FFP) has been developed and manufactured by Biocon, and is being commercialised by FFP in Japan. The product is a ready-to-use, prefilled disposable pen with 3 ml of 100IU Insulin Glargine. Lawsuits, court rulings, settlements, regulatory issues
Government relaxes FDI norms in pharma The government has relaxed FDI policy norms for the pharma sector. According to these norms, up to 74% FDI under the automatic route in brownfield projects will be allowed (from 49% earlier) while government approval would be needed beyond 74%. Bombay HC imposes stay order on government move to cap drug prices The Bombay High Court has imposed an interim stay on the government's decision to further cut prices over the negative WPI of 530 drugs. The court said companies need not take any further price cuts over WPI, which would be under the revision of the national list of essential medicines.
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Medicines Patent Pool (MPP) has signed nine new sub-licensing agreements Medicines Patent Pool (MPP) has signed nine new sub-licensing agreements including Aurobindo, Lupin and Cadila for the generic manufacturing of HIV and hepatitis C (daclatasvir) treatments. The agreement sub-licences to produce and sell anti-retroviral drugs and Daclatasvir in 112 low and middle income countries. Cadila receives EIR for Moraiya Facility Cadila‘s Moraiya manufacturing facility has received an Establishment Inspection Report (EIR) from the USFDA. EIR indicates closure of the inspection points (483s) raised based on the inspection carried out between August 28, 2014 and September 05, 2014. Though this is a positive step towards the resolution of the warning letter, it does not indicate resolution of the warning letter. The company is still following up with the USFDA for resolution of the warning letter. Lupin receives EIR from US for Goa, July 2015 Lupin has received Establishment Inspection Reports (EIR) from USFDA for Goa facility, which was inspected in July 2015. However, observations from the March 2016 inspection for the same plant are still being reviewed. Lupin Dabhasa unit gets two observations; voluntary action indicated only Lupin’s Dabhasa facility has received two Form 483 observations from USFDA. The plant was inspected by USFDA from June 29 to July 6, 2016. The inspection has been classified as voluntary action indicated (VAI). Alembic received EIR from USFDA for Karakhadi API unit Alembic has received an Establishment Inspection Report (EIR) from USFDA for Karakahadi API III plant, which was inspected in April 2015. Others
Crisil downgrades Ipca’s long term debt rating Crisil has reduced Ipca’s long term debt and non-convertible debenture rating to AA -/Stable (from AA/Negative) while it has reaffirmed Ipca’s short term debt rating (A1+ rating).
IPM grows 6.4% in June • The Indian pharmaceutical market (IPM) grew 6.4% YoY to | 8460 crore
in June. The growth was mainly driven by price hikes - 3.8%, and new product launches - 3.2% while volumes declined 0.6%
• The fixed dosage combination (FDCs) related market de-grew 14.6% to | 186 crore
• Drugs under the NLEM list declined 1.5% to | 963 crore while non-NLEM drugs posted growth of 8% to | 7120 crore. Volume growth in NLEM was 3% while it declined 1.5% in non-NLEM
• Among companies under I-direct coverage, Indoco, Ajanta and Alembic registered decent growth of 11.5%, 11.4% and 11.3%, respectively. Cipla, Glenmark, Lupin and Sun registered growth of 9.1%, 7.1%. 4.7%, and 3.6%, respectively, while among the worst performers Torrent Pharma de-grew 2.7%
• Therapy wise, 10 therapies have outpaced the IPM growth. Notable among them with growth rates- anti diabetic – 11.7%, Urology – 9.4%, Gastro – 8.8%, Derma – 8.8%, Ophthal– 8.8% and Respiratory—8.2%.
• In all, 324 new brands were launched in June 2016 • On a MAT basis, IPM growth was at 10.6% YoY to | 100017 crore.
Domestic companies have grown 7.6% while MNC companies have grown 2.0% in June 2016
Exhibit 3: Domestic formulations - growth trend
15.3
12.9
13.7
10.6
23.0
3.8
9.7
12.5
9.7
20
6.7 8.1
6.4
-5
0
5
10
15
20
25
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct-1
5
Nov
-15
Dec-
15
Jan-
16
Feb-
16
Mar
-16
Apr-1
6
May
-16
Jun-
16
(%)
Indian Pharma Market
[
Source: AIOCD data base, ICICIdirect.com Research
Exhibit 4: Companies growth in domestic market in June, 2016
Top brands in Indian pharma market Brand Company Therapy June' 16 June' 15 Gr. (%)Corex Pfizer Respiratory 319.8 240.1 33.2Spasmo Prox Wockhardt GI 309.0 215.2 43.6Augmentin GSK Anti-Infectives 302.5 329.6 -8.2Lantus Sanofi Anti Diabetic 291.5 235.5 23.8Galvus Met Novartis Anti Diabetic 290.6 199.7 45.5Clavam Alkem Anti-Infectives 245.3 224.7 9.2Volini Ranbaxy Pain 230.1 206.3 11.5Becosules Sun Pharma Vitamins 219.8 255.6 -14.0Foracort Cipla Respiratory 200.7 179.3 12.0Pan Alkem GI 200.5 177.9 12.7
Source: AIOCD data base Industry acute to chronic therapy ratio percentage…
Acute, 48126.05,
48.1%
Chronic, 31651.12,
31.6%Sub-
Chronic, 20240.24,
20.2%
Source: AIOCD data base ; As per AIOCD MAT June 2016
ICICI Securities Ltd. | Retail Equity Research
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IPM grows 6.4% in Q1FY17 • The Indian pharmaceutical market (IPM) grew 6.4% YoY to | 25411
crore in Q1FY17. The growth was mainly driven by price hikes- 4.4%, and new product launches- 3.1% while volumes declined 1.0%
• The fixed dosage combination (FDCs) related market de-grew 15.2% to | 580 crore
• Drugs under the NLEM list declined 0.2% to | 2989 crore while non-NLEM drugs posted growth of 7.5% to | 21240 crore. Volume growth in NLEM was 0.4% while the decline was 3.4% in non-NLEM
• Among companies under I-Direct coverage Ajanta, Alembic and Glenmark registered decent growth of 10.7%, 9.4% and 8.2%, respectively. Cipla, Sun and DRL registered growth of 5.7%, 4.8% and 1.1%, respectively, while, among the worst performers Lupin and Torrent Pharma de-grew 1.0% and 1.5%, respectively
• Therapy wise, 12 therapies have outpaced IPM growth. Notable among them with growth rates- Anti diabetic – 14.5%, Urology – 10.6%, Derma – 8.6%, CNS– 8.5% and Cardiac—8.1%.
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