ICICI Securities Ltd. | Retail Equity Research December 22, 2015 Monthly Update Healthcare IPOs; warning letter for Sun… Three IPOs within a span of 10 days sums up the sudden rush of healthcare IPOs amid profit booking in the secondary market. This was on the heels of the Syngene IPO, which hit the markets in July. Anti-infective leader Alkem, diagnostic lab Dr Lal’s Pathlabs and hospital chain Narayana Hrudayalaya raised | 1350 crore, | 640 crore and | 600 crore (estimates), respectively. Sun Pharma has received a warning letter from the USFDA for its Halol manufacturing facility. This was expected as the management had revealed that the facility was qualified for official action indicated (OAI) by the USFDA, at the time of Q2FY16 conference call. Note that the facility received 23 observations post September 2014 inspection. The company has been working with external consultants to get Halol back to compliance. However, on the approvals front, the company has received a shot in the arm as it got exclusive generic approval for Novartis’ oncology drug Gleevec from USFDA. The drug is meant for the treatment of chronic myeloid leukaemia. Annual sales of this drug are ~US$2.5 billion. Sun Pharma is eligible to launch this drug in the US on February 1, 2016 while the same will be launched from the US based Cranbury facility. On the domestic approvals front, Cipla, Natco and Hetero Pharma have received approval from the Drugs Controller General of India (DCGI) to launch the generic version of Gilead Sciences' hepatitis C treatment drug Harvoni (Ledipasvir+Sofosbuvir) in India. Natco Pharma plans to launch this combination drug immediately under its brand name Hepcinat LP and through its strategic partners in India. Natco also received approval to launch generic version of Daklinza (Daclatasvir Dihydrochloride). Daclatasvir is used in combination with Sofosbuvir for the treatment of hepatitis C. Natco will market generic Daclatasvir under its own brand NATDAC. The Indian pharmaceutical market (IPM) grew just 8.6% YoY to | 7954 crore in November due to the base effect. The growth was mainly driven by price hikes – 5.0%, volume growth – 1.0%, and new product launches – 2.7%. On a MAT basis, IPM growth was at 14.4% YoY to | 95121 crore. Among our covered companies, Alembic registered highest growth of 18.8% YoY followed by Cipla, DRL, Glenmark and Indoco that registered growth of 15.8%, 12.6%, 11.5% and 10.1%, respectively. Recent headwinds factored in; long term drivers still intact We believe the recent setbacks on account of USFDA issues have already been factored in the benchmark Nifty Pharma index, which is down ~17% from the peak and is trading at 18x FY18E against the historical range of 20- 22x. Going ahead, the Street apprehensions on account of compliance issues and currency volatility in emerging markets are likely to be mitigated by acceleration in US approvals (YTD 139 ANDAs against 105 in CY14 for I- direct coverage) and sustainable growth in domestic formulations. The US and Indian formulations remain main growth drivers for the sector (~50% of overall universe sales) on the back of a strong pipeline and incremental product launches. Our FY15-18 growth expectations for the US and Indian formulations for the I-direct pharma universe were at 15.3% and 17.8%, respectively. Similarly, our FY15-18 growth estimates for EBITDA and PAT for the universe was at 19.7% and 22.8%, respectively. We continue to maintain a positive view on the sector on the back of earnings visibility, consistent operating cash flows, healthy operating margins, relatively low leverage and strong return ratios. Health Check Sector View Outperformer Index Performance as on December 22, 2015 Return (%) 1M 3M YTD 1Y CNX 500 0 1 -3 -2 Nifty -1 0 -6 -6 NSE Pharma -1 -8 6 7 Return (%) Stocks Performance Mcap Company 1M 3M YTD 1Y 21-Dec Sun Pharma.Inds. 5 -15 -8 -6 183865 Lupin -2 -5 25 24 80414 Dr Reddy's Labs -10 -24 -8 -7 51202 Cipla 0 0 3 4 51716 Aurobindo Pharma 1 18 48 52 49167 Cadila Health. -6 1 22 29 40008 Glenmark Pharma. -3 -8 22 22 26499 Divi's Lab. 1 6 35 36 30947 Glaxosmit Pharma 2 -2 2 9 27655 Torrent Pharma. -5 4 29 37 24711 Apollo Hospitals 9 6 28 25 20169 Wockhardt 0 20 59 73 17789 Alembic Pharma 2 -1 51 57 12670 Ajanta Pharma -4 -10 38 40 11301 Pfizer 0 -9 11 17 10969 Ipca Labs. -3 0 2 5 9424 Natco Pharma 9 26 85 107 9836 Biocon 7 11 14 11 9692 Strides Arcolab -5 8 35 42 10489 Jubilant Life 4 25 247 243 6697 Indoco Remedies 8 -1 4 11 2995 Unichem Labs. -7 -1 10 9 2418 Return (%) M Market cap in | crore Price movement 5000 6000 7000 8000 9000 10000 11000 12000 13000 14000 15000 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 4000 6000 8000 10000 12000 CNX Pharma Nifty (RHS) Research Analyst Siddhant Khandekar [email protected]Mitesh Shah [email protected]Nandan Kamat [email protected]
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ICICI Securities Ltd. | Retail Equity Research
December 22, 2015
Monthly Update
Healthcare IPOs; warning letter for Sun… Three IPOs within a span of 10 days sums up the sudden rush of healthcare IPOs amid profit booking in the secondary market. This was on the heels of the Syngene IPO, which hit the markets in July. Anti-infective leader Alkem, diagnostic lab Dr Lal’s Pathlabs and hospital chain Narayana Hrudayalaya raised | 1350 crore, | 640 crore and | 600 crore (estimates), respectively. Sun Pharma has received a warning letter from the USFDA for its Halol manufacturing facility. This was expected as the management had revealed that the facility was qualified for official action indicated (OAI) by the USFDA, at the time of Q2FY16 conference call. Note that the facility received 23 observations post September 2014 inspection. The company has been working with external consultants to get Halol back to compliance. However, on the approvals front, the company has received a shot in the arm as it got exclusive generic approval for Novartis’ oncology drug Gleevec from USFDA. The drug is meant for the treatment of chronic myeloid leukaemia. Annual sales of this drug are ~US$2.5 billion. Sun Pharma is eligible to launch this drug in the US on February 1, 2016 while the same will be launched from the US based Cranbury facility. On the domestic approvals front, Cipla, Natco and Hetero Pharma have received approval from the Drugs Controller General of India (DCGI) to launch the generic version of Gilead Sciences' hepatitis C treatment drug Harvoni (Ledipasvir+Sofosbuvir) in India. Natco Pharma plans to launch this combination drug immediately under its brand name Hepcinat LP and through its strategic partners in India. Natco also received approval to launch generic version of Daklinza (Daclatasvir Dihydrochloride). Daclatasvir is used in combination with Sofosbuvir for the treatment of hepatitis C. Natco will market generic Daclatasvir under its own brand NATDAC. The Indian pharmaceutical market (IPM) grew just 8.6% YoY to | 7954 crore in November due to the base effect. The growth was mainly driven by price hikes – 5.0%, volume growth – 1.0%, and new product launches – 2.7%. On a MAT basis, IPM growth was at 14.4% YoY to | 95121 crore. Among our covered companies, Alembic registered highest growth of 18.8% YoY followed by Cipla, DRL, Glenmark and Indoco that registered growth of 15.8%, 12.6%, 11.5% and 10.1%, respectively. Recent headwinds factored in; long term drivers still intact We believe the recent setbacks on account of USFDA issues have already been factored in the benchmark Nifty Pharma index, which is down ~17% from the peak and is trading at 18x FY18E against the historical range of 20-22x. Going ahead, the Street apprehensions on account of compliance issues and currency volatility in emerging markets are likely to be mitigated by acceleration in US approvals (YTD 139 ANDAs against 105 in CY14 for I-direct coverage) and sustainable growth in domestic formulations. The US and Indian formulations remain main growth drivers for the sector (~50% of overall universe sales) on the back of a strong pipeline and incremental product launches. Our FY15-18 growth expectations for the US and Indian formulations for the I-direct pharma universe were at 15.3% and 17.8%, respectively. Similarly, our FY15-18 growth estimates for EBITDA and PAT for the universe was at 19.7% and 22.8%, respectively. We continue to maintain a positive view on the sector on the back of earnings visibility, consistent operating cash flows, healthy operating margins, relatively low leverage and strong return ratios.
Exhibit 1: Summary of USFDA approvals for November 2015
[5
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeAjanta Pharma Memantine Hydrochloride CNS Forest Labs Namenda US$ 1.1 billionAurobindo Pharma Sildenafil Citrate Erectile Dysfunction Pfizer Revatio US$ 300 millionAurobindo Pharma Risedronate Sodium Osteoporosis Warner Chilcott LLC Actonel US$ 180 millionAurobindo Pharma Methylprednisolone Sodium Succinate Anti-Allergy Pharmacia & Upjohn Solu-Medrol US$ 102 millionAurobindo Pharma Loperamide Hydrochloride GI Johnson & Johnson Imodium US$ 9.7 millionJubilant Life Sciences Paroxitine Hydrochloride Anti-depressant Apotex Technologies Paxil NALupin Ethinyl Estradiol; Norethindrone Acetate Contraceptive Warner Chilcott LLC Estrostep NALupin Levonorgestrel ; Ethinyl Estradiol Oral Contraceptive Teva Seasonale US$81 millionStrides Acrolab Dutasteride Nephrology Glaxo Smith Kline Avodart US$ 467 millionSun Pharma Risedronate Sodium Osteoporosis Warner Chilcott LLC Actonel US$ 180 million
Company Drug Name Therapeutic Area Innovator company Generic Version of Market SizeAurobindo Pharma Palonosetron Hydrochloride Anti-Nausiatic Helsinn Hlthcare Aloxi 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 and JVs
Strides Arcolab completes amalgamation with Shasun Pharma Strides Arcolab has amalgamated Shasun Pharmaceuticals with effect from November 19, 2015 and Shasun Pharma share of | 2 each was suspended from trading on stock exchanges. Under the amalgamation scheme, Shasun shareholders will get five equity shares of | 10 each of Strides Arcolab for every 16 equity shares of | 2 each of Shasun Pharmaceuticals. With the merger, Strides Arcolab has changed its name to Strides Shasun Ltd. DRL signs agreement with Alchemia for generic anti-coagulant drug DRL has purchased worldwide exclusive intellectual property rights for Fondaparinux sodium, its generic anti-coagulant drug from Australian partner, Alchemia Ltd. Alchemia has received US$17.5 million from DRL as consideration for the sale and the agreement is effective July 2015. Fondaparinux is a generic version of the anticoagulant drug Arixtra, which is used in the treatment of deep vein thrombosis (DVT) and pulmonary embolism (PE). It is also indicated for the prevention of DVT after major surgery, such as knee and hip replacement. Sun Pharma enters into agreement with Weizmann Institute, IDIS Sun Pharma has entered into a tripartite research and option agreement with Israel-based Weizmann Institute of Science and Spain’s Health Research Institute of Santiago de Compostela (IDIS) to develop products (currently under animal trials) for the treatment of neurological diseases like brain stroke and glioblastoma (a type of brain cancer). Sun Pharma divests Ohio unit Sun Pharma's subsidiary has entered into an agreement with Nostrum Laboratories Inc. (Nostrum) for the divestment of the Bryan (Ohio) unit in the US. This is a part of its manufacturing consolidation in the US. According to the deal, this subsidiary of Sun Pharma has divested its unit as a going concern along with employees and related products to Nostrum. Cipla plans to transfer consumer healthcare business to wholly-owned subsidiary Cipla plans to transfer its consumer healthcare business to a wholly-owned subsidiary Cipla Health. The company's board has approved the transfer of the consumer healthcare business to Cipla Health Ltd on a going concern basis by way of a slump sale for a lumpsum consideration of | 16 crore.
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Biocon partners with Novartis to market Diabetes drugs Biocon's arm NeoBiocon partnered with Novartis Middle East FZE to market diabetes drugs Jalra and Jalra-M in the UAE. The partnership will help NeoBiocon expand its product offerings in the metabolics segment and will immensely benefit diabetics in UAE. Alembic Pharma enters into exclusive agreement with Novartis Alembic Pharma’s associate company Rhizen Pharmaceuticals SA has entered into an exclusive worldwide license agreement with Novartis for the development and commercialisation of a lead compound that could be used in the treatment of human airway disorders. Rhizen will receive an upfront payment and is eligible to receive development, regulatory and sale milestones payments. AHLL offers world class diabetes care to Malaysia populace Apollo Health & Lifestyle (AHLL) has announced a collaboration with Ramsay Sime Darby Healthcare (Ramsay) to offer world class diabetes care to people of Malaysia. This partnership is aimed at reducing the burden of disease for the people of Malaysia. Capex, investments, fund raising
Strides Shasun to raise funds for expansion, debt repayment, corporate purposes Strides Shasun is planning to raise up to | 1,500 crore to fund expansion, debt repayment and other corporate purposes and has sought fresh approval from its shareholders. The company may issue equity shares on a private placement basis, issue convertible bonds or such other equity linked instruments or a mix of them. Cadila Healthcare receives approval for fresh equity infusion of | 5000 crore Cadila Healthcare has received FIPB approval for fresh equity infusion of up to | 5,000 crore through qualified institutional placement on a private placement basis for the expansion of the business. Lawsuits, court rulings, settlements
DRL countersues AstraZeneca Dr Reddy’s (DRL), which is currently facing a law suit from AstraZeneca over the usage of purple colour for generic version of Nexium, has filed a complaint in a US court alleging that the latter knew about its plans to use the same colour in the capsules. DRL has countersued AstraZeneca for two reasons. Firstly, it has objected to the fact that it cannot use purple colour and queried why anybody would object on usage of certain colour. Secondly and importantly the contention is that they always knew that DRL will be using purple colour for the generic version of Esomeprozole. Natco Pharma settles patent infringement suit with Gilead Natco Pharma and its partner Alvogen (that had Para IV filing for generic version of Tamiflu) have settled a patent infringement suit with Gilead Sciences Inc and others over Tamiflu, in a US court. Under the terms of the settlement, Natco's partner Alvogen will be able to market the oseltamivir phosphate capsules (gTamiflu) before the expiration of the paediatric exclusivity period listed (February 23, 2017). Aurobindo resolves pending patent litigation with Acorda therapeutics Acorda Therapeutics has entered into a settlement with Aurobindo Pharma to resolve pending patent litigation on Ampyra (dalfampridine) extended release tablets. As a result, Aurobindo Pharma will be permitted to market a generic version of Ampyra in the US at a specified date in FY27 or potentially earlier under certain circumstances.
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Price cuts, new launches, recalls
Cipla, Natco receive approval for Hepatitis C combination in India Cipla, Natco Pharma and Hetero Pharma received approval from the Drugs Controller General of India (DCGI) to launch generic version of Gilead Sciences' hepatitis C treatment drug Harvoni (Ledipasvir + Sofosbuvir) in India. Natco plans to launch this combination drug immediately under its brand name Hepcinat LP and through its strategic partners in India while Cipla have already launched the product in India under the brand name Hepcvir-L. Natco Pharma receives approval for generic Daclatasavir in India Natco Pharma has received approval from the Drugs Controller General of India (DCGI) to launch generic version of Daklinza (Daclatasvir Dihydrochloride). Daclatasvir is used in combination with Sofosbuvir for the treatment of hepatitis C. Natco will market generic Daclatasvir under its own brand NATDAC, and through its strategic partners in India. Strides Shasun receive approval to manufacture Hepatitis C drug Strides Shasun has received approval from the Drugs Controller General of India (DCGI) to launch the generic version of Gilead’s Sovaldi used for treatment of Hepatitis C. The company has received approval for manufacturing a generic version of Sofosbuvir 400 mg. The product will continue to be marketed under the brand name Virso in India and overseas. Cadila Healthcare launches Tenglyn in India Cadila Healthcare launched Tenglyn - Teneligliptin 20 mg tablets, an anti-diabetic drug. Tenglyn - Teneligliptin belongs to a new class of oral anti-diabetic agents, Gliptins. Tengyln will be used for patients suffering from Type-II Diabetes. Import alerts, warning letters, 483 observations
Sun Pharma’s Halol facility receives warning letter from USFDA Sun Pharma has received a warning letter from the USFDA for its Halol manufacturing facility. This was expected as the management had revealed that the facility was qualified for official action indicated (OAI) by the USFDA, at the time of Q2FY16 conference call. Note that the facility had received 23 observations post the September 2014 inspection. The company has been working with external consultants to get Halol back to compliance.
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Exhibit 2: Patent litigations in last 12 months
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Month Innovator ANDA Filer Brand Name API Used for
Dec-15 UCB Inc. InvaGen Pharma Zyrtec-D Cetirizine Respiratory
Source: Bloomberg, ICICIdirect.com Research
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IPM grows just 8.6% in November due to base effect • The Indian pharmaceutical market (IPM) grew just 8.6% YoY to | 7954
crore in November due to the base effect. The growth was mainly driven by price hikes – 5.0%, volume growth – 1.0% and new product launches – 2.7%
• Drugs under the NLEM list witnessed growth of 4.8% YoY to | 975 crore while non-NLEM drugs posted growth of 9.3% to | 6626 crore. Volume growth in NLEM and non-NLEM was 0.3% and 1.1%, respectively
• Among our covered companies Alembic registered highest growth of 18.8% YoY followed by Cipla, DRL, Glenmark and Indoco registering growth of 15.8%, 12.6%, 11.5% and 10.1% respectively.
• Therapy wise, 10 therapies have outpaced the IPM growth. Notable among them with growth rates- anti-diabetic – 16.1%, Dermatology – 7.9%, Gastro Intestinal 9.8%, Anti-Infective – 7.2%, Respiratory – 12.9% and CVS – 8.2%.
• In all, 303 new brands were launched in November 2015 • On a MAT basis, IPM growth was at 14.4% YoY to | 95121 crore • Domestic companies have grown 9.1% while MNCs have grown 7.0% in
October 2015 Exhibit 3: Domestic formulations - growth trend
12.8 15
.3
14.0
19.9 21
.7
18.4
9.612
.5 15.3
20 12.7
21.8
8.6
-5
0
5
10
15
20
25
Nov
-14
Dec-
14
Jan-
15
Feb-
15
Mar
-15
Apr-1
5
May
-15
Jun-
15
Jul-1
5
Aug-
15
Sep-
15
Oct-1
5
Nov
-15
(%)
Indian Pharma Market[
Source: AIOCD data base, ICICIdirect.com Research
Exhibit 4: Companies growth in domestic market in November, 2015
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