Pharma Sector

September ,12 2011 Salim Hajiani

Priti PiyushJigar Shah

Pharma Business Basics Formulation Business (Glenmark,Lupin) API (Active Pharma Ingredient) NCE (New Chemical Entity) NME (New Molecular Entity)

3

Pharma Business Basics

1.Formulation business : Formulationis the process in which different chemical substances,including the active drug ,are combined to to produce final medical product.

2.API :An active Pharma ingredient (API) is the substance of a pharmaceutical drug or a pesticide that is biologically active. Terms in similar use include active pharmaceutical ingredient (API) and bulk active in medicine; in pesticide formulations active substance may be used.

3.NCE/NME :A New chemical entity (NCE), or new molecular entity (NME), is, according to the u.s. Food and drug administration, a drug that contains no active moiety that has been approved by the FDA in any other application submitted under section 505(b) of the Federal food, drug, and cosmetic act.

Drug DevelopmentFormulation studies involve developing a preparation of the drug which is both stable and acceptable to the patient. For orally taken drugs,this usually involves incorporating the drug into a tablet or a capsule. It is important to appreciate that a tablet contains a variety of other substances apart from the drug itself,and studies have to be carried out to ensure that the drug is compatible with these other substances.

Phase Manner Development of DrugClinical Trial Phase I Drug LoadClinical Trial Phase IIClinical Trial Phase III (Feasibility on the basis of Temperature,humidity,oxidation and photolysis (Ultra violet clearance)

Indian Pharma Story

India Pharma sector will lead to US $ 21 b by 2015

The Indian Domestic Pharma Story is founded

on 4 Pillars,What we call as 4 A'

AffordababilityAccessAwarenessAilments

Indian Pharma Market is growing CAGR @ 6% & will

reach to 12,72,121,cr. Market by 2015.

More Details on Ailments.

USFDA Approval in Pharma sector?

1. USFDA approval is needed for launching medicine in open market in US.

2. Drugs are feasible on Temperature,Humidity,Oxidation.

3. Drugs are in line with Medical Formulation for curing the disease or reducing the impact of the diseases.

Latest FDA Approvals ,Launch & Tie ups in Pharma Sector. Glenmark gets USFDA approval for hypertensive drug.

Sun Pharma receive USFDA nod for generic proscar tablet.

Dr. Reddy's resolve patent litigation of generic Lipitor with Pfizer.

Lupin to Market Sanofi's CNS brands in Phillippines.

Dr. Reddy's launches Allegra D24 OTC Tablet in US Market.

Rainbaxy Launches Painkiller in Domestic Market.

Orchid restarts production of API Facility.

The upcoming patent cliff :

The leading global pharmaceutical firms are facing some challenging times as a significant number of patents for branded drugs are set to expire over the next five years. From 2011-2015, the total value (as measured by annual sales) of patent expirations is expected to be around $100 billion, a significant increase from $73 billion in patent expirations over the previous five years. Indian pharmaceutical companies can capitalize on this opportunity due to their first mover advantage, strong process engineering skills and access to low-cost talent.Exa :

Benefits & Precautions of Patent Expiration to Indian Companies1.Globally Competitive

in the generic business

2.The First Mover Advantage

3.Low-Cost Manufacturing Base

4.Deep and Low-cost talent Pool.

1.Focus on Long Term & Niche Segment.

2.Strong Competitive position

3.Backward integration.

Details on Precautions

1.Focus on Complex & Niche Segment :Long-term growth can be generated by focusing in specialized therapeutic areas and/or more complex

molecules.

2.Strong Competitive Positioning : New drug delivery systems can be used to compete with

drugs whose formulation patents have not expired. These segments tend to be less competitive, but

development of such applications requires significant capabilities in both research and marketing.

3.Backward integration:Backward-integrated generic players with captive Active

Pharmaceutical Ingredient (API) manufacturing capabilities are likely to enjoy higher margins.

Domestic Pharma Sector

Growth Rate : 16.5% in 2010.

Highest Market Share : Cipla

Larges selling Brands : Cough Medication “Corex” (Pfizer)

Largest Growing Drugs : Abbott's insulin (27% rise)

Novartis Voveran (6%)

Important comments by Azaz Motiwala on Indian Pharma1. The Global market is expected to grow by 7% to 8% over

next 5 yrs. Reaching an anticipated $1.7 trillion

2. Indian consumer spend 1% of his total income on Drugs & Pharmaceutical,however rise in per capita income will triple the same by 2020.

3. Governments long term vision of making quality health care affordable,at least 50% of Indian population should be covered under health insurance by 2020 against 15% today.

4. Indian health care industry is estimated to be worth of $ 275.6 billion.

5. Indian pharma industry will be in Top 5 in the world by 2020.

Azaz Motiwala ,Founder,Ikon Marketing Consultant

Key Success factor for evaluation of Indian Pharma companies

Price Movements for BSE Health care Index v/s BSE Sensex

GLENMARK PHARMA

Introduction• Research-driven, global, integrated pharmaceutical company

• Leading player in discovery of new molecules

– NCEs (new chemical entity)

– NBEs (new biological entity)

– 13 molecules in various stages of preclinical & clinical development

• Significant presence in Branded Generics across Emerging Economies

• Out-licensing deals with Global Pharma majors re-affirms Glenmark’s strength in discovery

• 12 Manufacturing facilities located in 4 countires

• 5 R&D centres

Business Model Elucidated

Specialty Business : Drug Discovery

• Primarily focused in the areas of

– inflammation

– metabolic disorders

– pain

• Robust pipeline of molecules (NCE’s & NBE’s)

– 7 molecules are in clinical trials stage

• Potential peak sales opportunity for each molecule being in the range of USD 1 -10 billion

Molecules under research

Specialty Business :Formulations Business

• Currently organized around four regions

– India

– Latin America

– Central Eastern Europe

– Semi Regulated Markets of Africa/Asia

Focus on therapeutic areas

dermatology

– anti-infectives

respiratory

-cardiac

-diabetes

-gynecology

-CNS

Specialty Business : Generics• Glenmark Generics Ltd (GGL), a subsidiary of Glenmark Pharma

• It comprises of US Generics, Europe Generics, API and Oncology businesses

• GGLs Marketing Strategy :

– developing, manufacturing, selling, and distributing generic products through wholesalers, retailers and pharmacy chains

• GGLs focus on niche business segments :

– Dermatology, Hormones, Controlled Substances, Oncology, Modified Release Products

• It markets around 65 APIs globally, including the US, various countries in the EU, South America and India.

• GGL has so far filed 41 DMFs(Drug Master Files) with the US-FDA.

Diverse Product Portfolio

Segment Revenue Break-Up

Strength beyond Numbers

• Growth in net sales driven by robust growth in Specialty & Generics businesses in the domestic and global markets

• Booked out-licensing income related to GBR 500 of 111.2 crore as against 89.5 crore (related to GRC 15300) in Q1FY11. The remaining US$25 million will be booked in Q2FY12

• Latin American and Caribbean markets sales witnessed robust growth due to low base

• LATAM Region to be EBIDTA negative for next 2 years as it is still in investment phase. Thus implying robust revenue growth potential in the longer term

• Management guidance for growth of 25% growth in US in FY 2012 due to :

– Launch of key products : Malarone & Cutivate in Q3 FY12 and Q4 FY 12 respectively

Share Price Data

Financial Snapshot

Trend in EBITDA and PAT Margins

• Glenmark has various products in clinical development stages.

– Crofelemer completed its Phase III clinical trials and is expected to launch in beginning of FY13.

– Also received $15mn from Salix Pharma for upgrading manufacturing facility to meet high expected demand of Crofelemer.

• Launched two products in Q1FY12 i.e. Vorth TP & Dorigen in the orthopaedic segment.

• receivable days have dropped to 125 from 140

• Settlement of limited competition products like Fluticasone Propionate lotion (market size US$44mn) and Hydrocortisone Butyrate cream (market size US$38mn) would also pep up the growth in the next 2 years

• Last fiscal it launched 19 products and plans to launch 15 products in curent fiscal.

Valuation Matrix

Salesforce Productivity

Prescription Ranking

Strengths

Strong R&D pipeline

Plans to launch 7 products and file 15-20 ANDA’s in FY12

Satisfactory prospects for out-licensing deals

Focus on niche segments in the US market where price erosion is not steep includes :

oral contraceptives

Controlled Substances

Dermatology

Risks

Delay in product approvals

Rising competition intensity

Fragmented Market Share

Rapid Price Erosion

Adverse verdict in the ongoing Taraka Litigation

Highly regulated market

LUPIN

Formulations Business

Promoted by Dr. Desh Bandhu Gupta, a first generation entrepreneur, LPC is India’s fifth largest company by domestic sales.

Global Formulations business constitutes close to 84% of Lupin’s overall business mix, and in terms of geographies, USA is its largest market outside India. 67% of the overall business of the Company comes from International Markets

Active Pharmaceutical Ingredients (API)

• API space is driven by the two Asian giants China and India.

• The Company’s wide product basket comprising formulations from CVS, CNS, Anti-Asthma, Anti-TB, Diabetology, Dermatology, GI, and other therapy segments

• Plant shift from Goa to Indore SEZ

• Medicis Pharma to use Lupin R&D platform for US$20 millionTo market Eli Lilly’s Huminsulin products in domestic market worth 125

• Signed an agreement with Natco Pharma to jointly commercialise a generic equivalent GSK’s cancer drug Tykerb worth US$113.6 million

Valuation

• On the US front, the launch of Allernase• New product launches especially Ocs will determine the course.

The launch of generic Fortamet (anti-diabetic) and Ziprasidone (anti-psychotic) in the current fiscal and Tricor (anti cholesterol) and Combivir (anti-retroviral) in FY13 will be key triggers to watch out for.

• Launched 6 new products in Japan last fiscal and plans for 6 to7 in FY12

• Suprax sales grew 30% and Antara in single digit• Filed 4 ANDAs taking total to 152

– 51 approved Plans to launch 8 to 9 products in US between Q2FY12 – Q4FY12

South Africa sales increased by 47%

Valuation Matrix

Risks

• Earlier than expected Generic competition in Suprax

• INR appreciation would hurt, given its exposure to global markets

• Reasonable exposure to the domestic formulations market (c30% of sales)

• Inability to effectively scale up the Kyowa operations or Antara sales.

• Given its healthy geographic mix (80% sales from India, US & Japan)

• Differentiated products and robust financial metrics.

• Big product rollout in the US, including niche/PIV oppys

• Growth in emerging markets (including India) & Japan

• Margin improvement by backending sourcing to India from Japan & rising US sales

Strengths

GlaxoSmithKline

Stock Data

Market Cap Rs179.4bn/US$4.0bn

Share Outstanding 84.7

52-week Range (Rs) 2478/1842

Free Float(%) 49.3

FII(%) 16.8

Sensex Return 12m(%) 5.2

INTRODUCTION

GSK Pharma is the 4th largest formulations company in India, with a strong presence in segments like dermatology, respiratory and vaccines. Its parent has one of the richest product and R&D pipelines among Pharma companies worldwide .The companies in the process of expanding its presence in the life-style segment led by new launches from the parent's portfolio, launch of branded generics and in-licensing.

GSK Pharma is a 50% subsidiary of GSK Plc (UK) and is being currently managed by Dr. Hasit Joshipura (MD). Maintaining a leading presence in India and sustaining one of the highest profitability and return ratios in the industry despite miniscule presence in the high-growth life-style segments is the key achievement.

SPECIALLTY OF BUSINESS

GSK derives majority of its business from acute therapeutic segments and has very little presence in the chronic segments.

GSK derives 95% of its revenues from acute therapeutic segments with dominant presence in Anti-infcetives, dermatology, pain management and Vitamins .

It ranks no.1 in dermatology segment, no.3 in Pain management and Vitamins segments and no5 in AI and respiratory segments.

SPECIALLTY OF BUSINESS

GSK is among the laggards when it comes to launch of new products. GSK has launched very few new products over the last 4 years compared to its peers.

It has launched 5 new products (including line extensions) annually over the last 4 years.

Ramp-up in domestic formulations revenues is driven largely by existing products.

.

SPECIALLTY OF BUSINESS

New launches: GSK launched two innovative products, namely Revolade (oral platelet generator) and Votrient (oncology) in July’11.

In addition, the company has also launch a branded generic and a derma product from the Stiefel portfolio.

GSK remains on track to launch eight branded generics in CY11 .

Prescription ranking of GSK

Top 10 brands of GSK

VALUATION

Row 1 Row 2 Row 3 Row 40

2

4

6

8

10

12

Column 1

Column 2

Column 3

Year to Dec CY 09E CY 10E CY 11E CY12E

Net Revenue(Rs mn 19078 21511 25146 28798

Net Profit (Rs mn) 5097 5606 703 8415

Dil.EPS(Rs) 59.1 68.3 83.9 99.3

% Chg YoY 8.1 15.5 22.8 18.5

P/E(X) 35.9 31.1 25.3 21.4

EV/EBITDA(X) 23.9 20.9 16.4 13.3

Distribution and Reach

GSK derives 60% of its revenue from metros and Class-I towns compared with an industry average of 63% . Over the past four years revenue CAGR for all geographies has lagged the industry average. However, GSK's CY10 growth in all geographies was in higher double digits.

Improvement in MR productivity

GSK's revenue posted CAGR of 8.7% over CY04-10 and its sales force posted CAGR of 5.9% over CY04-10, implying improvement in salesforce productivity.

In 2004, GSK derived INR6.5m revenue per MR, which rose to INR7.7m in CY10. GSK's current MR productivity is arguably one of the best in the industry.

Cadila Healthcare

STOCK DATA

INTRODUCTIONCadila is amongst one of the largest domestic

pharma companies in India with a strong focus on the global generics opportunity.

The company is gradually building its presence in the regulated generic markets beginning with the US and France It also plans to tap some unique opportunities through its Jvs with Nycomed, Hospira.Bayer and Bharat Serums.

It is promoted by Mr. Pankaj Patel.

His key achievement is Sustaining strong growth and return ratios coupled with a very conservative , low-risk management . .

SPECIALLTY OF BUSINESSCadila is among the top three players in two of the largest therapeutic segments, CVS and GI.

The company ranks first in the fast growing gynecology Segment.

Cadila's international business, given its strong chemistry skills and pragmatic mix of its geographic presence and partnerships.

Prescription ranking of Cadila The top 3 therapeutic segments, CVS, GI and gynecology, contribu about half of Cadila's domestic formulations revenue. Other large segment such as respiratory and anti-infective, contribute 11% and 10% respectively to total revenue. Over the past 10 years , the contribution of CVS and GIsegments to revenue rose from 24% to 37% while that of respiratory and anti-infective segments fell from over 32% in FY01 to less than 21% in FY10.

Prescription ranking of Cadila

Distribution and Reach

Cadila derives 65% of its revenue from metros and class-I town compared with 63% of the industry average. In the past four years, revenue CAGR for all geographies except metros were in line or marginally better than that of the industry average.

Valuation summary

FY10 FY11 FY12 FY13

EPS(IN Rs) 24.7 37.7 40.5 52.9

PE(X) 35.4 25.2 21.6 16.5

Target PE(X) 38.6 27.5 23.6 18

EV to EBITDA(X)

24.8 20.5 17 12.6

Price to book(x)

11.8 8.9 6.8 5.2

RoNW(%) 37 38.7 34.3 34.7

Improvement in MR productivityCadila's domestic formulations business revenue posted 9.2% CAGR over FY04-10 and its sales force posted 11.3% CAGR, implying negative productivity of the workforce.

In 2004, Cadila derived sales of INR4.1m per MR, which fell to INR3.6m in FY10.

Cadila's performance was below average, compared with the average of performances covered in the report . .

THANK YOU