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Annual Update

Sector View

Neutral

Stocks Performance ( % Returns as on March 31, 2016)

Company

1Y

2Y

3Y

5Y

FY17 (YTD)

Jubilant Life

173

162

143

153

-17

Alembic Pharma

32

113

488

NA

-22

Aurobindo Pharma

22

191

921

660

-18

Torrent Pharma.

16

156

285

362

-7

Ajanta Pharma

15

254

719

5176

10

Glaxosmit Pharma

11

48

73

85

6

Divi's Lab.

11

45

100

193

-4

Unichem Labs.

9

-4

27

16

-3

Biocon

3

14

77

40

40

Glenmark Pharma.

1

41

72

180

-17

Natco Pharma

-2

158

381

650

-13

Apollo Hospitals

-3

45

58

181

-11

CNX 500

-8

23

45

39

2

Strides Arcolab

-8

180

24

194

-16

Ipca Labs.

-8

-31

10

94

-34

Nifty

-9

15

36

33

3

Cadila Health.

-9

55

113

101

-4

Dr Reddy's Labs

-13

18

72

85

-2

CNX Pharma

-14

44

85

142

-10

Pfizer

-20

41

69

44

-20

Sun Pharma.Inds.

-20

43

100

271

-10

Indoco Remedies

-20

107

400

390

-19

Lupin

-26

59

135

255

-21

Cipla

-28

34

35

59

-26

Syngene Int

NA

NA

NA

NA

-2

YTD: till 20-June-2016

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USDINR EUROINR RUBINR BRLINR JPYINR ZARINR Price movement 140 130 120 110 100 90 80
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ZARINR
Price movement
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90
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70
60
CNX Pharma
Nifty
Mar-15
Mar-15
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Sep-15
Nov-15
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Jan-16
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Research Analyst

Siddhant Khandekar siddhant.khandekar@icicisecurities.com Mitesh Shah mitesh.sha@icicisecurities.com Nandan Kamat nandan.kamat@icicisecurities.com

ICICI Securities Ltd. | Retail Equity Research

ICICI Securities Ltd. | Retail Equity Research June 22, 2016 Healthcare Annual Update Course correction

June 22, 2016

Healthcare Annual Update

Course correction drive after turbulent FY16

FY16 turned out to be a demanding fiscal for pharma players after a near hassle-free ride for five years. This was attributable to the triple whammy impact of 1) USFDA issues (483s and warning letters), 2) NLEM/FDC impact in the domestic market and 3) political turmoil and adverse currency shock in EMs. Indian companies received nine USFDA warning letters in FY16, by far the highest run rate over the years. What came as a surprise even for industry players was the frequency of inspections and the random nature of issues flagged in the scrutiny. Paradoxically, however, the fiscal also witnessed highest ever ANDA approvals for Indian companies (177 approvals vs. 92 in FY15). However, investors, by and large, remained sceptical as almost all players received either warning letters or critical Form 483 observations.

Despite the regulatory turmoil, US sales of a select pack of I-Direct universe (~37% of universe revenues) grew ~14% YoY in FY16 thanks to accelerated approvals and exclusivity launches by Lupin (gGlumetza; anti-diabetic), Torrent (gAbilify; CNS) and Sun Pharma (gGleevec; anti- cancer)) besides consolidation of new acquisitions (Natrol by Aurobindo). Note that US growth has not captured gNexium (GI) traction for Cipla and gAbilify traction for Alembic for nondisclosure of specific traction. Companies like Glenmark and Cadila have also registered strong YoY growth.

Domestic formulations from the select pack (~24% of universe revenues) grew ~11% YoY in FY16. The below-normal growth can be attributed to NLEM/FDC impact and, to some extent, also to the higher base of FY15. Among companies, Ajanta, Glenmark, Lupin, Cipla, Dr Reddy’s, Sun and Torrent witnessed strong growth.

Most companies spent heavily on R&D and also guided for incremental R&D spend in the next few years. Likewise, the capex spend also went up significantly as companies invested in augmenting capacity to mitigate the regulatory impact and debottlenecking besides out-bound acquisitions (Gavis by Lupin and InvaGen by Cipla among others). Overall, the R&D spend as a percentage of sales was at 7.7% for the I- Direct universe with some large caps committing even excess of 12% for the future. Similarly, capex spend for the fiscal was at | 15398 crore, by far the highest in recent years. 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 between 20% and 40% from their FY16 peaks. The companies are bracing for the ‘’new normal’’ whereby frequent and random USFDA audits will be common as 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 the new challenges. Our top picks are Lupin, Dr Reddy’s, Torrent Pharma, Natco and Syngene. USFDA, NLEM and FDCs related issues are likely to weigh in the near term.

Exhibit 1: US sales grow 66.3% in FY06-11 50000.0 40000.0 30000.0 20000.0 12355.5 9692.7 7220.5
Exhibit 1: US sales grow 66.3% in FY06-11 50000.0 40000.0 30000.0 20000.0 12355.5 9692.7 7220.5
Exhibit 1: US sales grow 66.3% in FY06-11
50000.0
40000.0
30000.0
20000.0
12355.5
9692.7
7220.5
10000.0
3804.2
3972.3
970.3
0.0
FY06
FY07
FY08
FY09
FY10
FY11
US Sales
Source: Company, ICICIdirect.com Research
Exhibit 3: I-Direct Universe capex FY06-11
20000
15000
8889
10000
7447
5711
4282
3760
5000
2872
0
FY06
FY07
FY08
FY09
FY10
FY11
Capex
Source: Company, ICICIdirect.com Research
|
crore
| crore

US remains market to conquer but new challenges emerge We divide the success story of Indian generic players in the US into two phases - FY06-11 and FY11-16. While the first phase witnessed heavy capex followed by growing US generic opportunities, the early part of the FY11-16 phase witnessed robust incremental free cash flows on the back of exclusivity launches and the extensive piggyback impact of the impending patent cliff.

Passing of the Generic Drugs User Fee act (GUDUFA) and Affordable Care Act also lifted the generics usage and, in turn, the fortunes of Indian generic exporters. However, the latter was marred by frequent recalls, increased USFDA scrutiny especially time taken between inspection and issuance of warning letter, pricing pressure due to buyer consolidation and waning impact of the generic patent cliff.

Exhibit 2: US sales grow 28.8% in FY11-16

50000.0 43739.1 37316.9 40000.0 32493.5 30000.0 23042.1 18321.5 20000.0 12355.5 10000.0 0.0 FY11 FY12 FY13
50000.0
43739.1
37316.9
40000.0
32493.5
30000.0
23042.1
18321.5
20000.0
12355.5
10000.0
0.0
FY11
FY12
FY13
FY14
FY15
FY16
| crore

US Sales10000.0 0.0 FY11 FY12 FY13 FY14 FY15 FY16 | crore Source: Company, ICICIdirect.com, Research We believe

Source: Company, ICICIdirect.com, Research

We believe Indian pharma players are at an inflection point as they plan to mitigate the US based risks by 1) improving quality checks, 2) higher investments in back-up arrangements, 3) augmented R&D to move away from plain vanilla generics and exploiting complex and untapped areas such as biosimilars and 4) outbound M&As including brands and select portfolios. Large cap players such as Lupin and Cipla acquired US based players to establish the manufacturing base in that country whereas Dr Reddy’s was busy in brand acquisitions. We also noted a changed strategy on part of Indian players, especially in the innovative space, whereby MNCs are offering their pipeline to Indian companies to take it forward for late stage R&D and marketing (Sun-MSD deal and Dr Reddy’s-Xenoport deal).

Exhibit 4: I-Direct universe capex (FY11-18E)

20000 18375 15233 15000 10498 10323 10000 8023 8383 7447 7276 5000 0 FY11 FY12
20000
18375
15233
15000
10498
10323
10000
8023
8383
7447
7276
5000
0
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
|
crore

CapexFY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E | crore Source: Company, ICICIdirect.com, Research ICICI Securities

Source: Company, ICICIdirect.com, Research

ICICI Securities Ltd. | Retail Equity Research

Page 2

Exhibit 5: I-Direct Universe R&D FY06-11 Exhibit 6: I-Direct Universe R&D FY11-18E 10.0 10.0 8.8
Exhibit 5: I-Direct Universe R&D FY06-11 Exhibit 6: I-Direct Universe R&D FY11-18E 10.0 10.0 8.8
Exhibit 5: I-Direct Universe R&D FY06-11
Exhibit 6: I-Direct Universe R&D FY11-18E
10.0
10.0
8.8
8.9
8.0
8.0
7.9
6.8
6.4
6.0
6.0
5.7
5.5
5.3
5.3
5.4
4.8
4.6
4.4
4.0
4.1
4.0
2.0
2.0
0.0
0.0
FY06
FY07
FY08
FY09
FY10
FY11
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
I-Direct R&D as % of Sales
I-Direct R&D as % of Sales
Source: Company, ICICIdirect.com, Research
Source: Company, ICICIdirect.com Research
Exhibit 7: Top five companies R&D as percentage of sales
Exhibit 8: Others with significant spike in R&D as percentage of sales
13.0
12.0
14.0
14.0
11.5
10.5
12.0
11.3
12.0
9.9
12.0
9.8
7.4
9.0
7.0
10.0
8.0
10.0
8.0
7.6
7.7
7.1
6.9
6.1
6.9
6.5
4.0
8.0
6.1
8.0
4.5
5.5
5.1
6.0
4.4
6.0
4.3
4.3
4.0
4.0
2.2
1.9
2.0
2.0
0.0
0.0
Sun Pharma
Lupin
Dr. Reddy's
Cipla
Glenmark
Alembic
Ajanta
Cadila
Torrent
Indoco
Labs
Pharma
Pharma
Healthcare
Pharma
Remedies
FY12
FY16
FY18E
FY12
FY16
FY18E
Source: Company, ICICIdirect.com, Research
Source: Company, ICICIdirect.com Research
The new investments are likely to take more time to mature because of
the changed rules of the game and also due to crowding in existing
opportunities. Despite receipt of nine warning letters (by far the highest
in any fiscal) there were as many as 177 approvals, also the highest. This
suggests that the approval machinery is on and running. Although there
will be some windfalls due to FTF launches, we expect a major change of
course in the strategy beyond FY18.
Exhibit 9: Warning letters (highest in FY16)
Exhibit 10: ANDA approvals (highest in FY16)
10
9
200
177
138
8
7
150
119
6
106
6
92
100
4
3
3
3
44
35
35
50
29
2
22
2
1
1
1
0
0
0
FY12
FY13
FY14
FY15
FY16
Final Approvals
Tentative Approvals
Warning Letters
Source: USFDA, ICICIdirect.com Research
Source: USFDA, ICICIdirect.com, Research
For FY16-18E, the I-direct universe of the select US pack is likely to grow
at a CAGR of 14.4% to | 55339 crore. Companies like Lupin, Glenmark,
Cadila and Aurobindo are likely to post good growth whereas Sun,
Alembic and Torrent are likely to be laggards.
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16

ICICI Securities Ltd. | Retail Equity Research

Page 3

  NLEM additions for domestic formul ations likely to continue; FDC new headache In FY16,
 

NLEM additions for domestic formulations likely to continue; FDC new headache In FY16, besides extension of the NLEM list (NLEM 2015) by NPPA, the companies were also hit by negative adjustment for NLEM portfolio- in synch with negative WPI for FY16. However, the major unforeseen event was banning of 344 fixed dosages combination (FDCs) over safety concerns. In 2014, the government formed a panel (Kokate panel) to review over 6,000 FDCs that were able to penetrate the market after approval from only individual state regulators and not from the central government, which is a legal necessity. Although companies contested the ban in the Delhi High Court, which subsequently stayed the order, the abrupt government action had its impact on the banned drugs sales due to channel disturbance. Also note that the panel has notified 963 FDCs as irrational so the fate of the remaining 619 is still hanging in balance. This suggests that smooth sailing in the Indian formulations space is likely to be a thing of past as companies will have to introduce new products and push for more volumes for growth. In this scenario, we expect the annual growth trajectory for Indian formulations to come down from 13-15% to 10-12%, going ahead.

 

For FY16-18E, the I-direct universe select pack is likely to grow at a CAGR of 15.4% to | 33606 crore. Companies like Ajanta, Alembic, Glenmark, Sun and Dr Reddy’s are likely to post good growth whereas Biocon, Cadila, Ipca and Torrent are likely to be laggards.

Exhibit 11: Impact NLEM 2015, FDC ban and negative WPI

 

(| crore)

Full Value

NLEM 15 - New

 

FDC's

WPI

COMPANY

MAT VAL

Total

% Impact

MAT VAL

% Impact

MAT VAL

% Impact

MAT VAL

% Impact

IPM

98042.2

4460.7

4.5

877.5

0.9

3049.3

3.1

534.0

0.5

Glenmark

2346.7

192.3

8.2

42.0

1.8

141.8

6.0

8.5

0.4

Lupin

3405.4

113.0

3.3

32.1

0.9

63.3

1.9

17.6

0.5

Cipla

4886.4

136.6

2.8

78.1

1.6

26.2

0.5

32.4

0.7

Zydus

3810.9

105.2

2.8

59.7

1.6

18.1

0.5

27.4

0.7

Sun

8643.8

230.5

2.7

97.8

1.1

87.3

1.0

45.4

0.5

Dr Reddy's

2420.7

64.1

2.6

36.0

1.5

13.1

0.5

14.9

0.6

Torrent

2271.7

39.7

1.7

12.5

0.6

12.1

0.5

15.0

0.7

Abbott Healthcare

3148.9

500.7

15.9

8.4

0.3

473.3

15.0

19.0

0.6

Pfizer

2871.9

441.8

15.4

52.2

1.8

365.7

12.7

24.0

0.8

Macleods

2828.9

364.1

12.9

12.3

0.4

338.3

12.0

13.4

0.5

Micro

1842.3

97.8

5.3

17.6

1.0

70.4

3.8

9.8

0.5

Mankind

3655.6

185.7

5.1

1.9

0.1

169.5

4.6

14.3

0.4

Alkem

3045.2

142.0

4.7

44.5

1.5

75.4

2.5

22.1

0.7

Aristo

2425.5

80.5

3.3

1.5

0.1

61.9

2.6

17.1

0.7

USV

1951.6

64.7

3.3

8.2

0.4

47.8

2.4

8.7

0.4

Intas

2770.9

88.7

3.2

27.6

1.0

48.5

1.7

12.7

0.5

Sanofi

2357.8

72.2

3.1

45.3

1.9

9.7

0.4

17.2

0.7

GSK

3197.8

94.9

3.0

12.0

0.4

54.1

1.7

28.9

0.9

Abbott India

1973.4

26.1

1.3

14.5

0.7

5.6

0.3

6.0

0.3

Source: AIOCD, ICICIdirect.com Research

 

ICICI Securities Ltd. | Retail Equity Research

Page 4

Financial CAGR in FY11-16     Revenues EBITDA Profit Ajanta Pharma 27.9 43.3 51.4

Financial CAGR in FY11-16

 
 

Revenues

EBITDA

Profit

Ajanta Pharma

27.9

43.3

51.4

Alembic Pharma

21.2

44.4

54.4

Apollo Hospitals

18.5

13.3

12.5

Aurobindo Pharma

25.8

26.8

27.7

Biocon

4.7

6.9

19.5

Cadila Healthcare

16.3

18.4

16.5

Cipla

16.7

13.2

8.8

Divi's Labs

23.1

22.4

20.5

Dr Reddy's Labs

15.7

18.9

17.0

Glenmark Pharma

21.3

22.1

14.6

Indoco Remedies

15.6

19.3

11.0

Ipca laboratories

8.7

-1.9

-11.2

Jubilant

11.0

18.2

13.4

Lupin

19.5

25.7

21.4

Natco Pharma

20.2

25.5

23.7

Sun Pharma

37.9

34.7

22.3

Syngene Int

28.0

29.3

52.1

Torrent Pharma

25.1

47.5

49.1

Unichem Laboratories

10.1

1.8

3.2

Financial CAGR in FY13-16

 
 

Revenues

EBITDA

Profit

Ajanta Pharma

22.7

37.6

52.6

Alembic Pharma

27.0

57.9

62.5

Apollo Hospitals

17.1

8.7

6.2

Aurobindo Pharma

32.8

51.7

85.6

Biocon

11.8

14.6

20.5

Cadila Healthcare

15.5

26.3

32.3

Cipla

18.0

4.4

-0.2

Divi's Labs

20.2

19.6

21.7

Dr Reddy's Labs

9.9

13.2

13.1

Glenmark Pharma

15.4

16.8

13.2

Indoco Remedies

16.6

23.1

25.9

Ipca laboratories

0.8

-18.0

-29.8

Jubilant

3.9

7.4

40.9

Lupin

13.7

17.8

19.8

Natco Pharma

19.6

21.4

28.9

Sun Pharma

35.8

20.4

18.0

Syngene Int

26.0

28.2

29.1

Torrent Pharma

28.2

59.7

65.6

Unichem Laboratories

7.2

-2.0

-0.5

Expected CAGR in FY16-18E

 
 

Revenues

EBITDA

Profit

Ajanta Pharma

17.0

16.6

18.0

Alembic Pharma

10.0

-13.9

-13.9

Apollo Hospitals

15.9

29.2

43.8

Aurobindo Pharma

13.0

14.4

17.1

Biocon

15.5

16.0

-17.5

Cadila Healthcare

15.5

13.0

17.3

Cipla

16.2

15.7

18.1

Divi's Labs

16.1

14.5

12.0

Dr Reddy's Labs

10.6

9.1

10.6

Glenmark Pharma

16.1

19.9

24.7

Indoco Remedies

21.0

31.4

47.9

Ipca laboratories

11.9

38.7

74.3

Jubilant

13.3

17.0

43.9

Lupin

18.7

21.7

21.2

Natco Pharma

16.7

15.1

20.9

Sun Pharma

9.4

13.0

23.3

Syngene Int

24.2

26.8

29.5

Torrent Pharma

-0.8

-21.1

-20.2

Unichem Laboratories

16.8

29.1

34.1

Source: Company, icicidirect.com

Exhibit 12: Growth trends in Indian formulations market in FY16 (secondary market) 25 22.9 20
Exhibit 12: Growth trends in Indian formulations market in FY16 (secondary market)
25
22.9
20
18.8
15.8
15
13.4
13.6
13.0
12.5
12.2
10.4
10
9.6
9.6
6.6
5
0
IPM Growth (%)
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16

Source: AIOCD Data base, ICICIdirect.com Research

Exhibit 13: Growth in key therapeutic segments in FY16

25 21.2 20.3 19.6 20 17.4 16.9 16.2 15.3 14.6 16.4 14.2 13.4 15 13.1
25
21.2
20.3
19.6
20
17.4
16.9
16.2
15.3
14.6 16.4
14.2
13.4
15
13.1
12.5 12.5
10.8
10.5
8.5
10
12.2
5
1.6
0
[
(%)
Anti-Infectives
Cardiac
Gastro
Intestinal /
Vitamins
Minerals /
Anti Diabetic
Respiratory
Pain /
Analgesics
Neuro / Cns
Derma
Gynaecological
Hormones
Vaccines
Anti-
Neoplastics
Ophthal
Blood Related
Urology
Others
Anti Malarials
Sex Stimulants

Source: AIOCD Data base, ICICIdirect.com Research

Exhibit 14: Leading brands in Indian formulation market (| crore)

   

Brand

Company

API

Therapy

FY16

FY15

Gr.(%)

 

Augmentin

Glaxosmithkline PharmaceAmoxycillin; Clavulanic Acid

Anti-Infectives

317.5

319.0

-0.5

Corex

Pfizer Ltd

Chlorpheniramine; Codeine

Respiratory

310.9

228.6

36.0

 

Spasmo ProxyvWockhardt Ltd

Dicyclomine; Paracetamol

GI

309.3

178.2

73.5

Lantus

Sanofi India Ltd.

Glargine

Anti Diabetic

273.0

220.8

23.6

 

Galvus Met

Novartis India Ltd

Vildagliptin; Metformin

Anti Diabetic

272.1

187.5

45.1

Clavam

Alkem Laboratories Ltd.

Amoxycillin; Clavulanic Acid

Anti-Infectives

239.9

225.4

6.4

 

Becosules

Pfizer Ltd

Vitamin B Complex

Vitamins

228.6

243.8

-6.2

Volini

Ranbaxy Laboratories Ltd Diclofenac

Pain

217.0

212.1

2.3

 

Foracort

Cipla Ltd.

Formoteral; Budesonide

Respiratory

196.1

169.1

16.0

Synflorix

Glaxosmithkline PharmaceAll Other Vaccines

Vaccines

195.1

151.9

28.5

[

Source: AIOCD data base, ICICIdirect.com Research

ICICI Securities Ltd. | Retail Equity Research

Page 5

Exhibit 15: Domestic performance (primary-reported by companies) ICICIdirect.com coverage companies quarter wise 45 38
Exhibit 15: Domestic performance (primary-reported by companies) ICICIdirect.com coverage companies quarter wise 45 38
Exhibit 15: Domestic performance (primary-reported by companies) ICICIdirect.com coverage companies quarter wise
45
38
40
34
35
27
30
23
25
21
19
19
15
19
17
17
17
20
16
16
15
15
14
13
13
13
15
12
11
11
11
10
10
11
10
9
8
8
9
9
8
8
8
10
6
6
5
3
3
2
5
2
1
1
1
0
0
1
1
0
0
-5
Ajanta
Alembic
Biocon
Cadila
Cipla
Dr Reddy's
Glenmark
Indoco
Ipca Labs
Lupin
Sun Pharma
Torrent -1
Unichem
Pharma
Pharma
Pharma
Labs
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Source: Company, ICICIdirect.com Research
Exhibit 16: Domestic performance (secondary market) ICICIdirect.com coverage companies
35
32
30
28
30
27
25
23
24
25
22
19
19
19
18
18
20
17
17
18
17
18
16
15
15
15
15
14
15
14
14
15
13
12
12
13
10
10
10
9
9
9
8
8
8
10
7
7
7
5
5
4
4
5
2
2
0
0
0
Ajanta
Alembic
Biocon
Cadila
Cipla
Dr Reddy's
Glenmark
Indoco -2
Ipca Labs
Lupin
Sun Pharma
Torrent
Unichem
-5
Pharma
Pharma
Pharma
Labs
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Source: AIOCD data base, ICICIdirect.com Research
(%)
(%)

ICICI Securities Ltd. | Retail Equity Research

Page 6

Stock performance 240 220 200 180 160 140 120 100 80 60 CNX Pharma Apollo
Stock performance
240
220
200
180
160
140
120
100
80
60
CNX Pharma
Apollo Hospitals
Nifty
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16

Key Financials

(| Crore)

FY15

FY16P

FY17E

FY18E

Revenues

5178.5

6085.6

6956.2

7974.5

EBITDA

734.7

782.3

1063.0

1299.1

Adjusted PAT

326.5

301.9

482.6

679.2

Adj. EPS (|)

23.7

22.2

34.7

48.8

Key Ratios

 

FY15

FY16E

FY17E

FY18E

Debt / Equity

0.6

0.8

0.7

0.6

PE (x)

55.0

56.4

38.7

27.5

EV to EBITDA (x)

27.4

26.6

19.3

15.4

Target EV/EBITDA (x)

28.6

26.8

19.7

16.2

Price to book (x)

5.9

5.4

4.9

4.2

RoNW (%)

10.4

8.9

12.5

15.3

RoCE (%)

9.9

8.2

10.8

13.3

ICICI Securities Ltd. | Retail Equity Research

13.3 ICICI Securities Ltd. | Retail Equity Research Apollo Hospitals Capex cycle on; expansion of pharmacy

Apollo Hospitals

Capex cycle on; expansion of pharmacy business affects margins

FY16 Highlights

Revenues grew 17.5% YoY mainly due to consolidation of Hetero Pharmacy, Nova Speciality Hospital and Guwahati Hospital. The hospital segment grew 9.4% while the pharmacy business grew 31% YoY

Strong growth in the low margin pharmacy business led to contraction in EBITDA margin by 133 bps YoY to 12.9% in FY16. The pharmacy business margins were 3.6% while healthcare services margins were 21.3%

Total 1,725 beds in 11 locations were commissioned in the last 36 months – Vanagaram 260, Jayanagar 140, Trichy 200, Nashik 120, Women and Child OMR 60, Indore 120, Nellore 190, Perungudi 150, women & child SMR 50, Vizag new 245, Malleswaram 190. Chennai cluster revenues grew 11% YoY in FY16 to | 1378 crore and Hyderabad cluster revenues grew 8% in FY16 to | 535.4 crore

Revenues from new hospitals grew to | 318.7 crore in FY16 from | 176.7 crore in FY15. FY13 Hospitals – Vanagaram & Jayanagar reported an EBITDA of | 19.5 crore in FY 16 compared to | 6.8 crore in FY15

Hospitals in Vizag and Malleswaram were commercialised in Q4FY16 with ~50% occupancy rate

Currently, 15% of business can be attributed to international patients

The company added 251 pharmacy stores and closed 51 stores in FY16, taking the total number of pharmacy stores to 2326

The company entered into an agreement with Patanjali to market its products through Apollo’s stores

What to Watch

Apollo plans to add 545 beds in Navi Mumbai (480 beds) and Indore (65 beds). The Navi Mumbai hospital is expected to be commissioned by Q2FY17 (150-200 beds initially)

The company plans to add another 500 beds in FY19 – South Chennai 200, South Mumbai 300

Total capex estimated for this expansion plan is | 1520.4 crore. Of this, investment of | 584.1 crore has already been made. Balance will be invested through a mix of internal accruals, debt

Apollo is planning expansion of its international business in South East Asia along with Africa and the Middle East. The company expects it to improve to 20-25%, going forward

Apollo expects overall EBITDA margins to reach 20% level in five years from 13.7% in FY16

The company gave tax rate guidance of 20-21% for FY17, FY18

Our View With more and more players getting listed in healthcare space, we believe scrutiny for margin improvement and improvement in return ratios may intensify. Newly commissioned hospitals have achieved the BE level fairly ahead of our expectations. Focus now is likely to shift to operational gauges for different cluster hospitals as the current phase of the capex cycle nears the end. On the pharmacy front, margins showed a substantial improvement in the last few quarters. We value the stock on an SOTP basis by valuing the healthcare business at 15x FY18E EV/EBITDA and pharmacy business at 1.5x FY18E EV/sales. Our SOTP target price is | 1420. We continue to monitor progress on margins and return ratios.

Page 7

Stock Performance 200 180 160 140 120 100 80 60 CNX Pharma Ajanta Pharma Nifty
Stock Performance
200
180
160
140
120
100
80
60
CNX Pharma
Ajanta Pharma
Nifty
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16

[

Key Financials

(|crore)

FY15

FY16P

FY17E

FY18E

Revenues

1480.6

1729.4

2011.0

2368.9

EBITDA

505.2

582.3

682.2

791.8

Net Profit

309.9

403.3

462.5

561.5

EPS (|)

36.0

45.7

52.4

63.6

Key Ratios

 

FY15

FY16E

FY17E

FY18E

Debt / Equity

0.1

0.1

0.0

0.0

PE (x)

42.7

32.8

28.6

23.6

M.Cap/ Revenues (x)

8.9

7.7

6.6

5.6

EV to EBITDA (x)

26.0

22.7

19.3

16.3

Price to book (x)

15.7

11.3

8.6

6.7

RoNW (%)

37.8

34.4

30.0

28.2

RoCE (%)

50.3

43.7

37.9

35.6

ICICI Securities Ltd. | Retail Equity Research

35.6 ICICI Securities Ltd. | Retail Equity Research Ajanta Pharma Visibility intact amid near term challenges

Ajanta Pharma

Visibility intact amid near term challenges

FY16 highlights

Revenues for FY16 grew 16.8% YoY to | 1729 crore mainly due to the strong growth in the African tender business and domestic cardiology segment

The export business grew 19% YoY to | 1162 crore due to strong growth in the African tender business. African tender business grew 51.8% to | 413 crore. Total African & Asian business grew 29% and 7% to | 682 crore and | 469.5 crore, respectively

The domestic branded business grew 18.9% to | 497 crore mainly due to strong growth in the cardiology segment, which was partially offset by slow growth in the dermatology segment on account of increased competition from the Melacare brand

The domestic institutional business declined to | 35 crore in FY16 from | 61 crore in FY15

Global field force strength has gone up from 572 to 650 in FY16

Total 26 ANDAs have been filed in the US market, out of which five have been approved. Sales in FY16 accounted for ~US$2 million

What to watch

Guided for 33-35% EBITDA margins for FY17. In the domestic market, it expects 18-20% YoY growth while in exports it expects mid-teen growth

The company expects ~US$10 million revenues from US sales in FY17 and US$20 million for FY18

It plans to file eight to 12 ANDAs every year

R&D guidance for FY17 - 7% of sales

Guided for 25-26% of tax for FY17 and 24-25% for FY18

Guided for capex of ~| 475 crore for FY17. This includes allocation towards the development of the Guwahati plant (| 300 crore), new corporate office, capitalisation of R&D (| 100 crore for next two years) and maintenance capex (| 50-60 crore annually)

Validation batches from the Dahej plant have been started. The company expects to start US filing from H1FY17. It expects to commercialise the Dahej facility and Phase I of the Guwahati facility from Q1FY18. Guwahati phase II is expected to start from

Q1FY19

Our view The company is entering the stretched phase of capex across two to three years to bolster the domestic business and exports franchise, especially the US. We believe this is a calculated move as Ajanta prepares to scale up in the backdrop of 1) challenges in the domestic derma space 2) currency translation issues in emerging markets and 3) slower-than-expected off-take in the US. With a strong balance sheet and high return ratios, we believe the time is ripe for the company to enter the capex cycle, the benefit of which is likely to pan out beyond FY18. We have ascribed a target price of | 1780 based on 28x FY18E EPS of | 63.6.

Exhibit 17: Notable Para IV Filings

 

Brand Name

Indicator

Generic Name

NDA holder

Filing Date

 

Abilify

Depression

apriprazole

Otsuka Pharma

17-Mar-15

[

Source: Bloomberg, ICICIdirect.com Research

Page 8

Stock Performance 240 220 200 180 160 140 120 100 80 60 CNX Pharma Alembic
Stock Performance
240
220
200
180
160
140
120
100
80
60
CNX Pharma
Alembic Pharma
Nifty
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16

[

Key Financials

(|crore)

FY15

FY16P

FY17E

FY18E

Revenues

2056.2

3140.4

3227.1

3802.7

EBITDA

404.6

1006.0

536.6

746.4

Net Profit

284.3

719.4

369.7

533.1

EPS (|)

15.1

38.2

19.6

28.3

Key Ratios

 

FY15

FY16P

FY17E

FY18E

Debt / Equity

0.3

0.1

0.1

0.1

PE (x)

36.2

14.3

27.9

19.3

Target PE (x)

41.1

16.2

31.6

21.9

EV to EBITDA (x)

32.2

12.6

23.9

17.3

ROIC (%)

33.7

78.5

34.8

40.1

RoNW (%)

32.1

51.5

22.3

26.2

RoCE (%)

30.7

58.0

24.8

29.7

ICICI Securities Ltd. | Retail Equity Research

29.7 ICICI Securities Ltd. | Retail Equity Research Alembic Pharma gAbilify windfall boosts FY16 numbers; sharp

Alembic Pharma

gAbilify windfall boosts FY16 numbers; sharp R&D spike to impact near term profitability

FY16 highlights

Alembic’s revenues grew 52.7% YoY to | 3140 crore in FY16 on account of gAbilify launch in the US by its partner under shared exclusivity. gAbilify launch and a better product mix in the domestic market caused an EBITDA margin expansion of 1230 bps to 32% in FY16

The company received four Form 483 observations from the USFDA in March 2016 for its Panelav facility. The same facility was also inspected by the agency last year without any observations. Post the observations, the company received ANDA approval from USFDA to be sold from the facility

APL’s cumulative ANDAs were at 76. In FY16, it filed eight ANDAs and received nine approvals in FY16. The company filed nine DMFs in the US market in FY16 taking the count to 81

The company had launched 11 products under its own label in

FY16

APL has added ~1400 MRs in the past two years in the domestic market to widen its focus on the specialty segment by introducing more divisions within segments taking the total MR strength to ~5000

What to watch

Guided for | 450 crore (14-15% of sales) of R&D spending in

FY17

Guided for higher than | 300 crore capex in FY17. Total | 80-100 crore capex for its JV with Orbicular for dermatology portfolio. Under the JV, It shortlisted ~40 products for future development. Total market size of these opportunities is ~US$5 billion

The company expects six to nine ANDA approvals in FY17

The Sikkim plant became fully operational during Q4FY16. It is expected to reach full capacity utilisation in FY17

Reiterated tax rate guidance of ~20% for FY17

Our view With the announcement of aggressive R&D and capex plans, the management has signalled the strategy for the next five to six years, especially on the US front. This includes a foray into niche areas like oncology, injectables, derma, etc. This, we believe, is fraught with a new set of challenges, the benefits of which are most likely to be back-loaded. The company is now at a new inflection point as it prepares to do away with one-off finite opportunities in the US. The immediate cash-burn is likely to weigh on sentiments in the near term. Accordingly, we have reduced our FY17E, FY18E EPS estimates by 31% and 21%, respectively. Our target price is | 620 based on 22x FY18E EPS of | 28.3.

Page 9

Stock Performance 150 140 130 120 110 100 90 80 70 CNX Pharma Aurobindo Pharma
Stock Performance
150
140
130
120
110
100
90
80
70
CNX Pharma
Aurobindo Pharma
Nifty
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16

Key Financials

(| Crore)

FY15

FY16P

FY17E

FY18E

Revenues

12120.5

13831.2

15543.9

17652.7

EBITDA

2563.6

3140.7

3524.3

4109.8

Net Profit

1575.8

1915.6

2200.6

2627.8

Adjusted PAT

1635.4

1981.6

2200.6

2627.8

EPS (|)

27.1

32.8

37.7

45.1

Adjusted EPS (|)

28.1

33.9

37.7

45.1

Key Ratios

 

FY15

FY16E

FY17E

FY18E

Debt / Equity

0.9

0.5

0.4

0.2

PE (x)

27.5

22.7

19.7

16.5

Target PE (x)

36.6

30.2

26.3

21.9

EV to EBITDA (x)

30.7

24.8

22.0

18.5

Price to book (x)

8.4

6.2

4.8

3.8

RoNW (%)

31.7

28.1

24.3

22.9

RoCE (%)

23.4

25.0

24.6

26.4

ICICI Securities Ltd. | Retail Equity Research

26.4 ICICI Securities Ltd. | Retail Equity Research Exhibit 18: Notable Para IV Filings   Brand

Exhibit 18: Notable Para IV Filings

 

Brand Name

Indicator

Generic Name

NDA holder

Filing Date

 

Abilify

Depression

apriprazole

Otsuka Pharma

9-May-14

Brilinta

Cardiovascular

Ticagrelor

AstraZeneca

30-Oct-15

 

Lyrica

diabetic peripheral neuro pregabalin

Pfizer

7-Dec-11

Multaq

prevention of cardiovasc dronedarone hydrochloride

Sanofi

4-Apr-14

 

Staxyn

erectile dysfunction

vardenafil hydrochloride

Bayer

18-Sep-15

Uloric

febuxostat

hyperuricemia

Takeda

19-Nov-13

 

Viibryd

major depressive disorde Vilazodone Hydrochloride

Forest Laboratories

30-Mar-15

Benicar

hypertension

olmesartan medoxomil

Daiichi Sankyo

1-Apr-16

[

Source: Bloomberg, ICICIdirect.com Research

Aurobindo Pharma

Highest ever approvals in FY16; robust product basket bodes well for future

FY16 Highlights

Revenue growth of 14% was largely driven by strong US sales on the back of extensive product launches

Received highest ever USFDA annual approvals (49 final USFDA approvals including 20 injectable approvals and nine tentative approvals) among all Indian pharma companies

Filed 78 ANDAs with USFDA under injectables segment (including ophthalmic) of which 29 have received approvals. The company launched 28 products in the US during FY16

Cumulative ANDA filings were at 398 including 215 final approvals, 36 tentative approvals and 147 pending approvals

Received EIR for Unit III (January 2016 inspection), Unit VII, Auronext, Unit XI (API facility) and Unit VIII (API facility). Unit XII (July 2015 inspection) is pending EIR. Unit IV (September 2014 inspection) is expected to be inspected within the next 12 months.

Auromedics garnered sales of US$36.3 million registering growth of 98% YoY on account of new product launches

Natrol recorded revenue growth of ~15% in FY16 to US$110 million. Natrol’s margins are better than the company’s consolidated margins

Actavis portfolio has start generating net profit during the year

Net debt was US$584 million with cash of ~US$127 million

Capex was US$212 million (US$18 million intangible and US$194 million tangible)

What to watch

The company expects Nexium launch in H2FY17. It expects stiff competition due to a crowded market

Aurobindo plans to start filing oncology and hormonal products in the US in the next four quarters while injectable filings are expected to be same as FY16

For the Natrol business, the company guided for 15% YoY revenue growth with margin expansion

The company is planning an expansion of its injectable capacity and de-bottlenecking of capacity at unit VII

Guided for high single digit EBITDA margins for Europe in a couple of years

Guided for 4-4.5% of R&D spending in FY17E

Guided for | 1200 crore of capex in FY17E and | 500 crore in

FY18E

Page 10

Stock Performance 180 160 140 120 100 80 60 CNX Pharma Biocon Nifty Mar-15 May-15
Stock Performance
180
160
140
120
100
80
60
CNX Pharma
Biocon
Nifty
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16

Key Financials

(| Crore)

FY15

FY16P

FY17E

FY18E

Revenues

3089.8

3485.4

4031.8

4647.9

EBITDA

695.8

820.0

955.6

1103.4

Adj. Net Profit

408.4

441.2

565.2

609.5

Adj. EPS (|)

20.4

22.1

28.3

30.5

Key Ratios

 

FY15

FY16E

FY17E

FY18E

Debt / Equity

0.3

0.6

0.5

0.5

PE(x)

32.2

14.7

23.3

21.6

Target PE (x)

26.6

24.7

19.2

17.8

EV to EBITDA (x)

12.5

10.9

12.7

12.5

Price to book (x)

10.4

9.1

10.9

11.1

RoNW (%)

9.6

8.7

7.3

6.0

RoCE (%)

4.0

3.2

3.0

2.7

ICICI Securities Ltd. | Retail Equity Research

3.0 2.7 ICICI Securities Ltd. | Retail Equity Research Our view The company continues to thrive

Our view The company continues to thrive in the US, backed by a robust product pipeline and niche launches. Despite a sharp increase in approvals in FY16 (49 final approvals, nine tentative approvals), the filing to final approval gap (147 at present) still bodes well for future US growth. We expect initial margin pressure on account of Actavis and now Natrol, to ease further on the back of incremental high margin US launches. With the USFDA expected to hasten the approval process (90% of approvals by September 2017) companies like Aurobindo will stand to benefit the most. We have ascribed a target price of | 990, based on 22x FY18E EPS of | 45.1.

Exhibit 19: Notable Para IV Filings

 

Brand Name

Indicator

Generic Name

NDA holder

Filing Date

 

Acular LS

Ocular Pain

Ketorolactromethamine

Allergan

6-Nov-15

 

Prevacid

Stomach ulcers

lansoprazole

Salix Pharmaceuticals,

13-Oct-15

Xarelto

Blood Thinner

Rivaroxaban

Takeda Pharma

21-Oct-15

 

Aloxi

nausea and vomiting

palonosetron hydrochloride

Roche

15-Apr-13

Angiomax

blood clots

bivalirudin

The Medicines Compan

11-Apr-13

 

Boniva

osteoporosis

biphosphonic acid

Roche

22-Jan-13

Allegra-D

seasonal allergies

fexofenadine hydrochloride

Sanofi-Aventis U.S. LLC

5-Nov-10

[

Source: Bloomberg, ICICIdirect.com Research

Biocon

Event full FY16; biosimilars progress to trigger growth…

FY16 Highlights

Biocon’s revenues grew 12.8% to | 3485.4 crore on account of 30% growth in Syngene to | 1068.5 crore

The company raised ~| 550 crore via unlocking of Syngene

Biocon offloaded ~11% stake in the process. Proceeds

from the IPO are expected be used by Biocon for its biosimilar pipeline

Four of its biosimilar products (Trastuzumab, Pegfilgrastim, Adalimumab and Insulin Glargine) reached the advanced stage (Phase III or beyond) of global clinical trials

The company received first biosimilar approval in a developed market with Japanese approval of Insulin Glargine. Its partner Fujifilm Pharma expects to commercialise the product in H1FY17. The company also launched its biosimilar Glargine in emerging markets while five of its biosimilar products entered late stage development

Biocon, with its partner Mylan, has announced positive phase III data for biosimilar of a Roche biological Herceptin (Trastuzumab; oncology). Global sales of the drug were ~US$6.5 billion in FY16

The company has completed Phase I study for Insulin Tregopil (insulin) in the US with BMS as its partner

Biocon acquired API and oncology formulation manufacturing unit of M/s. Acacia Lifesciences Pvt Ltd at Vishakhapatnam

Malaysian facility is in validation stage and is expected to receive regulatory approvals in near term. The company plans to commercialise sales of insulin in Malaysia and other emerging markets in FY17. The Malaysian plant has received local approval

The company is in the process of setting up oral solid dosage facility for generic formulations and sterile formulations facility

(IPO)

Page 11

Stock Performance 200 180 160 140 120 100 80 60 CNX Pharma Cadila Healthcare Nifty
Stock Performance
200
180
160
140
120
100
80
60
CNX Pharma
Cadila Healthcare
Nifty
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16

Key Financials

(|crore)

FY15

FY16P

FY17E

FY18E

Revenues

8635.8

9844.0

10921.5

13140.0

EBITDA

1740.2

2389.3

2393.0

3048.6

Net Profit

1146.4

1530.8

1586.0

2105.5

EPS (|)

11.2

15.0

15.5

20.6

ICICI Securities Ltd. | Retail Equity Research

20.6 ICICI Securities Ltd. | Retail Equity Research for biologics business. These plants are being built

for biologics business. These plants are being built in Bangalore SEZ area and are expected to be commissioned in CY17

The company has filed seven ANDAs with the USFDA till the end of FY16. It has filed gCopaxone (Glatiramer acetate; multiple sclerosis) 20 mg and 40 mg with the USFDA

What to watch

Biocon is planning US/EU biosimilar filings for Trastuzumab, Pegfilgrastim, insulin Glargine and Adalimumab in FY17

The management has reiterated its FY19 revenue guidance of US$1 billion

The company expects higher growth for biosimilars in emerging markets and branded formulations and mid single digit growth for small molecules

Progress of the Malaysian insulin plant, which has recently been commissioned. It expects emerging market sales from this plant to start from FY17 and expects developed market approval by

FY18

The company plans to spend 18-20% (gross) of biopharma sales on R&D expenditure for FY17

Biocon is planning standalone capex of | 200-225 crore for FY17. This includes maintenance capex along with additional capex required for commissioning the two new facilities in Bangalore

Our view Syngene continues to maintain growth momentum. However, the positive surprise was biopharma growth on the back of biosimilar launches in emerging markets. This, along with the Japanese Glargine approval and proposed filing in other markets bodes well for the future as the company expects higher contribution from biosimilars, going forward. On the other hand, prolonged restructuring, pricing pressure and capacity constraints continue to impact small molecules growth. Given the different fortunes for different segments, we continue to adopt SOTP methodology for valuation. Our SOTP target price is | 545.

Cadila Healthcare

Moraiya resolution, site transfer momentum to be in focus

FY16 Highlights

Cadila revenues grew 14% in FY16 to | 9844 crore on account of 19% growth in US sales. EBITDA margins grew 412 bps YoY to

24.3%

The company received a warning letter from the USFDA for its Moraiya formulation facility and Ahmedabad API facility (Zyfine). ~60% of its US revenues (25% of overall revenues) are from Moraiya facility

On the other hand, four formulation facilities, viz. oral solid dosage facility, oncological injectable facility (Alidac), transdermal facility (all in Ahmedabad SEZ) and oral solid dosage

facility at Baddi received the establishment inspection (EIR) from

the USFDA

The company successfully completed site transfer of five products from Moraiya to Baddi for the US market in FY16, taking the cumulative number of such site transfer products to 12

FY16 capex was ~| 950 crore. This includes acquisition of select animal healthcare brands, the manufacturing operations in India from Zoetis and acquisition of Actibile (GI), the brand from Albert David