CRAMS INDIA : OVERVIEW & OUTLOOK. June 2011

Transcription

1 CRAMS INDIA : OVERVIEW & OUTLOOK June 211 ICRA Limited CRAMS INDIA June 211

2 Agenda: CRAMS Overview & Outlook Description Slide Global Growth Drivers 3-6 Market Dynamics 7 Outsourcing Trends 8 Contract Manufacturing Outsourcing 9-11 Contract Research Outsourcing Key Challenges 14 Key Players -Divi s Lab 15 -Dishman Pharma 16 -Jubilant Lifesciences 17 -Piramal Healthcare 18 -Biocon Limited 19 Outlook & Conclusion 2-21 Annexure Analysts Contact 24 ICRA Limited CRAMS INDIA 2

3 CRAMS Global Growth Drivers Patent Expiries Falling R&D Productivity Focus on Generics / Branded Generics Cost Pressures Drugs worth US$ 97 billion expected to go off patent from in US compared to USS$73 billion during 26-1 period New launches not enough to justify loss of existing block-buster going off patent Sales generated by new approvals have seen declining trend over the last few years despite increase in R&D budgets Average R&D cost increased to US$1.3 billion per NME; rising intolerance to side effects of new drugs reduces research productivity Increasing role of Generics being played out in developed countries by Insurance and healthcare providers Foray into branded generics segment of emerging markets to boost dwindling global revenues and profitability Falling R&D productivity coupled with pricing pressure has led to margin contraction Increase in raw material and wage inflation further impact bottomline STRONG GROWTH PROSPECTS FOR GLOBAL CRAMS INDUSTRY BACKED BY COST PRESSURES for INNOVATIVE PHARMA COMPANIES AND INCREASING GENERICISATION ICRA Limited CRAMS INDIA 3

4 US$ billion CRAMS Global Growth Drivers $8. $7. $6. $5. $4. $3. $2. $1. $. New FDA approvals and R&D Spending by Year (21-21) 36 $63.2 $63.7 $65.9 $67.4 $56.1 $ $ $29.5 $3.8 $ R&D spend (LHS) No. of New drugs (RHS) US: Patent Expiries Schedule E 212E 213E 214E 215E Source: USFDA, PhRMA Industry Profile 211, Industry reports, ICRA estimates. ICRA Limited CRAMS INDIA 4

5 CRAMS Global Growth Drivers Patent Expiries: Selected Products Product Company Yearly Sales ($Billion) Year of Patent Expiry Xalatan Pfizer Leavaquin Johnson & Johnson Zyprexa Eli Lilly Diovan (ex-us) Novartis Aricept (Japan) Eisai Taxotere Sanofi-aventis Concerta Johnson & Johnson Lipitor Pfizer Singulair Merck&Co, Inc Seroquel AstraZeneca Provogil Cephalon Geodon Pfizer Tricor Abbott Eloxatin Sanofi-aventis Viagra Pfizer Lexapro Forest labs Plavix (US) Bristol-Myers/ Sanofi-aventis Diovan (US) Novartis Enbrel (US) Amgen Actos Takeda ICRA Limited CRAMS INDIA 5

6 CRAMS Global Growth Drivers Patent Expiries: Selected Products Product Company Yearly Sales ($Billion) Year of Patent Expiry Cymbalta Eli Lilly Niaspan Abbott Lidoder Endo Oxycontin Purdue Pharma Adavir GlaxoSmithKline Aciphex Eisai Sanofi-aventis/Bristol- Myers Plavix (ex-us) Epogen Amgen Seretide/Advair GlaxoSmithKline Lyrica Pfizer Nexium AstraZeneca Copaxone Teva Celebrex Pfizer Blopress (Japan) Takeda Welchol Daiichi Sankyo Aggrenox Boehringer Ingelheim Aloxi Eisai Avodart GlaxoSmithKline Zyvox Pfizer Androgel Solvay Gleevac Novartis Namenda Forest Labs Source: ICRA research, Moody s, Industry Reports* Year generally reflect date that patents first begin to expire. Generic competition may not necessarily occur depending on many factors including strength of later patents, whether generics receive approval, status of patent challenges etc. ICRA Limited CRAMS INDIA 6

7 US$ Billion US$ Billion CRAMS - Market Dynamics Global CRAMS Market, US$ Billion CAGR15% E Approximately 64% of the estimated US$ 67 billion global CRAMs market in 21 is dominated by contract manufacturing which includes manufacturing of intermediates for new chemical entities (NCEs) or manufacturing of APIs Contract Research predominantly consists of drug discovery, preclinical and clinical research and represent US$ 25 billion opportunity globally Contract Manufacturing Drug Discovery and Research Huge scope for growth as currently only ~2% of global Pharma R&D spend is being outsourced Indian CRAMS Market, US$ Billion E Contract Manufacturing Drug Discovery and Research Source: Industry reports, ICRA estimates, excludes Clinical Trials Out of the estimated US$3.8 billion market in 21, approximately US$ 2.3 billion pertains to contract manufacturing. Chemical synthesis being the major contributor followed by formulations & packaging Contract research market size at US$ 1.5 billion displaying strong growth driven by chemistry capabilities, skilled manpower and cost value proposition Players in the Indian CRO market in the year 25 were ~2, which increased to ~1 in 28 and expected to be around 15-2 by 212 leading to higher competitive intensity ICRA Limited CRAMS INDIA 7

8 CRAMS Outsourcing Trends 6% Extent of Outsourcing in each area of the value chain 5% 4% 3% 2% 1% % 55% 25% 2% 15% 15% 15% Discovery API dev. Dosage dev. API mfg. Dosage mfg. Packaging Over the past few years, Pharma MNCs have begun to outsource core functions such as clinical trials and manufacturing with drug discovery being one of the recent core functions to be out sourced Late life cycle outsourcing has the highest share with API manufacturing outsourcing the highest at around 55% While the Outsourcing of drug & discovery development activities and dosage manufacturing is low as they form part of core activities, they represent a huge scope for future growth as integrated CRAMS players emerge and build entrenched relationships with Pharma MNCs Source: Industry reports, ICRA estimates. ICRA Limited CRAMS INDIA 8

9 Contract Manufacturing (CMO) Overview Approximately 6% of the total US$2.3 billion Indian CMO market relates to chemical synthesis followed by formulation and packaging, which constitutes about 4%. The market has grown at a CAGR of 51% over 27-1 reflecting upon the strong potential it has to offer Contract Manufacturing requires upfront investments for building up requisite facilities and is capital intensive in nature, thereby requiring long term assured supply contracts in order to recoup investments or take or pay type of contracts Indian players have taken in-organic route of acquisition to gain access to customers, regulated markets of America and Europe and niche technologies like sterile injectables, cytotoxics to build strong franchise for themselves Growth Drivers High Number of USFDA and UK MHRA approved plants (2+) Well-developed chemistry skills Sufficient product filing track record: Indian companies have been on the fore-front, both in terms of filing DMFs and ANDA Robust talent pool Low production & R&D cost Quality Infrastructure & established track record of IPR compliance DMF s Filings 37% 39% 4% 4% 37% 36% DMF Filed, India (LHS) DMF filed, Overall (LHS) % India (RHS) Source: USFDA, ICRA estimates. 45% 4% 35% 3% 25% 2% 15% 1% ICRA Limited CRAMS INDIA 9

10 Contract Manufacturing (CMO) 2 Number of FDA approved plants for sample countries India* Italy China Spain Taiwan Israel Hungary Overall Indexed manufacturing cost (US FDA approved plants) 12% 1% 8% 6% 4% 2% % 1% 8-85% Cost Index 35-4% US Europe India Source: Industry Reports, ICRA estimates. Year 26, *For India upto 29 ICRA Limited CRAMS INDIA 1

11 Contract Manufacturing (CMO) Domestic Trends Domestic branded business present an attractive opportunity for contract manufacturing as large domestic branded generic players focus on marketing and product management and outsource non-core activities like manufacturing to local players Focused manufacturing players tend to be more efficient in production as well as enjoy higher level of capacity utilization leading to lower cost of production In addition to above, Contract manufacturers enjoy several other cost advantages owing to economies of scale in procuring raw material coupled with exploiting tax breaks through setting up of facilities in such notified areas Large domestic capacity of contract manufacturer facilitate flexible outsourcing for outsourcing companies based on market demand. This helps them respond rapidly to events like new product launches (line extension etc.) or surge in demand for existing products Many contract manufacturers have also been able to develop new products (line extensions, combinations) proactively as added service to domestic majors. Further Novel Drug Delivery System applications owned by these contract manufacturers help re-launch existing products thereby leveraging its value proposition ICRA Limited CRAMS INDIA 11

12 Contract Research Outsourcing (CRO) Overview Contract Research Organizations (CROs) provides services including drug discovery, new product development, formulation, pre-clinical trial management spanning till phase IIA The global contract research market reached at US$25 billion in 21 growing at a CAGR of 19% during The Indian contract research industry has been growing tremendously over the past few years and reached approximately US$ 1.5 billion in 21, a CAGR of 65% from 27-1, albeit on a small base The Indian Pharmaceutical outsourcing providers have capabilities to provide late stage discovery (research chemistry) and drug development services. However they are in the process of building up research biology skills to facilitate early stage discovery Low cost & time advantage Cost of Clinical Studies US$ Million India cost advantage Phase I Study 2-25 <5% Phase II Study 5-6 <6% Phase III Study 1-11 <6% Availability of diverse genetic pool Large resource of technical expertise Increasing compliance with WHO Good Clinical Practice (ICH-GCP) Growth Drivers Research Chemistry & biology 18% Pre-Clinical Trial 3% Indian CRO market Source: Industry Reports, ICRA estimates ICRA Limited CRAMS INDIA 12 Clinical Trials 52%

13 Contract Research Outsourcing (CRO) 12 1 Potential savings in outsourcing end-to-end research and development to India Potential cost savings of ~6% 2 Total R&D cost in US Research biology Research chemistry Development cost Total R&D cost in Idnia 35-4 KEY GOVERNMENT INITIATIVES IN THE LAST FEW YEARS Objective Key Initiative undertaken Promoting collaboration among industry, academia and government through various programmes such as Collaboration between industry, the New Millennium Indian Technology leadership (NMITLI) and Drugs and Pharmaceuticals Research academia and the government Program Focus on specialised The GoI has set up seven NIPERs as institutes of "national importance" to achieve excellence in pharmaceuticals education pharmaceutical sciences and technologies, education and training Duty relief for technology The GoI has also introduced zero duty for technology upgrades in the pharmaceutical sector through the upgrades Export Promotion Capital Goods Scheme (EPCG) scheme Promotion of Indian drug discovery platforms Tax Exemption Public Private partnership model to harness India's innovation capability through 5% public funding. Targeting to achieve one out of every five to ten drugs discovered worldwide by 22 originating from India. Increase in weighted reduction from 15% to 2% on expenditure incurred on in-house R&D activities and from 125% to 175% on activities outsourced to specific institutions Source: Industry, ICRA research ICRA Limited CRAMS INDIA 13

14 Key Challenges for Indian CRAMS Industry Cost Escalation & Talent attrition Regulatory Issues Captive CROs & intensifying competition Competition from China Unavailability of skilled manpower for conducting clinical trials CRAMs being a skill-intensive business with high gestation period, attrition of skilled work force is a high risk for the company leading to high compensation structure Concerns on diligent follow of guidelines issued by regulatory bodies Concerns on sharing details regarding NCE for want of proper regulatory framework and risk management framework High level of new entrants despite high level of entry barriers owing to attractive long term opportunity In order to cut costs, many MNCs having presence in India are outsourcing work to captive CROs in Indian China emerging as a strong contender for CMO business on account of cost competitiveness, though India has a lead over China in terms of manufacturing facilities and Language skills Improving IPR compliance through alliances/acquisitions by global CROs ESTABLISHING RELATIONSHIPS AND TRUST WITH INNOVATOR AND OTHER PHARMA MAJORS TOGETHER WITH PROPER RISK MANAGEMENT FRAMEWORK CRITICAL TO MITIGATE RISKS ICRA Limited CRAMS INDIA 14

15 Key Players Divi s Lab One of the largest CRAMS players - custom synthesis of active ingredients for innovator companies, other specialty chemicals like peptides & nutraceuticals. CRAMS contributing 5% of the turnover while the remaining from manufacture of Generic APIs US FDA approved facility, with 38 DMF filings and 1 Certificate of Suitability with European directorate Relatively high product concentration with top product accounting for 18% of sale and top 5 products accounting for 55% of the sales Established relationship with innovator companies; top 5 companies accounting for 49% of the revenues Exports constitute 91% of the revenues, thereby exposing it to foreign exchange fluctuations Performance summary Divi s Labs FY6 FY7 FY8 FY9 FY1 FY11 Operating Income (LHS) OPBDIT Margin (RHS) Source: Industry Reports, ICRA estimates. Rs. in crore OI Growth (RHS) PAT Margin (RHS) Business Overview 1% 8% 6% 4% 2% % -2% -4% Financials Strong growth over the years to cross peak turnover of Rs. 12 crores during FY 29. Decline in FY 21 owing to de-stocking and inventory rationalisation by global pharma majors, recovery during FY11 Healthy margins and profitability coupled with moderate capex plans leading to consistent free cash flows Strong Balance Sheet with net cash position and investments to the tune of approximately Rs. 525 crores as on March 211 ICRA Limited CRAMS INDIA 15

16 INR crores Key Players Dishman Pharma Business Overview Research driven company with expertise in chemical synthesis, manufacturing of APIs, API intermediates, quaternary compounds (Quats) & fine chemicals. Approximately 7% of the turnover from CRAMS Acquisition of Carbogen-Amcis (26) has enabled the company to be present across the value chain of CRAMS & strengthen its position Entrenched relationship with Pharma MNCs with Solvay as the top customer contributing more than 15% of the revenues US FDA approved manufacturing facilities Exports constitute 9% of the revenues; majority to Europe Performance summary Dishman Pharma FY6 FY7 FY8 FY9 FY1 FY11 Operating Income (LHS) OPBDIT Margin (RHS) Source: Annual Reports, ICRA estimates. Rs. in crore OI Growth (RHS) PAT Margin (RHS) 12% 1% 8% 6% 4% 2% % -2% Financials Strong growth over the last few years through organic and in-organic route CRAMS business impacted by recessionary conditions prevailing in Europe coupled with Rupee appreciation against Euro leading to overall -1.3% growth 9M FY11 Execution of low-margin contracts lead to drop in operating margins Moderately leveraged balance sheet with D/E ratio of 1.x as on March 211 Notwithstanding short term challenges, long term prospects remaining attractive ICRA Limited CRAMS INDIA 16

17 Key Players Jubilant Life Sciences Limited Business Overview Largest Indian CRAMS player with presence across the value chain from drug discovery research service to development, custom manufacturing (APIs, pyridines, sterile & non sterile products and radiology) Acquired Draxis Health Inc. in 28, a Canada based contract manufacturing & radiopharmaceutical company for US$255 million and in June 27 acquired Hollister Stier having contract manufacturing of sterile injectables. Acquisition to allow higher presence in regulated markets and on-shore presence Divested low margin Agri & Performance Polymers from FY11 business into a separate company to enhance business focus on Lifesciences US FDA approved manufacturing locations in India as well as North America with DMFs filed across various regulated markets Financials Performance Summary - Jubilant Life Sciences FY6 FY7 FY8 FY9 FY1 FY11 Operating Income (LHS) OI Growth (RHS) 5% 4% 3% 2% 1% % -1% -2% Proprietary products (pyridines and picolines) continue to post strong cash flows supporting other businesses Decline in FY11 due to divestment of Agri & Performance Polymers business and slowdown in growth of Contract manufacturing and drug discovery business Moderately high leverage with debt to equity ratio of 1.3x as on March 211 OPBDIT Margin (RHS) PAT Margin (RHS) Source: Annual Reports, ICRA estimates. ICRA Limited CRAMS INDIA 17

18 INR crore Key Players Piramal Healthcare Business Overview Presence in CRAMS business with assets in India and abroad. Capacity scale up in the past with Aveica (UK) acquisition and Pfizer s Morepeth facility (UK) Divested Domestic formulations business to Abbott for total consideration of US$3.8 billion; intend to scale up Contract Manufacturing business through organic and in-organic route Focused CRAMS player with presence across the value chain from drug discovery research service to development and custom manufacturing Recently acquired Ahmedabad based discovery services business which offers synthetic chemistry, medicinal chemistry and computational chemistry; acquisition to complement CRAMS business Financials Pirmal Healthcare: CRAMS Revenue and Growth FY 28 FY 29 FY 21 FY 211 CRAMS Revenue (LHS) Revenue Growth (RHS) 3.% 25.% 2.% 15.% 1.% 5.%.% -5.% -1.% -15.% CRAMS revenue affected in financial year 21 owing to de-stocking by Pharma companies amidst concerns of economic slowdown Recovery during FY11 (+8.6%) with positive growth during H2 FY11; momentum likely to continue going forward as global demand recovers Strong balance sheet with huge cash reserves resulting from sale of domestic formulations business to Abbott Source: Annual Reports, ICRA estimates ICRA Limited CRAMS INDIA 18

19 INR crore Key Players Biocon Limited An integrated biotechnology company with presence across the value chain - R&D, manufacturing and building strengths in marketing CRAMs presence through its subsidiaries (Syngene International Limited, Clinigene International Limited) offering contract research and clinical trials services besides Biocon offering contract manufacturing services for select innovator products (deal with Optimer) Research Services business focus on on discovery research in the areas of Molecular Biology, Custom Synthesis and Chemistry FTEs in pre-clinical phase besides offering clinical trial services; Research Services has partnerships with large global pharmaceutical companies with the company having set up a dedicated facility for Bristol-Myers Squibb FY28 FY29 FY21 FY211 Revenues (Rs. crore, LHS) Revenue Growth (RHS) PBIT (Rs. crore, LHS) PBIT/OI (RHS) Source: Annual Reports, ICRA estimates for Research business Business Overview 35.% 3.% 25.% 2.% 15.% 1.% 5.%.% Financials Research Services business witnessed strong revenue growth between FY27 and FY21; revenue growth in H1FY211 moderated on account of higher competition faced by the business besides reduced outsourcing budgets of global pharma majors. However, there has been a recovery in revenue growth during H2FY211 Profit margins impacted due to increasing competitive intensity and commoditisation of services offered Biocon (on consolidated basis) has low debt levels and strong cash balances ICRA Limited CRAMS INDIA 19

20 US$ Billion US$ Billion Outlook & Conclusion (1/2) The global CRAMS market is expected to grow further to approximately US$85 billion by 212. Increase in outsourcing from developed to developing countries will continue as the innovator companies will lose patent protection for many of their blockbuster drugs over the next few years; thereby forcing them to look for various alternatives such as, cost control and introduction of generics to their portfolio Outsourcing of non-core activities like manufacturing of intermediates and APIs to low cost destinations like India is gaining momentum for pharma MNCs as they focus on their core R&D and brand building business The Indian CRAMS market stood at approximately US$3.8 billion in 21 and is estimated to reach US$7.6 billion by 212. With high number of USFDA approved plants, skilled manpower and technical competencies coupled with inherent cost advantage, contract manufacturing is likely to dominate the CRAMS space. The CMO business is expected to be US$7-8 billion opportunity by 215 as per industry estimates IndianCRAMS Market 2.5 CAGR 44% E 212E Source: Industry Reports, ICRA estimates ICRA Limited CRAMS INDIA Global CRAMS Market 58 CAGR 13% E 212E

21 Outlook & Conclusion (2/2) Further, Indian Companies have strengthened their presence in the market by acquiring better technologies and developing technical expertise in niche segment (sterile drugs, cytotoxics, lyophilization etc.) that offer higher margins and higher entry barriers. Acquisition of foreign facilities would accelerate growth and foster better relationship with innovator companies, though generating adequate return on such investment needs to be monitored In the long run, companies which provide integrated drug development, research, clinical trial and manufacturing outsourcing services will prove to be one stop shop for all the needs for innovator pharma companies resulting in long term partnerships and better customer franchise Outsourcing of high end services like clinical trials (CTO) and drug discovery (CRO) will require Indian companies to build entrenched relationship with Innovator companies over a period of time; initially with smaller projects and gradually moving onto mission critical and high value add projects The domestic market represents a window of opportunity for CRAMs players as increasingly larger domestic players are outsourcing manufacturing and packaging services to these players in order to focus on marketing and sales and new product development. There ability to offer value added services like drug delivery systems, combination drugs further leverages their value proposition Overall, the outlook for Indian CRAMS appears healthy supported by Contract Manufacturing Outsourcing for APIs and increasing presence in high end Contract research business ICRA Limited CRAMS INDIA 21

22 Annexure1: CRAMS - Overview Area of Contract Research Area of Contract Manufacturing Drug Discovery Process Pre-Clinical Study Clinical Study Custom Synthesis Drug Substance Production Dosage form development & Production Disease Study/Target discovery, Target validation, Lead discovery, Lead testing, Lead optimization In-vivo, In-vitro animal toxicity studies Filing of IND with FDA Phase I, IIA Scaling up from Lab-scale to kilo level and from kilo to Ton level Commercial Production of APIs/Intermedia tes Commercial Production of Formulations in different dosages form Contract Research activities taken on cost plus basis of full time equivalent (FTE) basis Contract Manufacturing activities for both New Chemical Entities and offpatent drug. ICRA Limited CRAMS INDIA 22

23 Annexure2. CMO deals done in past by Indian Companies Indicative Indian Company Outsourcing Partner Description Aurobindo Pharma AstraZeneca, Pfizer Supply generic medicines for developed & emerging markets Strides Arcolab Limited Pfizer Supply 67 generic drugs to Pfizer with focus on Oncology Torrent Pharmaceuticals AstraZeneca Supply 18 products for various markets Indoco Remedies Aspen Range of Ophthalmic Products for 3 emerging markets Watson Develop and manufacture generic drugs with market size of US$ Indoco Remedies Pharmaceuticals 67 million Cadila Healthcare Altana, Zyban JV structure for manufacturing on patent drugs Shasun Eli Lilly, GSK Contract manufacturing for APIs and formulations Dishman Solvay, GSK Contract manufacturing for APIs and intermediates Jubilant Novartis Contract manufacturing for intermediates and APIs Matrix GSK Contract manufacturing for API Divi's MNCs Custom chemical synthesis Strides Arcolab Limited GSK Supply of drugs for semi-regulated markets Ipca AstraZeneca Contract generics manufacturing of APIs Torrent Pharmaceuticals Novo-Nordisk Contract manufacturing of formulations ICRA Limited CRAMS INDIA 23

24 Analytical Contacts: Anjan Ghosh Subrata Ray Gaurav Jain Anupama Arora Mumbai Mumbai Pune Gurgaon ICRA Limited CRAMS INDIA 24