A few pharmacies !
Global Generics Segment (~80% of revenues):
Top revenue contributors of the segment are nervous system drugs (19%), gastrointestinal (14%) & oncology (13%).
Pharmaceutical Services & Active Ingredients (PSAI) (~15% of revenues):
The company is one of the largest manufacturers of APIs in the world. It works
with several leading generic formulator companies in bringing their molecules
first to the market. Its API development also helps its own generics
business to be cost competitive and get to the market faster than competitors.
The
company's R&D expenses as a % of total revenues has come down from 13% in
FY18 to 9% in FY21.
USA accounts for 44% of revenues, followed by India (18%), Russia (10%) and others (28%).
Number
crunching
Mcap – 72000 Cr
Book Value per share - Rs. 1114
Sales- 20800 Cr
Gross margin
50-55% (gross margin for the Global Generics and PSAI were at 57.7% and 21.6%
respectively )
OPM – 20%
Management- Mr. Erez Israeli -- CEO; Mr.
Parag Agarwal -- CFO
Erez- We continue to make good progress on our
strategy execution by enhancing our development pipeline of both small
molecules and biosimilars, continuing with our new products launch momentum,
gaining market share in key products, making inroad into newer sets of markets
in Europe, driving productivity and accelerating our innovation agenda.
Target – 25 EBITDA RoCE
What When How.
Consolidated revenue for the quarter(Q1FY22) stood at
Rs.4,919 crores, that is US $662 million and grew by 11% on year-on-year basis
and by 4% on a sequential quarter basis. The growth is mainly driven by
new product launches including COVID products, higher base business
volumes, full quarter impact of portfolio acquired from Wockhardt in
Q1 FY'2021 and was partly offset with price erosion in some of our products
mainly in US and Europe.
While the gross margin in current quarter(Q2FY22) was
impacted due to price erosion, product mix and increase in input material cost,
primarily on KSM, solvent and other fuel, it was supported by out-licensing
income and leverage benefit for manufacturing overhead. Gross margins from the
global generics and PSAI businesses were at 56.9% and 25.9% respectively for
the quarter.
The growth was primarily led by :
(a) higher volumes due to seasonal demand,
(b) revival in market growth after a negative impact due to COVID in quarter 1,
and
(c) launch of biosimilar Bevacizumab
Product mix used as leverage to balance gross margins.
Export incentive that was withdrawn has clearly put a
downward pressure on the gross margin. There is some pressure that is
there because of the North American price erosion. "To offset its impact
we drive higher sales growth and we sweat our asset, we can leverage the cost
base and the second is the product mix. Some of our significant high value
launches are margin accretive. So overall, I don’t believe that there is a
downward trend in gross margin, gross margin fluctuates from one point to
another and we are fairly confident of the margin profile of the generic
business.”
New Platform coming up- Successfully managed to
expand our business model ‘Beyond the Pill’ through digital innovation and true
demonstration of that is the launch of SVAAS, an app-based integrated OPD
service delivery platform in India. This will provide simple and high quality
healthcare by addressing patient needs for doctors, pharmacies, laboratories and
insurance all under one roof.
“First, it's not an app, it is a OPD service that we are
giving to people and people in this case it's a collaboration, we will get
under an insured service, their needs under one roof, meaning we are going to
provide them the healthcare that they deserve in much better service and much
cheaper than they used to, to get to buy the current alternatives that they
have. The beauty of that is an end-to-end platform, in which comprise the
physicians, the insurer, the pharmacies, the delivery, the information and
everything under one roof.”
D2C
“We are basically on the last stages of finishing the pilot.
We are now present in 5 cities, going to 10 cities in the next few weeks. This
will cover of course the main cities of India including Mumbai and Delhi.
Accordingly will be the roll out of the companies that will join this
platform. Our main way to grow this business is by convincing the
companies to work with us and give treatment to direct consumers and
basically insured by our insurance in this product. And of course, rolling out
good services by physicians as well as by other vendors to provide excellent
service. This is very niche project and I'm very proud of the beginning and
believe in it very much. It's a good thing for us and I believe it's a very
good thing for India as a whole.” (ROBUSTNESS EXAMPLE)
Covid Impact and Stocking issue
PSAI business recorded sales of $102 million with a
year-over-year decline of 10% and sequential quarter decline of 6%. This was
largely due to higher sales base for business during same quarter in last year
owing to stocking activity by our customers as a response to mitigate the
COVID-related potential disruptions. Considering the nature of this business,
we expect some fluctuations in quarter-on-quarter sales due to lumpiness in
order book
India vs US market
In India and emerging markets, yes, but it's also
supported well with the sales and the profit. So, this is a very healthy
business, it is growing and it's paying for its investment plus with great
return on investment and great EBITDA.
The activities that are related to more geographic spread as
well as services as they are taking current products and expanding into other
areas. RoCE as well as the EBITDA in India is above our average. There is
a good chance that India, as a market, will be bigger than United States in
three to four years to come.
Horizon 2, the future of the company, the activities that will generate growth
for the company, post-2026, post-2027, will derive from innovation that will be
initiated in India, with partners in India and outside of it.
"Seeing good growth in our market and therefore we are putting money
behind our brand in the branded markets like India and Russia. We are also
investing behind digitalization both frontend and backend, so that is one part
of it."
"We are building a portfolio of 25 to 30 products a year, and continue to
do that. Some of them are like Icosapent next year, like Revlimid next year,
and other products, are promising, in terms of the value. This is the
business we are and that's the nature of the market."
The specific capital allocation for the United States moved from about 90-percent-plus
in FY16 to about 15 percent in FY22. Overall, the injectable and the
complex generic will drive the growth in the United States on the generic path
and it will grow faster than the retail product.
Next few quarters- The main growth will come in the
next, so overall strategically, the main growth will come when the new
portfolio of API, which will of course support launches by our customers
including our own internal use of the newer API. So if you wish
our API business with the biggest products that is primarily driven by a
group of products or let us say veteran in the generic business and the
new products that will be launched, primarily peptides, will replace
pareto products in the next coming years. Specifically, the API is
doing well given the fact that on one hand you have increase in commodity and
you have intensified competition of some of these key product, but we are doing
well in penetrating with the newer product and I believe that, within the next
few quarters, we will see sustainable growth. The fluctuation that we see now
probably will continue in the next 2 to 3 quarters.
“Our strategy for the last 4 years, we are investing in
other markets for growth in both India and emerging markets and this is
providing us by using the same fixed assets based on our portfolio, our assets,
our knowledge, etc. this is allowing us more growth with less
risk. The United States will continue to be an important market for us. I
just want to emphasize on it and we will continue to invest and grow in the United
States. The other emerging markets anyhow will grow faster than the United
States. Therefore, then the average weight of the United States will decrease,
is decreasing already and will decrease over time. And the capital
allocation is done accordingly to the diversification efforts."
R&D Spend
“We are spending on our generic portfolio for the
spaces in each one of the markets, mainly in United States, China, Europe,
emerging markets, we are trying to globalize products, so we are developing
products for more than one market, and if possible to all of the relevant
market, which was the part of the productivity products, but this is in
line of our core business."
They are spending money on the biosimilars and
recently, also on the COVID products as well as vaccines, specifically for
India, Russia, certain clinically differentiated products, developing APIs as
well as intermediates as part of that. There is a small group under a branch of
Dr. Reddy’s, Aurigene discovery that is developing products for immuno-oncology with
the business model in which they are taking some of the assets and licensing
out in early stage for financing the products that are to be developed.
The current business model of generic, branded generic and API will
continue to be the main business.
"We want to create the growth of our core business as
well as building the new franchises and maintain 25-25. This is the challenge
that we took upon ourselves and so far we are in that direction."
Biosimilars-Robustness ratio guide
“Biosimilars, I believe that calendar year of 2024, we will
start to see more meaningful contributions and as we are now investing, the
sale that we have especially in emerging markets, by building more capacity and
indeed this is our business model and of course licensing in for the United
States. So this is right now the model and this continues to be the model
probably until the calendar 2024 or fiscal 2025. As for the margins, I am
reiterating the famous 25-25, as we are sharing well, we are very much in that
direction and it is coming faster than we anticipated, let us say, 3 years ago,
so we are very close to that.”
“We have rituximab which we have now commercially with most
of the emerging markets, and the primary markets for it today are India and
Russia. And then we have the bevacizumab and additional 4 biosimilars primarily
for emerging markets”
“Overall, it's a healthy portfolio that cover us very nicely
from about 2024 until 2031-2032 in which we will launch all of these products.”
Less risky CDMO bet ?
“PSAI is comprised also of our CDMO activities that are
slightly picking up. And we very much believe in it. So, most of the seeding
that is done now are with small projects which are in Phase-1 and early Phase-2
and naturally some of these products will come to Phase-3 and beyond that and
of course serve as a growth driver for the CDMO type of the business which is
as I discussed in the past part of our Horizon-2 activities and it's seeding
and picking up.”
Overall DRL is one of the prominent players with lot
of institutional investors, top notch management and plans to transform from
generic US to specialty diversified company.
Let us have a look at Aurobindo Pharma now !
Aurobindo
Pharma
Numbers
Mcap-41000Cr
Sales= 23,650 Cr
TTM & FCF=1500Cr and PAT/CFO= 85%
Focus on organic and inorganic growth-600+ANDAs
250+ DMFs +70% API integrated business
60% Gross margin business
R&D-1510/23681~6.3%
Insights -
Concall Snippets and Future guidance
Formulations business clocked a revenue of
Rs.5,211 crores, increased by 2% year-on-year. In the Formulations business, US
business posted a growth of 8% year-on-year to Rs.11,231 crores in FY'21
API
business clocked
a revenue of Rs.3,086 crores for the year; for the quarter, API business
increased by 5% to Rs.794 crores.
On a
constant currency basis, US business increased by 4% year-on-year to around
US$1.5 billion. For the quarter, on a constant currency basis, US revenue
ex-Natrol was at US$393 million, increased by 5% year-on-year.
In APIs, almost
60% is antibiotics and 40% is nonantibiotics. On nonantibiotics, selectively seeing some price improvement.
Revenue of AuroMedics,
our Generic Injectable business declined by 10% year-on-year to
US$249 million for the year due to reduction in hospital procedures on the back
of COVID-19. For the quarter, AuroMedics sales increased by 13% year-on-year to
US$67 million. We have filed a total of 145 injectable ANDAs as on 31st March
2021, out of which 91 have received the final approval and the balance 54 are
under review.
Take a LOOK---20%
revenue from injects (14 gen +6branded) ie
23681*20%=4736.2Cr out of which US=1875Cr RoW=2861Cr
In FY'2021, ARV
Formulations business grew by 49% year-on-year to Rs.1,863 crores.
In Q4 FY ‘21, ARV revenues grew by 29% year-on-year to Rs.491 crores. Our
Global Generic Injectable consolidated revenue is $395 million for the year.
Apart from this, Acrotech, our branded injectable business achieved a revenue
of US$103 million for the year.
Most of the
growth has come from Dolutegravir and its combinations—NOT COVID molecules
Way
Forward=Maintain this for 2 yrs and flatten then
State of US
business—50% revenue- As far as the US business is concerned, there is a bit of
erosion. We always budget for a mid-single-digit erosion and we have seen
mid-single digit at this juncture. As we progress, we will recalibrate on how
the market is performing. But as you are aware of it that since we have several
avenues in terms of the US market, so we don’t see that as an issue, there
could be a minor blip in the short-term and we don’t expect that to continue
for a longer term, that is as far as U.S. is concerned.
Areas of focus
from ORALS to peptide to depot injections to vaccines to biosimilars
FUTURE
IN US- There
has been enough investment which has gone in and in the next two to three years
most of it would have reached critical stage for commercialization. Definitely
we are convinced about whatever investment which has been made and we are
confident about the return from those investments which has happened so far.
Having said that, till we reach that particular fructification of those
opportunities, we have enough opportunity in terms of the filings which has
happened in our orals and injectables. You have already heard that in the next
three years, we would like our injectable business to reach around $700
million.+API ---5460Cr rev @20%-25%OPM
In Biosimilars,
we will be filing two products this year and two products next year.(oncology
biosimilars)
Antibiotics, cold
medicines and those things where we are having. We have not seen much movement,
but definitely we are expecting in the coming quarter onwards it will slowly
improve. To come par with the before years, it may take another four quarters.
Majority of the consumption would happen in winter, but the procurement will
happen in summer. So in next two - three months we will have clarity on where
we stand
Overall 10
hormonal and 65 oncology products are under development with addressable market
size of more than $45 billion. As on 31st March ‘21, we have filed 41 ANDAs
including 31 oncology that is including the 13 orals and 18 injectable and 10
hormonal products. So, we have enough headroom for us to continue working on
that. At this juncture, we have got approval for 15 products and we have
launched 13 products.
In complex
injectables there are at least 15-20 products including depot
injection. We are going to take exhibit batches for four depot products in next
three - four months and where filing may happen by end of this financial year.
Majority of the critical injectables will be manufactured from US plant because
of some specialty manufacturing lines required. These include pen injections.
So lots of things are happening on the difficult to develop injectables side.
Second highest number of Certificate of Suitability (CEPs) globally and second highest number of DMF filings in the US by an Indian Company.
Filed 251 DMFs with the USFDA and over 3,000+ filings in other geographies. Total revenue including captive consumption amounts to US$ 206 Million for Q3FY21 and US$ 632 Million for 9MFY21. Aim to double the external sales in next 4-5 years
Biologics, Peptides
and others—As cash rich-Inorganic growth opportunity.
"We
have not launched Ertapenem in Europe yet and the penem block is being expanded
so, we will be launching Ertapenem and looking forward to that very soon. You
heard about the Vizag general injectable plant, which will be in operation in
18 months and we are developing close to 50 products, which are going to be
very helpful for our hospital taskforces in Europe. We have a very good market
share in hospital with products which are sourced from Europe and plus we have
two biosimilar products which will be filed next quarter. So, you can have a
complete picture about our plans for higher margin products and opportunities."
As we get to know the details of various
business verticals of Auro and targets layed down by management going forward
calling it dead would do injustice to the mammoth. It is discounted or fairly
valued ? Well it is the question one needs to ask herself before investing.
Now lets see Gland Pharma - a much talked about stock, numbers, management's vision and product mix.
Gland Pharma deals in 3 major verticals-Injectables, Oncology and Ophthalmology. Its main business comes from US-61% ,16% India and 23% ROW.
FOSUN
Pharma—Chinese promoter
Asset Turns-2.8x
Gross Mg-55-60%
P/S-16x
& Mcap 57000Cr
B2B-US and
RoW & B2C in India
B2B Advantages
Gland's B2B Model
Include Stable Cash Flows, Better
Profitability Profile, Margin Stability from Natural Hedge Against Raw Material
Pricing and End-formulation Pricing Fluctuations
Steady /
Predictable Cash Flow Long-term supply contracts with marketing partners
ranging from 3-5 years and stronger partnerships due to lack of injectables
manufacturers with good regulatory track record.
Products licensed
to marketing partners strong in particular therapeutic areas resulting in
higher market share 6 Lower R&D Litigation Risks
Better Operating
Profits Efficient cost profile due to relatively lower SG&A vs B2C players
Reduce risk by partnering with a marketing partner to cover RSD litigation
expenses
Revenue Growth:
2014-19 Gross Margins: 2019 40.1% 34% 5 Lower RM/Formulation Pricing Risk Gland
B2C Players Gland B2C Players.
Due to
differentiated B2B Model, Gland can derive scale benefit at a product as well
as formulation level and lower Working Capital Requirement Revenues through
transfer pricing are immune to raw material price fluctuations. Transfer
pricing also helps regulate any adverse impact from price erosion in
end-formulations, as it gets restricted to the profit share component
Lower
requirements due to better inventory management, planned payables and better
visibility on receivables Gland has Demonstrated Faster Revenue Growth in Last
5 Years While Generating Superior Margins vs B2C and B2B Players
About injectibles
About Injectables---CAGR
10.1% growth
Injectables: One of the Largest and Fastest Growing Segment Growth Opportunity - Injectable formulations is the fastest growing segment in global pharmaceuticals, recording a 2014-2019 CAGR of 10.1% vs overall pharma market at 5.8%
Global generic injectables market is estimated at US$131bn growing at a 2014-19 CAGR of 8% - US the largest market i.e. c. 33-34% of market) is expected to grow at a 16% CAGR from 2019-2024E.
US$61.3bn in injectable brand sales expected to lose patent protection between 2020-24 (vs US$33bn in sales which post patent protection lost between 2014-19. Rising prevalence of chronic diseases Convenience and benefits of New Drug Delivery System Growth Drivers for Injectables
New market opportunities - Drug shortages in the US - from 2014 to 2019. 40-60% of the shortages have been in injectables space.
Market Entry Barriers - High
capital investments Manufacturing complexities to meet stringent quality
standards, high level of compliance and regulatory requirements and consolidation
trend expected to favour established players Activate Windows
Penem Antibiotics Injections like Ertapenem , Meropenem, Cisatracurium, Enoxaparin, Heparin, would you say that your Q4 numbers be the largely normalized numbers
Concall Snippets:
After Vaccine
250mn doses- started with contract manufacturing contract development
and to getting to own development. "I think that is the path that we want to
take, we want to dive in quickly into our own development, so this opportunity
what we took now is kind of a learning process for us and last year we have
been talking to people and they are expressing interest to move biosimilar
manufacturing. Which business model in biosimilars-If you look at our
business model that will continue, we always partner with people, we do not
take products or we do not get into development unless we have some
partnerships and that model will continue."
It has single
use bioreactors but to a certain extent to get to the scale of vaccine
we have invested to an expansion for the commercial production as well as
procure the bioreactors.
Why high margins? Some products not many players are there that is one of the reason even if you look at the top ten products in the company, five products or six products they make their own API so that gives an advantage in terms of backward integration and the capacities what we have in terms of facility utilization, capacity utilization that also is helping keeping those margins. So, it is a mix of backward integration, mix of the output we are giving through manufacturing sides and also the product mix in the markets it is the combination of these which is helping to keep those margins intact.
Peptide
APIs-"Peptide side, yes, we like I just mentioned before this call we are
working on some of the complex products including some peptides and some
hormonal products and some suspensions. So, one of the peptides complex
peptides is that we do expect to be filed this year and next year will be a
couple more."
Biologics - Way forward- "We are going up to 1 KL. I would say and then we will get into the other areas and then understand the demand and the technology. It all depends on the drugs substance technology as well. Like I said our idea is to enter into CMO kind of a business, CMO/CDMO and that will dictate what kind reactors we need getting into that basis."
62SKUs for
2022FY
Anti
Thesis-
Why Gland Pharma
seems relatively expensive Low gross margins (50-55%) vs 75% for pure play CDMO
Very low CFO/EBITDA conversion of just 50% 17x sales seems exorbitant for very
low CFO/EBITDA and relatively low gross margins
Top 10
molecules contribute about 57% at the company level
GLAND vs AURO-
High USFDA risk at 17x sales vs very low USFDA risk (> 95% non US sales) at
4x sales. Latter also has better gross margins, better CFO/EBITDA conversion.
Long term compounding works when known risks are low. The upside is wide open
in such cases.
Gland
Pharma continues to be niche business and hence trades at niche valuations. Can
it justify its price to perfection valuations of time or price corrections awaits
?
Disclaimer - This is not any investment advice. Please consult your financial advisor before investing.
