Monday, 21 December 2015

Logic in Investing Pharma Sector; and in Company like Torrent Pharmaceutical Ltd.

Research Report
[Not wholly copied from anywhere. Informations gathered and compiled from various business related magazines & publications, stock research websites, business newspapers, report from brokerage houses]
Logic in Investing Pharma Sector; and  in Company like Torrent Pharmaceutical Ltd.
Global Pharmaceutical Market
 Global Pharmaceutical market registered a modest growth in 2014-15 and key growth drivers continue to shift towards use of generic medicines accompanied by patent expiries mainly in the regulated market ( US, Japan, Germany, Italy etc) and higher growth in phrmaging markets (India, Brazil, Philippines ).
A brief snapshot about global market in geographically is depicted below:
United States : US Market is the largest pharmaceuticals market and it is estimated to be approximately us$ 365 billion. The market is expected to grow at a compounded annual growth rate (CAGR) of 5 – 8% through 2018 due to some patent expiries and launches of more innovative medicines. As 2014 was also a landmark year in the implementation of Affordable Care Act (ACA) which will cause rapid change in US healthcare market both directly from legislation and through market-based changes. With the largest generic substitution of 80% (in volume terms), it again becomes the single largest generic market. Expected patent expiry in the industry in next 4 years will be majorly driven by US, in which drugs worth USD 50 billion are expected to go off patent.
Japan: Japan is the second largest pharmaceuticals market in the world with sales of over USD 115 billion. Generic medicines account for 49% of total pharmaceutical volumes in Japan. The Japanese Government has a target of 80% generic penetration by 2020 which translates into an additional 35 – 40% of overall pharmaceutical volumes going generic.
Mexico: Mexico is one of the fastest growing pharmaceutical markets valued at over USD 13.5 billion growing at 9 – 10% annually.
Brazil:  Brazil is the largest pharmaceutical market in Latin America and the 6th largest in the world. The pharma market in Brazil is estimated to be in range of USD 30-33 billion which is expected to grow at CAGR of 14% till 2018 with increase in share of Generics and Branded Generics.
South Africa & Philippines: Both the market had shown a decent growth in 2014-15, whereas in South Africa generic grew at 9% by value and 4% by volumes during FY 2015.
Europe: European market is estimated to be approximately US$ 2016 Billion registering a growth of 3.3% in 2014-15. Across the major markets in Europe, economic austerity- let efforts to constrain growth in healthcare spending, and especially medicines, have resulted in spending declines or very low growth, which will continue through 2018.
Indian Pharmaceutical Market
In India pharmaceutical business model is witnessing a paradigm shift, moving toward a future where companies use a wide range of outsourcing, partnership initiatives and other contractual and relationship arrangements to create networks of collaboration and discovery. Companies that will be most successful in doing business in India will be those that are most adept at managing and mixing a range of contractual relationships and partnership strategies.
Indian pharmaceuticals industry currently tops the chart amongst India’s science base industries with varied ranging capabilities in the complex field of drug manufacture and technology.
Indian pharma market remains one of the fastest growing pharma markets in the world and is dominated majorly by branded generics constituting merely 70% to 80% of market. The market is estimated to be among the top 10 by 2016(source IMS).
The growth in the Indian domestic market will be on the back of increasing consumer spending, rapid urbanization and raising healthcare insurance. In 2015-16 Growth allows individuals more legroom to spend on healthcare.
Lifestyle segments such as cardiovascular, diabetes, central nervous system (CNS), Oncology will continue to be fast-growing owing to increased urbanization and changes in lifestyle pattern.
Logic in investing pharma sector
The fact is that domestic business is a huge opportunity for every Indian Pharma Companies, but it is not the sole reason for investing in Indian Pharma Companies. It is because of their positioning in global scenarios which excite me the most. So, would like to list down few of the important factors that will illuminate the logic of investing in pharma companies:
Ø  Demographic trends will act as a significant driver of global demand for pharmaceuticals during the next five years. The global population aged 65 and over will grow faster than any other age segment and will account for almost 30% of overall population growth in the next five years.
Ø  The prevalence of non – communicable diseases (NCDs) such as cancer, cardiovascular, metabolic and respiratory diseases is increasing day by day worldwide. NCDs are often associated with aging populations and lifestyle choices, diet and lack of exercise and many of these require long-term management.
Ø  US spends 20% of their GDP in healthcare. Because of steep cost of medicinal usage in USA, there is a big time discourse going on for affordable healthcare.
Ø  Ample of block-buster drugs are going to off-patent and are expected to be going off-patent in impending years. This shall effect Indian Companies in the following ways:
>> Indian generic players will gent opportunity to sell generics in US and other developed market and get benefitted.
>> US giant pharma companies like Pfizer, Abbott etc. will feel pressure of reduced margin and profitability. As a result a forced transition will work towards pharma outsourcing, and or shifting R&D/Manufacturing Facility to cheaper places like India.
Ø  The scope of moving value chain will emerge. Eventually some of Indian Companies will move up in the value chain and start competing with global pharma giants in finding new molecules and patenting them.
Ø  Our Country has excellent chemistry skills. The fact is being ignored over the time that Indian Pharma Companies can do cheap R&D, manufacturing, maintaining required quality.
In summary investing in Indian Pharma Companies is a play on investing in a non-cyclic theme (one do not have to bother where the Index is heading), cheap but still maintaining quality business. Further companies will continue to get benefitted by exporting as the dollar will show upward momentum against rupee in coming days also.
Torrent Pharmaceuticals Ltd.
Torrent Pharma is the flagship co of Torrent Group based in Ahmadabad, it was promoted by U.N. Mehta initially named as Trinity Laboratories Ltd was later renamed as Torrent Pharmaceuticals Ltd. Now it operates more than 50 countries and has several product registrations globally. It has 17 subsidiary companies and one associate company over countries like Germany, Russia, Brazil, USA, Philippines, Mexico, Australia, Thailand, Romania, Malaysia, France, and United Kingdom.
The Company’s key areas of operations are formulations, Active Pharmaceutical Ingredients (API), Drug Discovery, marketing and sales of Drugs. It has manufacturing capacity at (i) Village Indrad, Dist. Mehsana, Gujarat, (ii)Baddi, Dist. Solan, Himachal Pradesh, (iii) Gangtok, Sikkim and (iv) Dahej SEZ Phaze II, Dist. Bharuch, Gujarat [This facility is expected to commercialize during the next year].
Why Torrent?
Torrent is one of the front runners in the Indian Pharmaceuticals Industry having presence in India as well as International Markets. The company’s revenues are mainly from manufacture and sale of branded as well as unbranded generic pharmaceuticals products.
The Segmentation of business can be depicted as under:
                                           Torrent Pharma


                               Branded Generics                           Generics
                               (Semi-Regulated Markets)                          (Regulated Markets)
 


  
                    India Business                      Brazil,                              USA                   Germany, UK and Others
                                                     Philippines & Others

Segment Revenue (` in Crore)
2014-15
2013-14
Growth

Amount
Share
Amount
Share
(%)
India
1,609
35%
1,161
28%
39%
Other Branded Markets
927
20%
838
20%
11%
USA
832
18%
776
19%
7%
Other Generic Market
990
21%
1,016
24%
-3%
Others/CRAMs
295
6%
393
9%
-25%
TOTAL
4,653
100%
4,185
100%
11%

Torrent Pharmaceuticals Ltd – Core Competencies
With Torrent’s Core competencies in Branded markets ever since 1970, - Branded Markets remain a key priority for Torrent. Moreover, such markets offer significantly higher visibility and sustainability to the business. Going Forward, the strategic priorities includes the following:
1>   Branded Markets
-          India Business: Continuous focus on specialities and new products.
-          Scaling up in Key markets in Branded Generics with stronger presence in (Cardiovascular) CVD & (Central Nervous System) CNS markets (in markets like Brazil).
-          Harmonizing marketing model and New Product Pipeline across Branded Generics markets.
2>    Generics
                          Strengthening New Product Pipeline through innovation and complex products     for markets like USA and Europe.
Novel Drug Delivery System (NDDS) & Pipeline Augmentation
## What is NDDS?
It is a method by which a drug is delivered can have a significant effect on its efficacy. Some drugs have an optimum concentration within which maximum benefit is derived and concentration above or below this range can be toxic or produce no therapeutic benefit at all.
A new era of science and technology has evolved in pharmaceutical research focused at development of different novel drug delivery systems. The evolution of an existing drug from its traditional form to a novel delivery system may considerably improve its performance in aspects of efficacy, safety and patient compliance.
The new product pipeline also includes several first time in the world Novel Drug Delivery systems which will give Torrent the edge over competitors with negligible competition. As Torrent moves towards branded markets and innovation with complex generics, the pipeline is being augmented with new complex oral solids, ointments/creams and Injectables.


Countrywise Performance
India
Company’s formulation segment registered growth of 39% over the previous year on the back of improved performance of all chronic segments as well as recovery in the acute business through re-structuring initiatives taken up in the past year. The integration of acquired Elder Pharma’s domestic formulation business has further aided the growth of the India Business as the synergies in Pain, Nutraceutical and Women Healthcare therapies have begun to yield results.
The company is now among the top 15 companies in the domestic market and has 9 brands in top 500 brands of the Indian Pharma market. The company ranks among the top 5 in Cardiology & CNS therapies and among top 10 in Nutraceuticals and Gastrointestinal therapies. It also is among the fastest growing companies in therapies like Dermatology, pain/wound care and Diabetes which are identified future growth drivers for the India Business.
The company entered the Nephrology market through a new division launch in the year gone by. The company also entered new into an exclusive licensing agreement with Reliance Life Sciences for marketing three biosimilars in India – Rituximab, Adalimumab and Cetuximab.
Most interestingly between 2016 and 2020, drugs worth $108 billion drugs are likely to go off-patent and biosimilars and inhalers will account for nearly half ($52billion) of the market.
## What is Biosimilars?
Biosimilars are cloned versions of biological drugs. Biologics are made from living cells, unlike normal medicines that are manufactured from chemical substances. Biosimilars are relatively difficult to develop and manufacture vis-a-vis traditional generics. Traditional generics take 1 to 4 months to develop, whereas the time taken by biosimilars is around eight years. Their development cost is relatively higher at $100-200 million compared with the average cost of $1 to 5 million for traditional generic drugs.
Brazil
During 2014-15 the Brazilian operations registered revenue of `606 crores which is the growth of 14% over previous year. Among the Indian Companies, in terms of market share, Torrent ranks No 1 with the second largest less than half of the size of Torrent. The company has 20 products under approval out of which 2 products are expected to be approved during the coming year. The company has a strong pipeline (product under development + under approval) of 48 products in Cardio Vascular, Central Nervous System and Oral Anti Diabetic/Obesity Segment to augment future growth.
USA
Torrent, despite being a late entrant in the US pharma market is ranked No 8 amongst the US Generic Indian Companies and has a market share of around 10% in its covered market. Revenues from US operations were ` 832crores (USD132Mn) during the financial year 2014-15 as compared to `776 crores (USD 125Mn) during the previous financial year.
Given the future market moving towards complex products, Torrent is significantly ramping up its popeline with products like Ointments, Injectables, Specialty Oral solids (Oncology).
In US the company received 6 ANDA approvals in 2014-15. The company has 53 ANDA approvals (including 5 tentative approvals) and its pipeline consists of 19 pending approvals and 40 products under development. The US business is expected to contribute to the growth of international business in a significant way.
## What is ANDA?
The full form of ANDA is Abbreviated New Drug Application. An Abbreviated New Drug is an Application for a US generic drug Approval for an existing licence medication or approved drug. The ANDA is submitted to FDA’s Centre for Drug Evaluation and Research office of generic drugs, which provides for the review and ultimate approval of a generic drug product. Once approved, an applicant may manufacture and market the generic drug product to provide a safe, effective, low cost alternative to the American public.
Europe
(A) Germany
Among the Generic players, Torrent holds 6th position with a market share of 4.2% and is ranked No 1 among Indian players in the Market. Revenues from Germany from, during 2014-15, were `620 crores with a growth of 8%.
(B)  Other Markets
Dossier out licensing and product supply business continues to be an important part of the Europe business for the Company; with revenues of `221 crores during FY 2014-15.

Contract Manufacturing Segment
This segment registered revenue of `276 crores during FY 2014-15, a major portion of which is from manufacture of human insulin. The company has been a stable partner for manufacture of human insulin for Novo Nordisk for their India market needs.
## What is API?
The full form of API is Active Pharmaceutical Ingredient. The dosage form for a pharmaceutical contains the API, which is the drug itself, and excipients, which are the substances of the tablet or the liquid. A drug is composed of two components. The first is the actual APIs which are the central ingredient. The second is known as an excipient. This refers to substance inside the drug or tablet. If it is in syrup form, then the excipients are the inactive or inert substances present inside a drug while the API is the chemically active substance, which is meant to produce the desired effect in body.
MANUFACTURING
The company’s state of art manufacturing facilities for formulation and API, have significantly contributed to the demand of high quality products and in sustaining its growth and success.
New capital investments:

The Company has set up a state of art formulation and API manufacturing facility at Dahej SEZ in Gujarat. It started the process of getting the formulation plant approved by various regulatory authorities viz. USFDA, BfArM – Germany for International markets. The facility is expected to commercialize during the next year. During the current year, the company has initiated an expansion of its current manufacturing facility at Sikkim. The additional capacities would be available within next two years timeframe.

New facility for Oncology

For the sake of diversity, the company is planning to enter critical care therapy segment for international markets by establishing integrated manufacturing facility for drug substances and drug products (API & formulations) in oncology. The plant is expected to become operational within next two years time.

Oyster Shell Plant

The company has set up a manufacturing facility for Oyster Shell powder (natural calcium source), an API for manufacture of ‘Shelcal’ Brand.

RESEARCH AND DEVELOPMENT

Discovery Research

The Company is currently working on several in-house New Chemical Entities (NCE) projects within the areas of metabolic, cardiovascular and respiratory disorders.

## What is NCE?
 An NCE( New Chemical Entity is a molecule developed by the innovator Company into the early drug discovery stage, which after undergoing clinical trials could translate into a drug that could be a cure for some disease.

The Company has cumulatively filed 467 patents for NCEs from these and earlier projects in all major markets of which, 224 patents have been granted /accepted so far. The most advanced discovery program of the Company is Advanced Glycation End-Products (AGE) Breaker, of which the Phase II clinical trials for the indication of diabetes associated heart failure in India and Europe is completed. Currently the scientific and commercial aspects for further clinical development of the NCE are being evaluated. In the financial year 2013-14, the Company completed the Phase-I (SAD) clinical trial of its third NCE for the indication of acute kidney injury and in the financial year 2014-15, the molecule has progressed to multiple dose studies. Another Multiple Ascending Dose study for a second indication of inflammatory bowel disease has also been initiated & is expected to be completed by Q1 2016-17. The Company has published eleven well received research papers in above mentioned therapeutic areas, in peer reviewed international journals describing various findings of their NCE research.

THREATS,  RISKS  AND  CONCERNS  and  MEASURES  TAKEN  FOR  MITIGATION
(A) Drug Price Control:

The National Pharmaceutical Pricing Authority (NPPA), the governing body for controlling and monitoring the prices of pharmaceutical products in India has further announced ceiling prices of certain non-scheduled anti-diabetic and cardiovascular products which has been challenged by the Industry in the Hon’ble Mumbai High Court. It is likely that the government may bring more drugs and formulations under price control or change the mechanism of calculating the ceiling price of the Drugs which are under the ambit of the revised policy, which in turn will affect the net margins of the Company. The Company manages its product portfolio so as to minimize the product weightage of drugs under price control.

(B)  New Product Approvals:

The success of any Company is dependent on the continuous launch of the new products in the market. In highly regulated business, the requirements to obtain regulatory approval based on a product’s safety, efficacy and quality before it can be
marketed for an indication in a particular country, as well as to maintain and comply with licenses and other regulations relating to its manufacture and marketing, are particularly important. The submission of an application to regulatory authorities (which vary, with different requirements, in each region or country) may or may not lead to the grant of marketing approval. Regulators can refuse to grant approval or may require additional data before approval is given, even though the medicine may already be launched in other countries. The Industry is also subject to strict controls on the commercialization processes for products, including their development, manufacture, distribution and marketing. The Company manages the risk through careful market research for selection of new products, detailed project planning and continuous monitoring.

(C)   Geographical expansion:

The development of the business in new markets is a critical factor in determining future ability to sustain or increase global product revenues. This poses various challenges including; more volatile economic conditions; competition from companies with existing market presence; the need to identify correctly and to leverage appropriate opportunities for sales and marketing; the need to impose developed market compliance standards; inadvertent breaches of local and international law; not being able to recruit appropriately skilled and experienced personnel; identification of the most effective sales channels and route to market; and interventions by national governments or regulators restricting access to market and/or introducing adverse price controls. However the Company carefully studies the business scenarios of the new market, prepares the business plan and undertakes various researches to reduce the risk at the minimal level.

(D) Overseas markets:

The Company has expanded operations into select overseas markets of Latin America and European Union. Such expansion involves substantial business set up expenses, product pipeline development expenses and a gestation time before revenues begin to accrue. The Company faces the risk arising out of a failed or delayed market entry which may significantly affect the future profitability and financial position. In the US, there is a continuing trend towards consolidation of certain customers groups such as wholesale drug distribution and retail pharmacies, as well as emergence of large buying groups. The consolidation may result into these groups gaining additional purchasing leverage and consequently increasing the product pricing pressures. The result of such developments could affect the sales volumes and price realizations of our products on an overall basis. In Brazil where the Company sells branded generics, the pure generic competition could adversely affect development of branded business. Price erosions continue in the German generic market leading to shrinking operating margins. Likewise in other European markets, regulatory changes could affect price realizations. The risks are sought to be mitigated through careful market analyses, improved management bandwidth, marketing alliances and corporate management oversight.

(E)  Manufacturing& Supplying Risk:

Although a major portion of our finished formulations are being manufactured at in- house facilities, we also depend on third party suppliers for sourcing in some of the markets. Any significant disruption at any of such in-house facilities or third party manufacturing locations due to internal, third party lapses even on the short term basis due to economic, political & social unrest may lead to impair company’s ability to produce, procure and ship products to the market on a timely basis and could expose us to penalty and claims from customers. Company purchases active pharmaceutical ingredient (API) and other materials that are used in manufacturing operations from other foreign and domestic suppliers. Although the Company has a policy to actively develop alternate supply sources for key products subject to economic justification, there would be certain cases where we have listed only one supplier in our application with regulatory agencies. An interruption in the supply from single sourced material can impact the financial performance of the Company. In addition, company’s manufacturing capabilities could be impacted by quality deficiencies in the products which supplier provides leading to impact on our financial performance.

(F)   Product liability risks:

The business is exposed to potential claims for product liability. These risks are sought to be managed by appropriate laboratory and clinical studies for each new product, compliance with Good Manufacturing Practices and independent quality assurance system. The Company also has an insurance cover for product liability.

(G) Discovery research:

The key risks are high rate of failure and long gestation period of a discovery project coupled with significant upfront costs to be incurred before results are known. The Company today may not have resources to carry through a discovery project to final commercial stage for global markets. These risks are sought to be mitigated by seeking suitable alliances with partners at appropriate stage to share the risks and rewards of the project while continuing to develop the NCE’s for India. Insurance is obtained to cover the risks associated with testing in human volunteers and the Company may be subject to claims that are not covered by the policy.

(H) New product risk:

New product development and launch involves substantial expenditure, which may not be recovered due to several factors including development uncertainties, increased competition, regulatory delays lower than anticipated price realizations, delay in market launch and marketing failure. The Company manages the risk through careful market research for selection of new products, detailed project planning and monitoring.

(I)    Litigation risks:

The Company faces the risk of high costs of litigation with the patent-holder in its business of international generic products. This risk is sought to be managed by a careful patent analysis prior to development & launch of the generic products and strategy of settlement with the patent holders on case-to-case basis, particularly in the US market.

(J)    New capital investments:

The Company has commenced building a new formulation and API manufacturing facility at Dahej. The Company faces risks arising out of delay in implementation, cost overrun and inappropriate implementation. The capacities are built in anticipation of demand and the Company runs the risk of underutilization of capacities resulting in high manufacturing cost. The risks are sought to be mitigated by forming appropriate project management team and corporate management oversight.

(K) Currency fluctuation risks:

Currency risks mainly arise out of overseas operations and financing activities. Exchange rate fluctuations could significantly impact earnings because of invoicing in foreign currencies, expenditures in foreign currencies, foreign currencies borrowing and translation of financial statements of overseas subsidiaries into Indian rupees. The Company has a defined foreign exchange risk management framework to manage these risks, excluding translation risks.

(L)  International Taxation:

Company has potential tax exposure resulting from varying application of laws and interpretations which include intercompany transactions with our subsidiaries in relation to various aspects of our business. Although company’s cross border transactions between affiliates are based on internationally accepted practices, tax authorities in various jurisdictions may have different views or interpretations and subsequently challenge the amount of profits taxed in their jurisdiction resulting into increase in tax liability, including interest and penalties causing the tax expenses to increase.

(M)                        Future Acquisition proposals:

Company’s monitoring team continuously look for opportunities in order to expand the product line either through complimentary or strategic acquisitions of other companies, asset acquisition, licensing agreements or any other arrangement. Any such acquisitions, may involve significant challenges in terms of integration with existing operations which may lead to requiring considerable amount of time, resources and effort. This may lead to temporary disruption of ongoing business; affect relations with the employees, customers with whom we have been dealing.

(N) Dependence on information technology:

In today’s world companies are highly dependent on information technology systems and related infrastructure. Any breakdown, destruction or interruptions of this system could impact the day to day operations. There is also a risk of theft of information, reputational damage resulting from infiltration of a data centre, data leakage of confidential information either internally or otherwise. The Company has invested appropriately in the protection of data and information technology to reduce these risks.

FINANCIALS
Net Sales and other operating income
Consolidated net sales grew by 14% to ` 4,585 crores from ` 4,036 crores in the previous year.

EBIDTA
EBIDTA during the year stood at 27% compared to 23% in the previous showing an improvement by 4% mainly on account of FOREX gain. The SG&A and R&D expenses during the year have gone up 2% during the year compared to the previous year.

Net Profit after Tax (PAT)
The net profit after taxes for the financial year 2014-15 was ` 751 crores compared with ` 664 crores during the previous financial year, an increase of 13%.

Net Interest Expense
Net Interest Expenses amounted to ` 161 crores compared to ` 21 crores during the previous financial year. The interest expenses are higher on account of the acquisition related borrowings during the year.

Depreciation and Amortization
Depreciation and amortization charge during the financial year 2014-15 was ` 191 crores as compared with ` 87 crores during the previous year. This includes amortization of intangibles relating to the acquired branded formulation business of Elder Pharmaceuticals during the year.

Income Tax
The income tax charge for the financial year 2014-15 stood at ` 189 crores compared to ` 180 crores in financial year 2013-14.

Debt
The net long-term borrowing increased by ` 1,445 crores during the year to ` 2,421 crores at the end of FY 2014-15 from ` 921 crores at the end of FY 2013-14. Increase in long term borrowings is mainly attributable to acquisition of branded formulation business of Elder Pharmaceuticals Limited.

Fixed Assets
The net investment in fixed assets during the year was ` 2,026 crores; comprising addition in gross assets, capital advances and capital work in progress of ` 2,251 crores reduced by increase in accumulated depreciation of ` 166 crores. Addition to fixed assets mainly includes intangibles related to acquisition of domestic formulation business of Elder Pharmaceuticals Limited.

Chartered Accountants
Deloitte Haskins & Sells is the Company’s Chartered Accountants, having immense experience in the related field.  The firm is reputed one and has many large audit assignments in top leading listed public limited companies in India.
Share Performance
Torrent’s share price was quoting at ` 524 at National Stock Exchange (NSE) on March 2014. It has made high of ` 1700 plus recently. Now it is trading at range of    ` 1500 marks. So, it got tripled in one and half year plus timeframe. Still it has a potential to go long ways. So, one can add this script systematically by seeking opportunity in dull market condition.
Conclusion

I personally hold Torrent Pharmaceutical Ltd. in my portfolio apart from other pharma stocks. Further, I am not an investment advisor as per SEBI guidelines. The opinions are personal. The above discussions are only meant for educating readers. The intention is to share knowledge to enrich potential investor and also get enriched by their feedback. My views are not biased.

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