CRAMS Note, Overview and Outlook

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CRAMS INDIA : OVERVIEW & OUTLOOK

June 2011

ICRA Limited

CRAMS INDIA

June 2011

Agenda: CRAMS Overview & OutlookDescription Global Growth Drivers Slide 3-6

Market DynamicsOutsourcing Trends Contract Manufacturing Outsourcing Contract Research Outsourcing

78 9-11 12-13

Key ChallengesKey Players -Divis Lab -Dishman Pharma -Jubilant Lifesciences -Piramal Healthcare -Biocon Limited

1415 16 17 18 19

Outlook & ConclusionAnnexure Analysts ContactICRA Limited

20-2122-23 24CRAMS INDIA 2

CRAMS Global Growth DriversPatent Expiries Drugs worth US$ 97 billion expected to go off patent from 2011-15 in US compared to USS$73 billion during 2006-10 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

Focus on Generics / Branded Generics

Cost Pressures

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 GENERICISATIONICRA Limited CRAMS INDIA 3

CRAMS Global Growth DriversNew FDA approvals and R&D Spending by Year (2001-2010)$80.0 $70.0 $60.0 $50.0 $40.0 $30.0 $20.0 $10.0 $0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $29.5 17 $30.8 24 21 $33.0 $47.6 20 $51.8 22 18 36 $63.2 $56.1 24 40

$63.726

$65.9

$67.4

35 30 25

21

20 15 10 5 0

R&D spend (LHS)

No. of New drugs (RHS)

US: Patent Expiries Schedule40 35 30 US$ billion 25 20 15 35.4 15.2 15.4 15.7 14.7 19.3 15.6

105 0 2006 12.4

14

12.5

2007

2008

2009

2010

2011E

2012E

2013E

2014E

2015E

Source: USFDA, PhRMA Industry Profile 2011, Industry reports, ICRA estimates.

ICRA Limited

CRAMS INDIA

4

CRAMS Global Growth DriversPatent Expiries: Selected Products Product Xalatan Company Pfizer Yearly Sales ($Billion) 1.7 Year of Patent Expiry 2011

Leavaquin Zyprexa Diovan (ex-US) Aricept (Japan)Taxotere Concerta Lipitor Singulair Seroquel Provogil Geodon Tricor Eloxatin Viagra Lexapro Plavix (US) Diovan (US) Enbrel (US) Actos

Johnson & Johnson Eli Lilly Novartis EisaiSanofi-aventis Johnson & Johnson Pfizer Merck&Co, Inc. AstraZeneca Cephalon Pfizer Abbott Sanofi-aventis Pfizer Forest labs Bristol-Myers/ Sanofi-aventis Novartis Amgen Takeda

1.6 5.0 3.5 1.01.2 1.5 10.7 4.7 4.9 1.1 1.3 1.3 1.4 1.9 2.8 6.7 2.5 3.3 4.1

2011 2011 2011 20112011 2011 2011 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012

ICRA Limited

CRAMS INDIA

5

CRAMS Global Growth DriversPatent Expiries: Selected Products Product Cymbalta Niaspan Lidoder Oxycontin Adavir Aciphex Company Yearly Sales ($Billion) Year of Patent Expiry Eli Lilly 3.1 2013 Abbott 1.1 2013 Endo 1.2 2013 Purdue Pharma 3.1 2013 GlaxoSmithKline 8.4 2013 Eisai 1.6 2013 Sanofi-aventis/BristolPlavix (ex-US) Myers 3.8 2013 Epogen Amgen 2.6 2013 Seretide/Advair GlaxoSmithKline 2.5 2013 Lyrica Pfizer 2.8 2013 Nexium AstraZeneca 5.0 2014 Copaxone Teva 2.8 2014 Celebrex Pfizer 2.4 2014 Blopress (Japan) Takeda 1.5 2014 Welchol Daiichi Sankyo 0.4 2015 Aggrenox Boehringer Ingelheim 0.4 2015 Aloxi Eisai 0.5 2015 Avodart GlaxoSmithKline 0.6 2015 Zyvox Pfizer 0.7 2015 Androgel Solvay 1.0 2015 Gleevac Novartis 1.3 2015 Namenda Forest Labs 1.3 2015 Source: ICRA research, Moodys, 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

CRAMS - Market DynamicsGlobal CRAMS Market, US$ Billion80 70 60 50 40 30 20 10 0

CAGR15%15 29 2007 18 33 21 25

US$ Billion

Approximately 64% of global CRAMs market in manufacturing which intermediates for new manufacturing of APIs

the estimated US$ 67 billion 2010 is dominated by contract includes manufacturing of chemical entities (NCEs) or

37

42

Contract Research predominantly consists of drug discovery, preclinical and clinical research and represent US$ 25 billion opportunity globally

2008

2009

2010E

Contract Manufacturing

Drug Discovery and Research

Huge scope for growth as currently only ~20% of global Pharma R&D spend is being outsourcedOut of the estimated US$3.8 billion market in 2010, approximately US$ 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 2005 were ~20, which increased to ~100 in 2008 and expected to be around 150-200 by 2012 leading to higher competitive intensityCRAMS INDIA 7

Indian CRAMS Market, US$ Billion4 3.5 3 2.5 2 1.5 1 0.5 0 1.5 0.9 0.6 0.3 0.8 2007 1.1 2008 1.6 2.3

US$ Billion

2009

2010E

Contract Manufacturing

Drug Discovery and Research

Source: Industry reports, ICRA estimates, excludes Clinical Trials

ICRA Limited

CRAMS Outsourcing TrendsExtent of Outsourcing in each area of the value chain60% 50% 40% 30% 20% 10% 0% Discovery API dev. Dosage dev. API mfg. Dosage mfg. Packaging 25% 15% 20% 15% 15% 55%

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 MNCsSource: Industry reports, ICRA estimates.

ICRA Limited

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8

Contract Manufacturing (CMO)Overview Approximately 60% of the total US$2.3 billion Indian CMO market relates to chemical synthesis followed by formulation and packaging, which constitutes about 40%. The market has grown at a CAGR of 51% over 2007-10 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 (200+) 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 complianceICRA Limited DMF s Filings1200 1000 800 600 400 200 0 2005 2006 2007 2008 2009 2010% India (RHS) DMF Filed, India (LHS) DMF filed, Overall (LHS)

37%

39%

40%

40%

45%

37%

36%

40%

35%30% 1131 736 271 760 294 1021 380 1024 365 25% 20% 455 15% 10%

799321

Source: USFDA, ICRA estimates.

CRAMS INDIA

9

Contract Manufacturing (CMO)Number of FDA approved plants for sample countries 200150 100 50 0

India*

Italy

China

Spain

Taiwan

Israel

Hungary

Overall Indexed manufacturing cost (US FDA approved plants)120% 100% 80% 60% 40% 20% 0% Cost Index US Europe India 35-40% 100% 80-85%

Source: Industry Reports, ICRA estimates. Year 2006, *For India upto 2009

ICRA Limited

CRAMS INDIA

10

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