I agree it would difficult to project future cash flows on these R&D expenses. I also agree that filing complex generics has become a survival game. Hence, I am more skewed towards large cap pharmas. The large cap companies can keep on filing expensive complex generics ANDAs and wait longer, for some of them to payoff heavily.
I think it becomes less of a “leap of faith” game if one buys a basket of large cap pharmas rather than betting on single company. Because after all, Indian pharmas are best positioned to take advantage of the huge number of exclusivity expiries ahead of them.
Buying a basket only helps you with unsystematic risk of any one company getting a 483 or a warning letter. It does not resolve the problem of entire industry facing shortage of simple generics. Large pharma can file more ANDAs and have some economics of scale in their R&D but they also have a big base to grow on. They also trade at lower multiple indicating that their bigger base overshadows their advantage in R&D.
I don’t have the exact numbers but my intuition is that the wave of expiring patents is ebbing. This is also a reason that there is a consolidation taking place in the industry globally. Its a sign of diminishing opportunities. To me the opportunities are shifting from formulation players to API players.
I was following a portfolio approach on pharma from last 1 year with a hope that the more I read the better I would be and then I will pick 1-2 n stay but the R&D , capitalization , non linear models n too much of domain knowledge requirement is giving me similar vibes which you have. But then, this is one sector which has created wealth across nations in long run.so, hard call
Agree with you here Yogesh. R&D costs are actually sunk costs. A company incurs the expenses and there are lot of variables which determine whether the expenses incurred on a drug will payoff or not. The variables include - successful passage of bioequivalence studies by USFDA, the timely approval of the drug, number of competitors, litigation etc. These are things which are not even in control of the management. However, the R&D expenses do give an indication of management’s focus on building a robust pipeline of drugs for the future. It does give an indication that management believes in philosophy of ‘pain today gain for future’ strategy. For a company like Alembic, given its size and base in US, the kind of R&D expenses it is incurring is commendable. I think we should start seeing that in the number as well as complexity of ANDA filings by the company. It is extremely difficult to project revenues and R&D expenses for pharma companies. There is a ‘leap of faith’ involved here. I think in terms of valuations, the whole sector has undergone huge multiple expansion over the past few years (excluding the last one or two years) and the returns will be largely driven by future earning growth.
@ankitgupta Companies have different break-up of R&D cost capitalized vs expense. Life would have been easier if all R&D cost would have been captured as expense. Given that is not the case,
how should be identify if the capitalized vs expense break-up is justified?
What are scenarios when R&D capitalization makes sense
Should we be cautious on companies whose sum of last 5-10 year R&D capitalization cost vs expense is higher than peers because though YoY it may differ due to nature of R&D cost, on an aggregated basis, they should fall in place?
Would really appreciate if you can provide guidance on these queries.
Most of the companies I follow including Alembic mostly expense R&D costs through P&L. I don’t think my companies capitalise this costs. Usually, costs for setting up a laboratory, buying new equipments for laboratory or for R&D should be capitalised and remaining should be expenses including ANDA and DMF filing fees & bioequivalence study expenses.
The December quarter DMF list of USFDA is out and Alembic filed two DMFs:
gInvokana (Canagliflozin): Innovator - Mitsubishi (marketed by Janssen Pharma). It is used for the treatment of Type 2 diabetes. The drug got approved by USFDA in 2013. Exclusivity expiry - May 20, 2019 and patent expiry - July 30, 2024. More than 10 DMF filers including Lupin, Mylan, MSN, Alkem, Indoco, DRL. US sales of USD 1.20 billion in 2016 (source - http://files.shareholder.com/downloads/JNJ/3445574474x0x924677/ACE5F259-F6F1-4BB2-9D09-1075DD7F6E9C/Sales_of_Key_Products_Franchises_4Q2016.pdf) . Lot of DMF filers for the molecule. Its the first molecule filed in diabetes segment by Alembic.
gBosulif (Bosutinib): Source - https://search.rpxcorp.com/litigation_documents/12279350. Details covered in June, 2016 DMF list. Its an oncology drug and it seems Alembic is taking contract manufacturing route for this oncology molecules.
Alembic Pharma announced today the launch of generic Pristiq (Desvenlafaxine Succinate) extended release tablets 50mg and 100mg by its partner Breckenridge Pharmaceutical, Inc.
This ANDA was filed as para IV on the FTF date.
Alembic Pharma will share 180-day exclusivity with other ANDA first filers (Lupin, Mylan and Sandoz most likely).
Pristiq tablets had annual US sales of approximately USD 883 million (IMS MAT December 2016).
In Alembic Pharma - The promoter sold 1 Million shares on the 23rd March 17 for a total value of about Rs 60 Cr. Just a message to all friends to be watchful…
The size of the drug is USD 340 million and is therapeutically equivalent to reference listed drug (RLD) product of Viibryd. Usually RLD drugs are considered to be more complex to manufacture and also require stringent bioequivalence studies. Teva also has tentative approval for the drug - https://www.accessdata.fda.gov/scripts/cder/daf/index.cfm?event=BasicSearch.process. Furthermore, some other companies where the innovator - Forest Labs has filed patent litigations appeal in courts include - Accord Healthcare (Intas), Apotex, Invagen Pharmaceuticals. Alembic is currently under litigation with the innovator.
The exclusivity for the drug had expired in 2016 while there is one more exclusivity for change in dosage from 20 mg to 40 mg as per the orange book. https://www.accessdata.fda.gov/scripts/cder/ob/patent_info.cfm?Product_No=001&Appl_No=022567&Appl_type=N
The result of the litigation/settlement with innovator will decide the launch date for the drug. The patent for the drug is getting expired from September, 2019.
The DMF list for quarter ended March 31, 2017 is out. Alembic has filed three DMFs during the quarter. It continues filing products in the oncology segment. The details of the products filed are given below:
Dasatinib (marketed by the name of Sprycel; name of the innovator - Bristol Myers Squibb; market size in US - USD 969 million in 2016): The drug is used for the treatment of chronic myelogenous leukemia and Philadelphia chromosome-positive acute lymphoblastic leukemia. The exclusivity for the drug has expired while the various patents for the drugs are getting expired between April, 2020 to Feb, 2025. There are eight DMF filers for the drug including Hikma Pharma, Reliance Lifesciences etc. The ANDA for the drug is already approved which was been awarded to Apotex. However, BMS has entered into settlement with Apotex under which Apotex will launch the drug only in September, 2024 or earlier under certain circumstances. The drug is a blockbuster product and seems to be difficult to manufacture since there are not many DMF filers for the same.
Erythromycin Ethylsuccinate (marketed under the name of Eryped; innovator - Arbor Pharms, market size of the drug - less than USD 50 million): The drug belongs to the macrolide group of antibiotics and Alembic has a hold under the segment even in domestic business. The various ANDA holders for the drug have discontinued their product while only innovator is continuing it. Its a very old product and has a small market size.
Linagliptin (marketed under the name of Tradjenta/Trajenta; innovator - Boehringer Ingelheim (marketed by Eli Lilly in US): The drug is used for treatment of Type - 2 diabetes. The exclusivity for the product has expired while various patents are getting expired between April, 2017 to August, 2023. The drug has more than 10 DMF filers including Glenmark, MSN, DRL, Teva, Aurobindo, Sun and Cadila. The drug had sales of USD 165.90 million (22% growth on a y-o-y basis) during CY17. The product is expected to be highly competitive with lot of filers.
Thanks Akbar for the updates. Lets just look at the competitive scenario for the drug. gBenicar (Olmesartan Medoxomil) after the 6 months exclusivity given to Mylan for the ANDA got flush of other generic players who got approval.The market size for the drug is USD 1 billion as per the press release by Mylan
It currently has 10 generic players including Accord (Intas), Zydus Cadila, Mylan, Alkem, Aurobindo, Jubilant etc. The drug is expected to be highly competitive product and might see high price erosion.
However, the competitive scenario for gBenica HCT (Omesartan Mecoxomil with Hydrochlorothiazide) is much better. There are only four generic players for the drug apart from innovator. The market size for the drug is USD 805 million. The price erosion for the drug is expected to be less compared to gBenicar.
