Pharma || Hospitals || Diagnostics : Industry perspective

Q&A: Questions & Answers
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Connecting some of the dots, its evident that FDA has found/re-discovered a sense of purpose, that of ensuring drug affordability with an altogether new zeal. May have to do something with the bigger healthcare plank that President Trump promised to electorates. invariably, has implication for most of Indian Pharma companies focused on US market:

First paragraph by Commissioner Scott Gottlieb itself is good to get a sense of what is on the cards:

"Too many patients are being priced out of the medicines they need. While FDA doesn’t have a direct role in drug pricing, we can take steps to help address this problem by facilitating increased competition in the market for prescription drugs through the approval of lower-cost, generic medicines".:

Two important announcements via this press release:
a> Have openly listed down the drugs where patent/exclusivity has expired at least a year back AND so far no approved ANDA for generic. Entire list can be classified into 2 parts. Part I of the list identifies those drug products for which FDA could immediately accept an ANDA without prior discussion. Part II identifies drug products involving potential legal, regulatory, or scientific issues which should be addressed with the Agency prior to submission of an ANDA.

b> Also, listed down the list of NDAs where only less than 3 ANDAs are approved against the same RLD and for which there are no blocking patents or exclusivities on the RLD may receive expedited review.

Both part 1 and part 2 listed drugs are such were FDA intends to create an 'Expedite Review" process, subject to meeting requirements. Also, to note, this will be applicable retroactively i.e not only any new submission but any existing under-review application will also be re-evaluated for prioritization.

Implication: May be too early to understand in full and have any meaningful assessment carried out, however, even by now we have reasonable indications that healthcare affordability (and drug affordability by extension) is very much in the mind space of policy makers. Removing hurdles, encouraging competition, fostering consumer friendly themes etc. are something which are very much within the ambit of FDA scope and they seems to be moving an inch close to that.

What is coming for Indian Pharma companies? Just to get a sense, Natco’s BOSENTAN (gTracleer) was so far perceived as a no competition drug, however has been notified under part 1 of the off-patent/off-exclusivity list which means that FDA can accept any new application immediately without any prior discussion.

Regards,
Tarun

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My thoughts on the pharma sector. Am invested in the pharma sector so obviously am biased:

  • Whenever I venture to the local markets, there are few shops which are always brimming with “customers”. One is medicine shops and the other liquor shops. I am invested in both sectors and consider pharma a part of the “consumption” basket like FMCG. It will protect the portfolio to some extent hopefully when the next market crash happens.

  • The USFDA issues, consolidation and thereby strong negotiation of the US buyers and less opportunity for first filers are all known issues. Markets have already discounted them. Markets follow cycles and pharma had a very good run in the past few years and share prices are consolidating now and I expect them to be much higher in the next 5-10 years.

  • India’s cost of production is nearly 33% lower than US. India has the 2nd largest number of USFDA approved manufacturing plants outside the US. Plus highly skilled labour force. Very difficult for other countries to compete with India.

  • As someone mentioned, increased longevity will result in more need for medicines. Lifestyle diseases are increasing at a rapid pace.

  • There are lot of opportunities in India itself. “Generic generics” is just noise, impossible to implement. Major risk is NLEM but we can live with it. We rank 147 out of 184 countries in healthcare spending. India spends 1% of its GDP on healthcare compared to 18% for the US. Glaxo would not have committed to investing 1000 crores if it didn’t see opportunity in the future. There are few pure India focussed players available like Alkem (somewhat), Eris (no exports and no plans) if you want to bypass USFDA risks.

It would be a good strategy to start sipping in a basket of pharma companies. Except Sun ( promoter attention shifting to other things?, Ranbaxy acquisition turnaround) and Auro,Fortis ( never had been comfortable with the promoter), I am bullish on all the major pharma companies. Lets see how it pans out.

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'The surest way to go broke in America today is to get sick.'

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USFDA observations beneficial in long run: Dr Reddy’s
http://www.moneycontrol.com/news/business/usfda-observations-beneficial-in-long-run-dr-reddys-2333325.html

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Hi Bhaskar, why did you say that promoter attention in sun pharma is shifting to other things?

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Taking personal stake in suzlon and then asking US subsidiary to invest in wind power

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Thanks for your reply but why do you think its bad? If dilip Sanghvi wanted he could choose to invest in something less risky but he has put his personal stake in suzlon which means he sees something in its future. Sun pharma is the biggest pharma company in India and among the biggest in the world. It has also invested heavily in R&D in India. I think if you are planning to remain invested in pharma, sun should be your first choice.

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Private market deals in hospital sector -

http://economictimes.indiatimes.com/industry/banking/finance/kkr-to-invest-200-million-for-49-in-radiant-life-care/articleshow/59640650.cms

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Generics constitute 89% of all prescriptions dispensed on a volume basis in the US. The narrative that there’s a much bigger US market for generics needs to be questioned. There’s not much of a market left to capture. A mere 10% increase in market share would be 97.9% market share of total volumes, crowding out branded drugs almost entirely. Wildly improbable.
http://thehill.com/opinion/op-ed/317206-best-asset-to-fight-rising-drug-prices-enhance-generic-competition

Price deflation of generic drugs in America is what’s been driving stock prices. This is now structural and not a cyclical issue.
Foreign investors were aggressive buyers of pharma exporter stocks starting from 2014 which coincided with 25% increase in US generic drug prices in 2014Q2. The Nifty Pharma index peaked out in Apr 2015 which is also when you first started seeing generic prices peak out in US and two-thirds of them come down in cost.
Links for price data:
(http://www.drugchannels.net/2015/04/retail-generic-drug-inflation-eases-but.html)(http://www.drugchannels.net/2015/08/the-retail-generic-drug-inflation.html)

The valuation enjoyed by pharma companies in 2015 were similar to IT sourcing companies in '00 following Y2k outsourcing work in '99. IT companies then had 100% growth in net profit and p/e ratios of 100. Both these situations were exceptional and will most likely never repeat. Sun pharma as an example had already fallen 36% from it’s 2015 high before FDA issued it’s Halol observations on Dec 16.
The Indian business media has done a bad job covering this.

You have had drug wholesalers/distributors such as CVS, Cardinal and McKesson all complain of generic prices going down as the reason for poor earnings. I don’t know how much of a price maker relationship they have v/s the price takers of Indian pharma exporters.
Link:(https://www.bloomberg.com/gadfly/articles/2017-04-19/cardinal-health-warning-generic-woes-aren-t-going-away)

The FDA wants to encourage greater competition among generics through faster approvals and bring prices down even further.
(https://www.bloomberg.com/news/articles/2017-06-09/drug-prices-trump-s-fda-stirs-a-generic-storm)

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Yes. Low hanging fruit has been already plucked. It is complex molecules and biosimilars which will make money going forward. Plain vanilla generic companies will struggle to show growth.

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One of the biggest risk is U.S.D in long run … Some of big bears in U.S keeps saying dollar is utterly overvalued and could correct be 50% . Which i don’t know and not sure about but IT and pharma did had the honeymoon period due to INR vs USD depreciation since 2009 and that seems to be reversing now.

Thats my only worry. Its safe to bet on indian pharma story but there too valuations are already high. Like Alkem has not corrected much .

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Over the last few months we have been hearing news stories about the FDA “becoming strict” and issuing a large number of 483 observations.

I was interested in knowing if this was indeed true.

FDA’s website has the data from 2006 to 2016: https://www.fda.gov/ICECI/Inspections/ucm250720.htm

Here is the number of drugs related 483s issued by the FDA for each year:

2016 - 691
2015 - 678
2014 - 645
2013 - 690
2012 - 787
2011 - 758
2010 - 746
2009 - 594
2008 - 498
2007 - 572
2006 - 649

I could not get India specific count, but this data does tell us that there is no drastic increase in the number of 483s in recent years. In fact more 483s were issued during 2010 to 2013 compared to last year.

Another bit is the ANDA approvals. They seems to have definitely slowed down over the last 3-4 years. Here is the total number of ANDA approvals by the FDA over the years:

2017 - 21 (till April 17)
2016 - 73
2015 - 90
2014 - 97
2013 - 106

Again this is not India specific data. But it does make a point about slow down in ANDA approvals.

Edit:

While the number of 483 observations may not have increased the ratio of observations to ANDA approvals has definitely increased!

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image.jpg744×400 119 KB

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@anni23 nicely put.
I agree the tide has turned for the pharma companies and it is a structural change. They were enjoying premium valuation for last few years, but US FDA and supplier consolidation has changed the game.

Recent new flow related to US Generic is pricing is the cause of concern. Once US Govt and Supplier find a way to squeeze prices for generic drugs, it is hard to get higher Prices. In addition to that, the competition will also intensify as USFDA has started approving more drugs.

The profit these companies earned last year will be difficult to match this year because of price erosion. The PE for most of these companies have come down, but with the further downside to their profit in next few quarters, even the PE for next 12 months would look expensive.

Many companies are talking about complex drugs/molecule, but it will be a while before it makes a significant dent in their revenue.

Having said that, most of the pharma companies have excellent management, great capital allocation history, great ROCE and ROE and still a decent growth ahead of them. But in a short for a term, the market is likely to punish their share prices.

Next few quarter will be interesting, and these companies may provide a good buying opportunity.

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Top ten Pharma companies in 2017

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Big global Pharma R&D spending

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