Which end of the Indian pharma space you are excited about both in terms of growth and margin sustainability? APIs, vaccine makers or biosimilars?
Biosimilars is very exciting in terms of opportunity. Around $60 billion worth of biologics are going off patent which is a significant opportunity. Unfortunately, most companies in India have not invested in addressing the first wave of opportunity. Other than Biocon, there is barely anyone with a significant portfolio of biosimilars. Lupin has a few of them while Aurobindo and Dr Reddy’s Lab are working on it. All of them are likely to be late in the market in the first wave. Biosimilars does not seem to be a meaningful opportunity for most large cap companies today in the near to mid term.
Biocon is struggling because they are a commercial partner and have not been able to push products as much as they would like to in the US market because of various commercial challenges. Biocon is likely to see a few more quarters of stress in terms of earnings because the products in the market are not doing as well as expected. New products have also been delayed.
Beyond biosimilars, the opportunity is in complex generics like respiratory generics or complex injectables or complex ophthalmics. Companies that have been investing in the last 3-4 years in building a pipeline of these complex generics are likely to see a significant expansion in EPS margin in the next few years. The growth is not likely to be secular. We do not think that the sector as a whole is likely to do well in the US market. Within our coverage universe, Cipla, Lupin and, to some extent, Dr Reddy’s have good exposure to a lot of complex generic products.
Cipla is an interesting choice because they are not a US dominated company and inhalers is their mainstay. Since they are not big in terms of vaccines, what makes Cipla so attractive?
There is opportunity in complex generics. They are one of the very few companies across the world who have the capabilities to make respiratory generic inhalers. We think it is a positive that their base in the US is actually smaller than most of their other peers. Their base is about $450 million compared to Lupin’s $850 million. Both Aurobindo and Dr Reddy’s do more than a billion dollars. So price erosion in the base is here to stay.
I do not think we are going back to the 2017-2018 time frame where we saw significant contraction in pricing. Price erosion is here to stay because that is how the generic market works. As more competition enters the market, prices will crash down. So the base portfolio for all these companies is shrinking. The only way to grow in the US market is to have enough number of new products that can cover up for the base erosion.
So Cipla’s lower base portfolio in the US is a positive as they need fewer new products to cover up for the base erosion and grow on top of that. Cipla was loss making in the US in FY19 and now their US EBITDA is close to the company’s EBITDA.
How do you look at the Covid opportunity for Indian pharma majors?
Some companies are likely to benefit more than the others. Cipla, for example, makes Remdesivir and they are seeing a lot of demand for Tocilizumab as well which they license from Roche. The heightened number of Covid cases is likely to persist. Zydus has Peginterferon approved for treating moderate Covid patients, Glenmark has been selling Favipiravir for quite some time now. All these companies are likely to benefit.
Both Cipla and Dr Reddy’s are significantly stepping up capacities to produce more of Remdesivir. I hear the same about Biocon and their Itolizumab and Reslizumab products as well. There are enough efforts going on to increase capacities and the demand is likely to persist at least for the next couple of months.
Beyond therapeutics, Dr Reddy’s have started importing Sputnik-V vaccines. They are expecting about 35 to 40 million doses to come through and be imported over the next 3 months. The private market has opened up for vaccination and Dr Reddy’s is likely to benefit from the sale of Sputnik-V vaccine. For Zydus, it is unclear but they are expected to secure an emergency use authorisation for their own DNA vaccine sometime soon. We understand that phase-3 clinical trials are near completion and they have a capacity of 200 to 240 million doses.
Gland has struck a partnership with RDIF to produce Sputnik-V vaccine. Their partnership is not specific to India, the doses that they produce can be sold by RDIF anywhere in the world. The partnership is for delivering about 250 million doses. We understand that they are likely to start pushing out stocks in Q4. It would depend on the demand-supply situation at that point of time. But Gland is the other likely beneficiary of exposure to Covid vaccines.
On risk from actions taken by USFDA
Earlier this year, I head a lot that FDA inspectors are getting vaccinated and we are likely to see a pick-up in the number of inspections in the second half of the year. This was an important concern in the minds of investors. But now with India seeing a second wave and new variants (of the virus) getting reported, in-person inspections might get pushed away even further. I do not think anybody knows when exactly this might start, but there is a broader understanding that it will possibly not start this year. The risk to earnings which comes from a negative FDA compliance action is far lower this year. That it is one of the reasons why investors are a bit more comfortable around pharma names.
