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1Jan 2018 – Spark Financial Services Newsletter

INVESTMENT BANKING NEWSLETTERHEALTHCARE AND LIFESCIENCES

APRIL 2018

2April 2018 – Spark Healthcare & Lifesciences Newsletter

FROM THE DIRECTOR’S DESK

Dear Reader,

I take this opportunity to welcome you to the second edition of the Healthcare andLifesciences Newsletter by Spark Capital and thank all our well-wishers and friendsfor the phenomenal response to the Inaugural Edition. We have attempted to take allyour feedback on board and sincerely hope that you will find this newsletterenriching and worth your time.

A number of themes we had listed as ones to watch out for in our Inaugural editionhave been playing out in the market. First there is a massive consolidation potential inhealthcare delivery – this was evidenced by the binding & non-binding bids receivedby Fortis Hospitals from a bunch of bidders. Additionally, we are increasingly seeinginterest from market participants – across sub-segments of healthcare delivery - inpursuing bolt-on acquisitions to build scale in their domain and believe this trend willonly accelerate from hereon.

Another theme we had outlined in the earlier edition of the newsletter was that ofscaled-up players preferring to provide liquidity to shareholders through a public listingrather than through a secondary private trade. Q4FY18 was a busy time in this regardwith Aster DM getting listed following in the footsteps of Shalby Hospitals which listedearlier in the year. And as I write this, another major chain is sitting with an approval fromthe regulator to launch its initial public offering, and a clutch of lifesciences companiesare busy preparing to file the draft red herring documents with the regulator.

And thirdly, as we had highlighted, from an investment standpoint, we are continuingto see some shifting trends and formation of a ‘new normal’ both in public andprivate markets.

In continuation of our efforts to deep dive into contemporary topics of interest for thesector (the last edition had focused on the Regulatory Landscape in India for MedicalDevices and Healthcare Delivery), in this edition we look at Specialty Pharma from anIndian context– a perspective not very often described. We then expand our horizonsto the US and developed world as we look at the Biosimilars sub-segment of specialtypharma and how that has played out in the recent past, given its high voltage headlinegrabbing entry onto the specialty pharma scene.

The motivation to cover these concepts is the constant talk we hear from eminentpersons in the industry of these being the next big growth drivers. Of the genericstory coming to an end and of Indian companies betting on specialty pharmaincluding biosimilars for their growth over the next decade. Strangely enough, manysell side research analysts also refer to these concepts loosely in their notes on thesector and on specific companies but have stopped short of giving out a numericalimpact on the earnings and share prices of the respective stocks.

While Specialty pharma is usually spoken of in the context of US market opportunityfor Indian pharma companies, and more from a B2B perspective andR&D/manufacturing capabilities, it is interesting to understand this upcoming sectorin the context of the Indian domestic market and where one could find pockets ofattractive investable opportunities.

Like the generic-generic market in US, which is witnessing excessive competition andcompressing margins below attractive levels, Indian branded generic market whilestill offering reasonably attractive margins, has always been rather fragmented and acompetitive space, with little scope of product/service differentiation. This situationmakes it difficult to discern one company from another in general, while evaluatingan investment bet for a larger play (Although we clearly agree that there are pocketswhich are differentiated on account of execution capability, quality of governanceand therapy focus).

By clearly understanding the definition of specialty pharma, we will be able todiscern opportunities spanning formulation segments like biologicals especiallybiosimilars as well specialised API segments like Peptides, Oncology APIs, Hormones,

http://mailapp.subscribetomailinglist.com/emhance/mailUserImages/80/files/Spark Capital Healthcare and Lifesciences Newsletter_Feb 18.pdf


FROM THE DIRECTOR’S DESK

Enzymes. Beyond the product space, we look service segment opportunities in Specialty pharma, which include supplychain (Specialty distribution),Delivery (Home infusion services) & Diagnostics (High-end diagnostics).

While biosimilars have been in existence for close to two decades now, their adoption can broadly be classified into threegeographical buckets – Europe, Rest of the World and the USA. Strangely, biosimilars have had a fair shares of success inthe EU and RoW markets with established approval pathways, large scale commercialization and impact on innovatordrug pricing, while they continue to remain an immaterial entity in the USA. Nearly a decade after the USA came out withits first guidance on the approval pathway for biosimilars, there are less than 10 approved biosimilars of which less than 5are commercialized. And what is even more interesting to note is that none of these have been approved asinterchangeable.

The premise was set perfectly well for the rise of biosimilars in the US market – large chronic and complex diseaseincidence population already on biologic drug prescription, patent cliff for several blockbuster biologics, lower cost ofdevelopment of biosimilars allowing predatory pricing compared to biologics and payer driven health economics alwayson the lookout for cost reduction initiatives. With the hope came the hype – guidance were issued without extensivestakeholder consultations, physician consent towards adoption given the cost arbitrage was assumed as a given andinterchangeability was thought of as inevitable. But then came the reality check – innovator biologic companies were justnot willing to take the onslaught lying down and see their value erode overnight – and that too in a litigation happymarket like the USA. Lawsuits after lawsuits followed on almost every biosimilar. Approval timelines were stretched.Development costs now also had to account for imminent legal battles. Innovators came up with unique and potent turfprotection strategies (some almost bordering on being anti-competitive) and physicians just refused to be drawn into thelure of prescribing a ‘similar’ drug which didn’t have the absolute ‘same’ results. Suddenly things weren’t as rosy as theyseemed. In the article titled ‘Biosimilars in the United States – The Hope, the Hype and the Reality!’, we chronicle thehappenings in the US biosimilar market, outline trends and potential scenarios based on current US market dynamics andevaluate scope for play by Indian pharma companies.

We continue with our series on the “Expert Speak” wherein we bring in a direct perspective from leading industryoperators in the chosen segments of the broader sector. For this edition, we have picked domestic pharma as the sub-segment of choice and accordingly have included interviews of a two industry flag bearers - in the sector in our ‘ExpertSpeak’ section. I would like to take this opportunity to whole heartedly thank and express our gratitude to Pankaj Singh,Chairman and CEO, LaRenon Healthcare and Deepnath Roy Chowdhury, National president- IDMA & MD, StrassenburgPharma for being of great help and for providing their thoughts on several of our questions captured later in thisnewsletter.

Also covered in this newsletter are some of the latest developments in deal making in the sector coupled with an update onthe Regulatory Environment which we had covered in the Inaugural Edition. Additionally, we hope you find the section on“From our Equities Desk” an interesting read on listed companies and our outlook on various sub-segments of the sector.

I hope you find the content in this newsletter insightful and would be grateful if you could connect with us with anyviews / information relating to the topics we have attempted to cover in this edition. Like always, we assure you of takingany feedback (including critique!) you may have on board for subsequent editions. We hope you enjoy reading it as muchas we did putting it together.

With best wishes,

Virendra Pandey

Director and Head – Healthcare & LifesciencesInvestment Banking


WHAT’S INSIDE?

10

INTERVIEW

CHANGE IS THE ONLY

CONSTANT

LATEST NEWS AND ANNOUNCEMENTS27

NEWS

Key news and happenings making the headlines in healthcare and

lifesciences

FROM OUR

EQUITIES DESK

Insights from Spark’s Institutional Equities Desk

28

ANALYSIS

5

INTERVIEW

‘CHRONIC’ APPETITE FOR

GROWTH

On how LaRenon Healthcare has grown rapidly to become one of the largest companies in its segment in

just over a decade

On the sector facing constant govt. scrutiny & strategic imperatives for small & medium sized Indian companies

SPECIALTY PHARMA IN

INDIA–INSIGHTS & OPPORTUNITIES

12

EDITORIAL

Insights on speciality pharma product & service

opportunities from the context of Indian market

BIOSIMILARS IN THE USA –

THE HOPE, THE HYPE AND THE REALITY!

16

EDITORIAL

An in-depth analysis of the biosimilar landscape in the USA and our view on what

the future holds for this segment!

RECENT HEALTHCARE & LIFESCIENCES

INDIA TRANSACTIONS

Recent activities and developments across the

Indian healthcare and lifesciences landscape

25

TRANSACTIONS

26 Follow-upREGULATION IN

HEALTHCARE

An update on the announcements and happenings from the fast evolving regulatory landscape in Indian

Healthcare and Lifesciences


1. Between 2011-15, Indian pharma storywas all about US generics, evenovershadowing a strong domestic market.Given all the headwinds in the US marketsthat seems to have changed with renewedinterest in the domestic pharma business,as a relatively safer bet. In this context,how do you see the overseas opportunityfor regulated markets pan out over thenext 5 years?

US generics market has become adifferent ballgame altogether with its risk-reward equation perhaps changing incomparison with that of domesticformulation opportunity. Our strategy is tofirst strengthen India and, then focus onselected emerging markets followed by anentry into the European markets. The USmarket, while remains attractive, may notbe amongst the top priorities for us in themedium term. However, to be sure, weplan to test the waters by planning anentry in the US market through patentedMedical foods segment.

2. Unlike some of your peers, La Renonstarted off as a Super Specialty focusedcompany focused on renal care,

EXPERT SPEAK

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USD 5.5 BnTotal transaction value till date

USD 3.7 BnCapital raised till date

USD 1.8 Bn M&A transaction value till date

300+ Number of fund relationships globally

USD 700 Mn Average annual deal closure value for the last 3 years

11No. of transactions > USD 100 Mn

~USD 1.2 BnCurrent value of transactions being executed

Healthcare & Lifesciences

~USD 500 MnTotal transaction value till date

~USD 100 Mn Current value of transactions being executed

INSIGHTS FROM AN INDUSTRY VETERAN

LaRenon is an emerging leader in specialty

pharmaceuticals. Founded in Ahmedabad in 2007, it

was the first to foray into the domain of Nephrology

with a focus on early stage Chronic Kidney Disease

(CKD) Patients.

It also gradually entered into other chronic

management therapies of Critical Care, CNS, Urology,

Gastroenterology, Respiratory and Cardio Metabolic

‘CHRONIC’ APPETITE FOR GROWTH

We interacted with Pankaj Singh, Chairman& CEO of LaRenon Healthcare, on howLaRenon has grown rapidly to become one ofthe largest companies in its segment in justover a decade

Pankaj Singh

Chairman and CEO, LaRenon Healthcare

subsequently selectively entered chronic& semi chronic segments like CNS & GI.Can you share your thought process onthis approach?

Yes, that’s true. To begin with; we adopteda different strategy by focusing on the earlystage of CKD (Chronic Kidney Disease),while the then existing incumbents werelargely operating in the end stage renaldisease. It is interesting to note that approx.60% to 70% of our revenue comes from theearly stage CKD, while only 25% to 30%comes from the end stage renal disease.

Further, as one would notice, peoplehave become increasingly aware of thecardio metabolic disorders, andproactively approaching specialists suchas Cardiologists, Diabetologist andNephrologists along with gettingthemselves tested for various healthconditions including kidney functiondisorders. Considering the paradigm shiftin the present generation of fostering aproactive approach towards one’shealth; I believe the development inCardio Metabolic therapy is going to bemimicked by the Nephrology segment inthe near future, enabling it to become amuch larger super-specialty therapy.


once or twice in a week, which leads to buildup of Toxins in the body, without dialysis. Toaddress this, we have launched a first timeproduct in India which helps reduce thenitrogenous toxins in the body. For this wesuccessfully litigated with a USA basedcompany, which had a process patent forthis product and we were able to revoketheir Indian patent. Many of our productshave implemented from product ideas whichoriginated with an unmet medical need.

FDCs have not been a key part of ourportfolio. Super Specialists are veryparticular about compositions, unlike thegeneral physicians, where creative FDCshave been a big part of the new productportfolio. Even drug dosage/strengthsare different for super specialitysegments in comparison with generalsegment patients. Let’s look at theexample of Torsemide, wherein a dose of100 mg is given by a super specialist to akidney patient, while a dose of 10-20mgis preferred by a general physician.

On a related note, we have developed3 patented medical foods for which wehave filed our patent applications in over 40countries including USA, Canada, Europeancountries and a number of those in theemerging markets. We plan to pursue themedical food approach primarily asregulatory barrier is low in most marketsincluding regulated markets. Similarly, weare exploring in-licensing opportunities aswell with players from US & Europe.

In April, we are launching a first of kindproduct in India, for Iron deficiency in Kidneydisease. For this, we have developed, anon-infringing API & formulation, in house.

4. The domestic formulations space has seenquite a bit of M&A activity over the past 12months which is only expected to intensify.Some of these have been succession related,while others have been due torationalisation of non-core business areas.Historically, pharma companies haveresisted from any divestment/restructuring.Do you see this trend changing and foreseemore transactions in future?

Yes, there seems to be a trend though Iwould say consolidation is stillepisodical. You see, the next generationis becoming more logical and decisions

If we take a look at Neurology, market isquite consolidated with 60% to 70%market being accounted for by top 4 or 5players. A number of new entrants haveunsuccessfully tried to enter thesegment. Given this background; beforetaking a plunge, we did some research asto why companies trying to enter thissegment had a high failure rate. Wefound one thing which was strikinglycommon. All the concerned companiescame from an acute therapy background.In our experience, managing acute andchronic therapies is very different. Sincewe started as a super chronic segment,we have well-established culture,processes and systems to successfullyexecute these strategies.

In India, we are planning to commenceoperations in new therapeutic segments ofOrthopaedics and Gynaecology. The Uniqueselling point that will differentiate us fromthe me-too players is the introduction of firstof its kind products by us.

3. In the product patent regime since 2005,access to new product opportunities havebeen limited by in-licensing or fixed drugcombinations or OTC/Semi OTC nutritionbased products. What has been yourstrategy for new product selection?

Our strategy is clear, to enter thechronic disease segments and even withchronic segment, our product selectionis focused on super chronic drugs &drug combination.

For instance, let’s look at our focus onearly stage CKD. For starters, no playerwas focusing on early stage CKD in acomprehensive manner. Take theexample of multi vitamin like Becosules,which was given to Kidney patientswhen we started in 2007. But Becosulesis a combination of water soluble and fatsoluble vitamins. However, we knowthat kidney patients should never begiven fat soluble vitamins. In light of this,we were the first ones to launch avitamin supplement meant for kidneypatients with only water solublevitamins. In the US, there is a concept ofalternate day dialysis. But in countriessuch as India conditions are verydifferent especially in Tier 2 and 3 citieswherein patients come for dialysis either

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EXPERT SPEAK


EXPERT SPEAK

are based less on emotional connections.There is also more business pressurenowadays in certain segments ofbusiness like the US. So some largeIndian companies are seeing domesticformulation as a relatively moreattractive opportunity for acquisitions.Even on in -bound acquisitions, while thesentiment are slightly dampened withthe experience of Daichii-Ranbaxy andsky high valuation expectations, largemulti therapy deals might not be ascommon. But in certain segments likeInjectables, deals have continued tohappen for likes of Gland-Fosun, Baxter– Claris and even before that Otsuka –Claris. Such in-bound acquisitions inspecialty/ differentiated areas are alsolikely to continue, in my opinion.

5. We are also seeing a spike in activity ondomestic brand acquisitions with moremeaningful play unlike the earlierdivestitures of ‘tail brands/high vintage’ byMNCs. Do you believe there is scope tomake money of such acquisitions, whichcome at rich valuation multiples and whatareas are you focusing on for La Renon?

From La-Renon’s perspective, I believethat organic growth should be the mostpreferred strategy; till a certain scale isachieved. Even in today’s market, thereare many new product opportunities stillavailable to launch on your own. Forinorganic, one needs to be careful intarget brand selection on the basis ofscale, penetration, reach and supplychain. One also needs to make sure thatthe targets are not compromised in someway or the other. Once you carefullyapply such filters, you will find that onlya few opportunities are genuinely good.

6. In the past decade, several new agepharma companies like Eris, La Renon,Corona & Koye have emerged successfully.What do you think has been the reason forthis trend? Do you see more such promisingcompanies in the making?

Yes that’s a promising development inmy view. We always ask ourselves, why80% to 90% of pharma market has to becontrolled by top 50 players, rangingfrom 10000 Cr. to 400 Cr. in revenues?

Top 30 companies will cover 55% to 60%of market and most of them werelaunched in 80’s & 90’s. You need torealise that while there are nuances, thisbusiness is not rocket science. With goodexperience and decent infrastructure,there is a significant scope to grow thebusiness through a differentiated strategy.You mentioned Eris, who are strong, inCardio Metabolic segment, and theirfounders had lot of experience in thesetherapies. Similar is the case with some ofthe other companies that you mentioned.

It is to be noted that when we started,Nephrology was a relatively small therapy,fragmented within the top 20 playerspresent in this therapy, who hold 3% to4% market share each. While the start waschallenging, we got some very interestingproduct ideas, which were very wellaccepted by the Nephrologists.Fortunately, even the availability ofNephrologists, has increased significantlysince we commenced. For an example, ofKerala for instance, wherein with manygood institutes today, there are over 100nephrologists operating successfully. Mostof them have over 100 patients a day,which is a benchmark for a very goodpractice. This is mainly because Keralacomprises of highly educated and health-aware patient population. A vibrantdoctor/Physician ecosystem prevails,which ensures that patients are referred tospecialists at an early stage itself, beforetheir condition worsens.

After the 4 to 5 successful new companies, alot of new regional companies have beensetup with a revenue traction of 30 Cr. to 40Cr. But most of these have been setup byregional or zonal managers of establishedpharma companies, who eventually find itdifficult to scale up beyond their state. Alsomany of them are not ambitious as well anddo not have a strategic vision, as they accrueenough profits in their focus geographies.The question these local entrepreneurs ask iswhy risk entering into unfamiliar territory?That is why we have not seen many largeemerging companies yet, post the initial few.It depends on risk appetite and confidence insuccessful execution on entry.

7. In terms of emerging markets, forex andprotectionism have been challenges for

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Indian companies’ expansion. Do you think itis wise to pursue a low risk B2B approachlike some of the players in the past or directpresence would be the right approach?

When we enter an emerging market, welook at it as just a single pharma market.We objectively look at them from thelens of specific therapies and doctorecosystem. It becomes very clear thatsome countries are much betterestablished in these therapies whichmakes it very attractive for us. They canbe regionally diverse such as aPhilippines, Vietnam and Cambodia inSouth East Asia to Ghana in Africa.

Let’s take a look at the example ofPhilippines. Pharma market there is aslarge as USD 4 Bn (one fourth of theIndian market), but 1/14th of populationand prices are similar to India. Being abranded generics market, it has a well-developed clinical practice, betterInsurance systems advantages likeincentives for healthy lifestyle, healthcheck-ups etc. Thus, all the foundationsare in place, which makes it a veryattractive emerging market.

In many large companies; emergingmarket product selection, is decided bytheir regulatory team or distributors.Though we are looking at it differently,from therapy lens. We engage with theregulators using data of renal careinfrastructure along with gauging thelack of it in the country and seek anapproval for a large number of productsin a short span of time. We are similarly,entering over 20 emerging marketsfocused only on our core therapies –Nephrology & Neurology.

8. While Pharma companies havehistorically focused on service to doctor andnot focused on Patient, Do you see thattrend changing with new service modalitieslike home healthcare, online pharma?

That’s a good point but you see, itdepends on what the target populationlooks like. For certain segments ofpopulation, especially urban, educatingthe direct consumer could make sense.But we need to appreciate that a largepart of the population is still dependenton doctor, who influence their drug

EXPERT SPEAK

consumption and patient care decisions.What we also see in our super chronictherapies is that, we engage the patientsto provide them frequent diagnosticstests like Kidney function test andSerological tests, without any financialburden along with providing them timelyreminders. While we do thispredominantly in Nephrology, we plan todo something similar in Dementia, whichis not even recognised as a disease andmany even consider it as a natural agerelated issue! We plan to change this in asmall way in order to sensitise peopleabout the disease and thus market thedrugs to address them.

9. In the domestic market business, regulatoryrisk has been an area of concern – MCIregulations, FDC ban, price control, Generic-Generic? What is your view are biggerconcerns in the near future? What riskmitigation strategies do players need to adopt?

Regulations have always been around. Soon that front, some risks and uncertaintywill continue to exist; to various degrees.However, regulators today have slowlystarted to realise that we are the cheapestin drug prices in comparison with othercountries. But the issue has been, that thecost of production at current standard islow due to very low standards ofcompliance sought by regulators.Regulatory authorities are focusing onimproving the quality control and qualityassurance standards for medicines for Indiasince such infrastructure is already availablefor drugs exported to regulated markets.

Even in the case, generic-generic becomesa reality (I am not saying that it will), qualityof manufacturing becomes a bigdifferentiator. For example, there arecompanies in India which follow a uniformmanufacturing infrastructure; making themedicine for both India and US market inthe same plant with same quality standards.

I understand that FDC issue has beenstayed by court. Court has asked thesecases to go to DTAB/ or itssubcommittee formed by DTAB for thepurpose of having a relook on the casesto establish if the FDCs should beregulated, restricted or out rightlybanned, but only after hearing thearguments of the industry.


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and what’s your medium and long-termvision for La-Renon?

I believe in focusing on processes whichshould bring the numbers and thenumbers are only incidental. We arecreating systems, processes, culture andinfrastructure to achieve growth and richnew product pipeline, entering newmarkets, speedy regulatory filings andmanufacturing infrastructure. I mentionedto you that we are planning to enter over20 emerging markets which wouldprovide further alpha to growth.

Our past performance can beexemplified. I would not like to commentspecifically on any future numbers butsuffices to say that we see enoughgrowth levers up our sleeve to grow wellin excess of the industry growth.

12. While the pharma sector overall haswitnessed muted public market sentimentsince Jan 2016, A few focused mid capplayers & domestic only companies havebeen an exception to this trend. Do youthink it is a good time for such focusedmid-sized pharma companies to tappublic markets?

Markets are sentimental as we all knowand flavours of the season keepchanging. In my view, Companiesdependent on significant portion ofrevenues coming from US, could bechallenged. Companies having a marketdiversification and/or a solid Indiafranchise could be more sustainable. Yousee the gap is further widening in thelisted space between US dependentfranchises and other diversified scaled-up, plays. But to each his own and Iguess companies should look at theirstage of the life-cycle, fundrequirements, shareholder exitrequirements and their ownpreparedness before they take a plungein the listed market. I think we haveinteresting times ahead.

EXPERT SPEAK

Another way to mitigate risks to growthand base business, is to diversify thebusiness across markets and beyondIndia into emerging and regulatedmarkets as well. In 5 years, we expectmeaningful part of our revenues comingfrom markets outside India. We arealready investing into this business wellahead of time in likes with, be it 400+dossier filings in over 20 emergingmarkets, patenting our medical foodsproducts in over 40 countries or evensetting up our green-field EUGMPcompliant manufacturing plant. Thus, astrong foundation is in place.

10. Do you believe having ownmanufacturing facility for domesticmarket critical in the future? Do youbelieve own API facility also provides ameaningful competitive advantage?

I think it is very important to have one’sown manufacturing facility for domesticas well as export markets.

With this perspective, we createdStanford labs, which is our own subsidiaryand accounts for approximately 60% ofour total revenues. In India, very fewcontract manufacturers are large enoughor have decent infrastructure to maintainthe high quality standard.

Likewise, it is critical to have in houseAPI facility. Many niche APIs have fewmanufacturers and many of these are in-house arms of large domestic pharmacompetitors. For 3rd party buyers, buyingAPIs is a risk from getting timelydelivery, as their priority is always inhouse supplies. Realising this, we havesetup an in house API R&D, which hasdeveloped some APIs, which we arecurrently contract manufacturing with a3rd party. We are taking this approachfor API supplies for all our key largebrands, which secures our supply chain.We plan to take a similar approach forsome of our promising pipeline products

11. La Renon has been one of the fastestgrowing companies in the domesticpharma segment with focus on 2-3therapies – what are your views on thegrowth of the market in your therapies


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EXPERT SPEAK

1. Among the many headwinds Indianpharma faced over the past couple ofyears, the threat posed by potentiallyturning branded generic market into ageneric-generic one, was the mostworrisome. Do you think it will happenin near future? What are the challengesyou foresee for this implementation?

Not sure what is going to happen.Government might not take a stance rightaway to ban branded generics. But theyhave decided to popularise generic-generics and have started taking measureslike opening more Jan Aushadi stores,amending the labelling provisions tohighlight the generic formulation, makingBA/BE studies mandatory for certainproduct categories and so on. Thegovernment also plans to introduceUCPMP (Uniform Code forPharmaceuticals Marketing Practices) toregulate Pharma Marketing Practices.

Branded generics have served Indianmarket well for several decades. Shiftingthe right to choose the product from thedoctors to the chemists might haveserious implications regarding margins &accountability. We are not againstgeneric products but our only request isto allow both the branded and genericproducts to be co-prescribed so that thedoctor can exercise his right to show hispreference for a brand and the patientmay decide whether to buy the brand or

the generic version. Both the brandedand the generics markets can co-exist inIndia without much disruption.

2. With the emergence of CRM basedpharma business model with multipledivisions selling same combinations underdifference brand names, do you think the eraof large brands is over? How valuable arebrands? Can we ascribe value to revenuealone or vintage/ reach also counts?

While the first part of the questionshould be addressed to companiesemploying the CRM model or operatingmultiple divisions, all I can say is thatsmall brands can never be as valuable asbig brands. In the recent past, mostcompanies have been applying evenmore focus on their big brands giventhat there is a huge difference inrevenue impact for a 20% growth on aINR 5 cr brand vs even a smallerpercentage of growth for a INR 50 crbrand. It is much easier to establishbetter brand recall among doctorsthrough bigger brands.

3. While Indian pharma market is highlyfragmented one, more so at the sub INR 100cr revenue level, with multiple playersoperating in limited geography at astate/regional level or single therapy level.

CHANGE IS THE ONLY CONSTANT

INSIGHTS FROM A LEADING INDUSTRY VOICE

Deepnath Roy ChowdhuryNational President- IDMA(Indian

Drug Manufacturers Association) & MD- Strassenburg pharmaceuticals

We interviewed Deepnath Roy Chowdhury, National President- IDMA(Indian Drug

Manufacturers Association) & MD-Strassenburg pharmaceuticals to seek his first

person view on regulatory developments affecting the pharma sector & structural

issues facing small & medium sized pharma companies

Source: News Publications


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Would you think the market is ripe forconsolidation for players with complementarygeographical/therapycoverage?

These are difficult times for very smallpharma companies. On one side, thereis serious regulatory pressure whichincreases costs and on the other side,there are pricing pressures that arereducing revenues. Economies of scaleon both production front and salesfront are becoming increasingly criticalfor survival.

Even strong regional companies arefinding it difficult to cross the INR 100cr threshold. A large number of verysmall companies are going out ofbusiness. Many of them havesuccession issues with the nextgeneration not interested in running thebusiness because of futureuncertainties. Many feel that if theyinvest further for expansion, they arenot sure they will get the returns. Thebottom line is that either you buildgreat manufacturing capability or createbig established brands. If you haveneither, then there is a serious concernabout the value and potential of thebusiness.

4. What are your thoughts on Departmentof Pharmaceuticals (DoP)’s proposal forcompulsory BA/BE studies for drugapprovals as well as discontinuation ofP2P & Loan licensing based manufacturingarrangements?

We have expressed our seriousreservation regarding the proposeddiscontinuation of P2P & Loan licensingbased manufacturing arrangements. Weunderstand these measures are unlikelyto be implemented in their current form.

5. Trade channel margins in retail pharmais among the highest in comparison withother consumer facing industries. Manyattempts to disintermediate the channelby online pharma companies, have beenmet with regulatory hurdles/lobbyingpressure? Do you think government mightpossibly intervene to cap the margins infuture?

Existing trade margins for brandedgenerics is reasonable - 10% for wholesale& 20% for retail. There may be instancesof unreasonable channel marginsprevalent in the generic-generic supplychain. This is being closely monitored bythe Government.

6. In view India’s improvingcompetitiveness vis-a-vis China in bulkdrug manufacturing, due to removal ofcustom duty exemptions, growing labourcosts & higher EHS compliance in China,do you think Indian bulk drug industry ison its way to regain past glory? Are thereany lessons to be learnt from APImanufacturers in Europe & Japan, whohave sustained their business despite thethreat of low cost manufacturing fromIndia & China in last decade and half?

IDMA has been closely associated with theAPI industry with around 75 membersfrom the industry sub-segment. We haveplaced recommendations before thegovernment to improve thecompetitiveness of the sector, though noconcrete steps have been taken yet. Wehave suggested that Government takeappropriate measures to streamlineEnvironment related issues and expeditenecessary permissions required by theexisting API manufacturers. To encouragemore investment & new projects in theAPI sector we have requested theGovernment to set up dedicated API Parkswith CETP and continuous supply ofpower & water at economical rates.

India’s import of APIs from Europe hasgone down considerably. Nearly 70% ofthe demand is met from China which is ahuge risk for the industry in the eventthere are negative surprises – political, oreconomical. The nearly USD 40 bn IndianPharma Industry’s (domestic & exports)critical dependence on China is a matter ofNational Health Security and should beaccorded due importance. It is imperativethat we develop alternate domestic supplysources.

EXPERT SPEAK



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USD 11 Mn

January 2010

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In

USD 26 Mn

October 2010

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From

Undisclosed

June 2011

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In

Undisclosed

March 2012


SPECIALTY PHARMA IN INDIA –INSIGHTS & OPPORTUNTIES (1/4)

Specialty pharma in India: Insights

While Specialty pharma is usually spokenof in the context of US marketopportunity for Indian pharmacompanies, and more from a B2Bperspective and R&D/manufacturingcapabilities, it is interesting tounderstand this upcoming sector in thecontext of the Indian domestic marketand where one could find pockets ofattractive investable opportunities.

Like the generic-generic market in US,which is witnessing excessive competitionand compressing margins below attractivelevels, Indian branded generic marketwhile still offering reasonably attractivemargins, has always been ratherfragmented and a competitive space, withlittle scope of product/servicedifferentiation. This situation makes itdifficult to discern one company fromanother in general, while evaluating aninvestment bet for a larger play (Althoughwe clearly agree that there are pocketswhich are differentiated on account ofexecution capability, quality of governanceand therapy focus).

One of the apparent opportunities thatoffer genuine business differentiation inour view is Specialty pharma, whichalbeit small today relatively, has thepotential to become meaningfully largein the near future.

What exactly is a specialty drug?

We have defined Specialty drugs as high-cost oral or injectable medications used totreat complex chronic conditions. Theseare highly complex medications, typicallybiology-based, that structurally mimiccompounds found within the body.

Medications must have at least one of thefollowing characteristics to be classified asa specialty medication:

High Cost

High-cost medications are typically pricedat more than $1,000 per 30-day supply;including self-administered injectables,professionally administered injectables/infusions, and oral medications.

High Complexity

Biological/Biotech products requiringcomplex R&D, manufacturing &regulatory approvals

Orphan or Ultra-Orphan drugsrequiring specialised licensingrequirements

Medications that are included in aspecialty therapeutic drug classstrategy

High Touch

Medications that require temperaturecontrol or other specialhandling/shipping requirements (i.e.,refrigerated or frozen shipping)

Medications that require ongoing drugmanagement by a pharmacist and/orphysician specializing in treating themember’s condition

Medications that require focused, in-depth member education, compliancemonitoring, side effect managementand, often, injection techniqueeducation

How big is the Specialty pharma Marketopportunity?

Specialty pharma is a huge opportunityglobally, accounting for over 28% of globalpharma market, It is heavily skewedtowards developed markets such as US &EU where they account for 35 – 40% oftotal pharma market.

In developing geographies such as India,Brazil & China, the penetration of specialtypharma is at high single digits to low teenslevels. Given that these developinggeographies account for significant shareof overall global population as well aspatient population in key disease areas,there is a tremendous scope of growth ifsome structural issues were addressed.

202

268

2012 2015

Global Specialty pharma market (USD Bn)

10%

2015

Total pharma

market

(USD bn)

% share of

Specialty drugs

Global 940 28%

US 390 36%

India 14 8%


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December 2009

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February 2009


Looking at Specialty pharma fromtherapy lens, Oncology, Auto immunedisorders & Anti viral medicationsaccount for top-3 therapy segments.

When we conversed with somehealthcare experts to understand thelevel of usage and challenges in adoptingSpecialty pharma, the biggest hurdles wefound out have been affordability,followed by supply chain issues and thelack of diagnostics services.

Outside super specialists mostlyoperating out of large cities, awarenesslevel among physicians among specialtydrug treatment protocols are low, whocontinue to prefer less effectivetreatment options

Since many of specialty drugs aredifficult to administer in a non-healthcare setting, low level ofcompliance is a big challenge for manypatients ensure continuity of care.

Oncology30%

Auto immune disorders

28%

Anti viral medications

17%

Others25%

Global therapy wise breakup

Therapy Sub segmentsCurrent Indian

context

Oncology

Chemotherapy,

Immune

stimulants, Pain

management

Available but

biologics which

are very highly

priced have low

penetration

Auto immune

disorders

Treatments for

Crohn’s disease,

Multiple Sclerosis,

Psoriasis &

Rheumatoid

Arthritis

Corticosteroids

are still preferred

over expensive

biologics, low

penetration of

diagnosis

Anti viral

medications

HIV/AIDS, Hep. C

& Hep. B

Available at a

fraction of US

prices due to

licensing model

with players like

Gilead

Others

Transplants (Immune suppression)

Hormone therapy (Infertility/growth hormones)

Genetic disorder therapies (Enzymes, blood fractions)

One or two Indian players manufacture locally

low penetration of diagnosis in genetic disorders

poorly managed cold chain distributor

Given the obvious market opportunity, anumber of Indian companies are activelyworking towards addressing thestructural challenges facing the market.

1. Pricing:

a. Many Indian companies such asBiocon, Dr. Reddys, Intas, BharatSerums and Reliance Lifesciencestoday have mastered the process ofdeveloping biologicals, in-housecomplex biotech products andbringing these products to themarket at a rapid clip.

b. While these Indian companies, havinglower R&D costs to amortise andcombined with a lower cost ofproduction, can offer biologicals atsignificantly lower pricing incomparison with global majors,subject to patent hurdle beingovercome.

c. Since many large biologicals, complexbiotech products like peptides havepatents expiring in the 2017-20period, market volumes are likely toincrease exponentially in near future.

d. While a few players like Biocon alongwith their commercialisation partner– Mylan are pursuing a strategy toenter the US market, other playersare taking a less risky, less capital-intensive strategy to grow the marketin India and in other emergingcountries through a penetrativepricing strategy.

e. Within the R&D and manufacturingsegment, there are specialised playersoperating in standalone API segment orformulation segment or both.

f. While most of the biologicalmanufacturing is integrated, there arespecialised API players manufacturers

Category Key players Investor

Immunosuppresants Concord

biotech

Quadria

Hormones Symbiotec

pharma

Actis

Peptides Hemmo

pharma

NA

Oncology APIs Shilpa medicare TA associates

Controlled substances ZCL chemicals Morgan Stanley

Blood derivatives Plasmagen Eight road

ventures

Anti Virals Laurus IPO

Select Other Sector Transactions

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~USD 32 Mn

December 2017

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Undisclosed

December 2017

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By

~USD 16 Mn

January 2018

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~USD 10 Mn

December 2017



g. Most of the companies in the above listhave attracted PE investments orprovided successful exits for PEplayers.

h. Most of the specialty pharma drugs areformulated at infusions or pre-filledinjectables. Scaled up players in thissegment have attracted investmentsand also witnessed successful exit toglobal strategics in the recent past

1. Sales of Gland pharma to Fosun

2. Sale of Claris to Baxter

3. Sales of Agila to Mylan

4. Orbimed’s investment in EurolifeHealthcare

2. Affordability:

a. With higher per capita income andlevel of savings, a larger share ofpopulation is now able to affordspecialty drug treatment in comparisonwith the past.

b. With health Insurance policiesbecoming more comprehensive incovering critical illness & havingdedicated packages for diseases likecancer, it has become easier forpatients to access specialisedtreatments unlike in the past when onehad to shell a large sum out of pocket.

3. Availability of High end diagnostics

a. Several independent high-enddiagnostics companies focused onspecialised oncology testing orpre/neonatal genetic screening areenabling greater adoption of specialtydrugs.

b. While traditional pathology labsfocused on basic biochemistry /immunology tests with little need forprescriber education, these high-endlabs actively educate / promote theirtests to prescribers leading to betterawareness & adoption, giving suchindependent lab a definite edge overlarge pathology chains, which arelooking to enter this space & shore uptheir high value test portfolios.

c. Many of these labs are also innovatingin-house/partnering with global playersto bring the latest technologies to Indiaand make it accessible to Indianpopulation.

d. While Oncology & Genetic screeningare better established with playerssuch as Core diagnostics in Oncology &Babyshield (Lifecell) in New bornscreening, high-end diagnostics forCardiology & Neurology havetremendous potential, which is stilluntapped in India despite a largepatient base.

4. Specialty sales teams:

a. Specialty drugs require a significantlyhigher degree of scientific selling thantypical Indian pharma salesrepresentative is used to.

b. To address this gap, many Indianpharma companies have created smallteams of qualified MBBS doctors topromote the drugs. This ensuresphysicians receive the inputs with moreintent and are more open to try outnewer treatment options.

5. Supply chain issues:

a. Supply chain issues in specialty drugsstart all the way from getting a licenseto actually importing the drug, followedby controlled storage andtransportation, dealing with a shortershelf life. Strong regulatory expertise isrequired to get import license forspecialty drugs, many of which areusually launched for the first time inthe country, while others might beorphan drugs for rare diseases, whichin many cases are imported on a namepatient basis.

b. Sometimes, many not so complexspecialty drugs also face significantavailability challenges usually in tier-2/3 hospital settings. With low &unpredictable usage trends, it isdifficult to stock these medicines inhospitals or pharmacies.

c. Some of these have short shelf lives,require narcotic licenses making anefficient supply chain a much-neededimperative. Unfortunately, India’spharma supply chain is a highlyfragmented one with very low level ofstorage compliance.

d. Unfortunately, Pharma distribution inIndia is highly unorganised, with only afew specialty distributors like SandorMedicaids having a nationwide coldchain network, as well as a dedicated


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of

~USD 24 Mn

November 2017



regulatory team to obtain regulatoryapprovals for novel productsincluding orphan products.

e. Companies focusing on productniches with supply chain complexitylike Plasmagen, which offers specialtyblood products have been backed byprivate equity players.

f. In a more mature market like US,Specialty distribution market isdominated by divisions of Big-3wholesalers – Mckesson, Cardinal &Amerisource Bergen, who haveconsolidated their presence throughacquisitions of independent specialtydistributors such as ASD healthcare,Oncology supply, Besse Medical etc.

6. Continuity of care:

a. Specialty drugs are typically used totreat complex diseases like cancer,auto immune diseases, for treatmentoptions are available only in majorcities. For this, patients usually travelvery long distances to major metros,where accommodation is veryexpensive for long term hospitaladmission. Since many of thespecialty drugs require long termcare, it is not economically possiblefor the patient to stay admitted forlonger durations.

b. Since most of the drugs arecontrolled infusions, which can beprovided only by trained technicians,it becomes a challenge for patients tocontinue care in a home setting. Toaddress this need, a bunch of Homehealthcare players like Health Care atHome, Portea and others arefocusing on providing infusions athome as a service for specialtymedications mainly Oncology.

c. Home infusion service providers havethe potential to become distributorsand sellers of specialty drugs sincethey have strong adjacencies.

d. In a more mature market like US,Home infusion is a highly fragmentedmarket with leading players operatingdivisions of specialty pharmacies likeCVS, Express scripts, Walgreens &Bioscrips.

Key factors investors must look for whileevaluating options in specialty pharmaare as follows:

1. Addressable market for the productsin India considering diseaseincidence, treatment alternatives &price sensitivity as some of thedisease segments might be niche,while in others treatment might onlyoffer incremental benefit

2. Core competencies - Defensibility ofthe business model consideringcurrent and potential competition

3. Adjacencies available to tap andcompany’s strategy to be able tosuccessfully enter a related business

4. Exit options for the investmentthrough consolidating on a largerplatform for scale or strategic exit toan MNC

Conclusion:

In conclusion, speciality pharma is ahigh value, high growth market segmentwith companies having specialised /differentiated competencies. Thismakes the opportunity very attractivefrom an investment standpoint.Needless to add, investors wouldrequire comfort regarding scalabilityand their exit when it comes toinvesting in a target company.


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To

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~USD 183 Mn

February 2017

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USD 32 Mn

March 2017

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From

~USD 52 Mn

July 2017

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From

USD 100 Mn

March 2017



Facts:

1. Biologic drugs will be a USD 290 Bn revenue business in2020 globally – nearly 1/4th of the pharma market. Ofthis nearly 50% is from the United States.

2. US offers unparalleled scale for biosimilars:

a. biologics account for almost 40% of US prescriptiondrug spending

b. over 50% of the drug spending growth from 2010 to2015 was due to biologics

3. Robust adoption of biosimilars is par for course:

a. Payers are increasingly looking to reduce healthcarecosts and biosimilars are step in that direction

b. Access to biologics is high – it is just a matter ofsubstitution of a biologic with a biosimilar

c. Several blockbuster biologics have already gone off-patent, or are nearing end of their patent life,opening up the market for biosimilars

Also consider this:

1. Estimates suggest that US biosimilars will be USD 11 Bnindustry by 2020 – single biggest geography globally forbiosimilars and ~40% of the global biosimilar market

2. Migration to biosimilars will result in over USD 50 Bnsaving between 2017 and 2026.

Mighty impressive statistics –hard to ignore; even harder ifyou are an Indian pharmaplayer thinking that this is thesecond wave ‘genericization’all over again.

In this article, review the happenings in the US biosimilar market, outline trends andpotential scenarios based on current US market dynamics and evaluate scope for playby Indian pharma companies. The numbers could well play out in reality as estimated - butbefore the prospect of Reality, it is imperative that we lay down the premise of the USBiosimilars Saga - the Hope and the Hype!

BIOSIMILARS IN THE USA – THE HOPE, THE HYPE AND THE REALITY! (1/9)

For nearly a decade,

or more, since the

formalized EU

regulations came out

in 2005, biosimilars have

loomed large over every facet

of the US healthcare debate.

Depending on which side one sits

on, biosimilars represent either a

dreaded threat to innovation or a

hoped-for answer to sky-high biologic

drug prices. However, neither scenario

has fully come to pass, and although we

still expect biosimilars to effect change in

the US market, when it will happen and

to what degree remains to be seen.


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June 2016


The Hope:

Branded biologics are essentially large molecular-weight, complex molecules that areproduced in living cells through genetic engineering and are used in treatment of complexdiseases like cancer, rheumatoid arthritis and several auto-immune disorders, amongothers. These drugs are extremely expensive and hence while they form a large chunk ofpayer monetary outgo, by definition, are accessible only to a miniscule patient population.High cost of branded biologics is placing enormous financial pressure on the nationalizedhealthcare systems and insurance companies. Substituting lower-cost branded biologics forbiosimilars would help reduce government healthcare costs and lessen the financial burdenof insurance companies and third-party payers.

When the concept was first introduced, biosimilars were seen as a potential replacementfor many biologics, offering comparable benefits at reduced cost. Passage of the BiologicsPrice Competition and Innovation Act (BPCIA) of 2009 was intended to encourage thedevelopment of low-cost biosimilars. EU had shown the way on overcoming the regulatoryhurdle - even before the first biosimilar was approved by the USFDA, there were over 20biosimilars having been granted the marketing authorization approval (MAA) in theEuropean Union (EU) with twice as many under development including many in Phase IIIclinical trials. By March 2017, there were 26 products in the EU existing for 10 differentreference biological products as depicted below and although some products likeEnoxaparin and Insulin aren’t considered biosimilar in the USA, the number is stillsignificantly higher compared to the US market:

Data also suggested that in the EU, between 2014-16, for Infliximab as an example,prescription rate for the biosimilar grew from 0 to 30% and was further expected to go upto 50% by 2018. A study of sales and spending on biosimilar products also revealedsignificant uptick in the volume/spend on the biosimilar with a corresponding decrease inthe reference product sales and spend. This indicated strong adoption rates amongst cliniciansand patients alike, in the EU – creating Hope for a similar roadmap in the US.


57 MAAs submitted

41 MAAs post review 16 MAAs under review

2 Negative

InsulinInterferon alfa

Adalimumab (2)Bevacizumab (2)

Etanercept (1)Insulin glargine (1)

Insulin lispro (1)Pegfilgrastim (2)

Rituximab (2)Trastuzumab (3)Adalimumab (2)

10 withdrawn

Epoetin (1)Insulin (6)

Pegfilgrastim (3)

3 withdrawn

Filgrastim (2)Somatropin (1)

26 Valid MAAs

Enoxaparin (2)Etanercept (1)

Epoetin (5)Filgrastim (7)

Follitropin alpha (2)Infliximab (3)

Insulin glargine (2)Rituximab (1)

Somatropin (1)Teriparatide (2)

29 positive

YearAnnual Spending on All products…

Total Units (‘000) Reference Product (‘000) Biosimilar Units (‘000)

0

250

500

Jan

-11

Au

g-1

1

Ma

r-1

2

Oct

-12

Ma

y-1

3

De

c-1

3

Jul-

14

Fe

b-1

5

Se

p-1

5

Ap

r-1

6

30% (all country)

Infl

ixim

ab

sta

nd

ard

u

nit

s ('0

00

)

0

5,000

10,000

15,000

20,000

25,000

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Annual units sold, all productsall countries in sample, 2007-2014

0

500,000

1,000,000

1,500,000

2,000,000

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

Annual spending on all productsall countries in sample, 2007-2014

0250500

J… A…

M…

O…

M…

D… J… F…

S…

A…

Remicade Remicade Trend

Biosimilar Infliximab TotalYear

Annual Spending on All products…Total Units (‘000) Reference Product (‘000) Biosimilar Units (‘000)0250500

J… A…

M…

O…

M…

D… J… F…

S…

A…

Remicade Remicade Trend

Biosimilar Infliximab Total


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November 2015

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USD 270 Mn

November 2015

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Undisclosed

December 2015

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Structured Capital Raise

From

USD 30 Mn

January 2016



With how the story had played out inthe EU, “Biosimilar” had become thenew buzzword in the US. Thefloodgates had opened for the firstwave of biosimilars in the mostrewarding pharmaceutical market.There was Hope, then came the Hype!

The Hype:

The “disruptive force” theory for USbiosimilars success was based on threekey pillars:

a. Time to market is low: Going byapproval roadmaps in EU, India,South Korea or Latin America,proving similarity needs lesser data,lesser clinical trials and hence‘application to commercialization’time is low;

b. Pricing is the end game: Lower theprice, higher the uptake - Highervolumes justify recovery of R&Dcosts even at lower prices creating avirtuous spiral; and

c. Interchangeability is inevitable:Similarity in attributes will ensurethat biosimilars replace the existingreference biologic as payers andclinicians insist on biosimilaradoption on cost-saving grounds.

Despite predictions that biosimilarswould become as disruptive a force inthe market as generics, this has not yetoccurred. While biosimilars have beenapproved and are entering the USmarket, the rate at which they arecoming to market and the pace of theirsubsequent growth in market share hasbeen slower than anticipated. This slowrate of adoption could be due to severalfactors, including, in some cases a lack ofinterchangeability, the drug’s breadth oflabel and targeted indications, and theneed for increased physician awareness.The most important factor, however,could be that biosimilar drugs are simplynot yet cheap enough.

In the section below we examine howexactly the Hype has played on to theReality with none of the three factorsmentioned above coming to the party –at least as yet!

The Reality:

Underestimating the Regulatory andLitigatory Hurdle in Time to Market

While the BPCIA was approved in 2009(as part of the famous Obama-care), thefirst approval from the USFDA for abiosimilar came about only in 2015. Toput things in perspective, between thatperiod, India came up with its guidancefor approval pathways for biosimilars,the EU issued product-class specificguidelines and guideline revisions to thebase guidelines approved in 2005 and awhole host of biosimilars were approvedin South Korea, India, Mexico, Russia andother parts of the world. By comparison,the US has less than 10 biosimilarsapproved to this date (Feb 2018), of whicha mere three have been commercialized.

One of the reasons behind the steep‘time-climb’ for the US biosimilarsmarket was that the base guidelinesitself were written with little or noconsultations, were ambiguous onseveral key points (naming of biosimilarswith biologic players lobbying to preventbiosimilars from using the same INN,need and scope of the patent danceprotocols, timing and point of notice tothe reference biologic provider beforecommercialization of the biosimilar andinterchangeability with the referencebiologic, to name a few key ones) andhence were prone to litigation at eachstage. Unlike the considerably ‘time andlitigation’ mature Hatch-Waxman Act of1984 in place at the time, the BPCIAlends itself to litigation at each stage, somuch so that there are several casesarguing the basic tenets of the Act evenas this article is being written and onwhich clarity will emerge only over thenext 18-24 months.

As an indicator of the extent oflitigatory activity, we have put belownew cases filed by competing playersin CY17 (11 v/s 7 in CY16) and CY18YTD even as we wait for verdicts inthe Janssen v/s Celltrion, Jannsen v/sHyclone (Remicade is the referencebiologic in both cases) and theImmunex v/s Sandoz (Enbrel is thereference biologic) cases which werefiled at least 12 months back:


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November 2014

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USD 60 Mn

April 2015

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QIP

Book Running Lead Manager

~USD 13 Mn

January 2015


There are two points of note here: (i) one isthat for the same reference biologic, courtshave allowed filing of different cases withdifferent underlying issues of dispute – sothis is not a one molecule one litigationkind of market; and (ii) Companies are nowpreferring to litigate on an ever increasinglists of patent disputes – up from 1-10 atstart of CY17 to nearly 40+ patents by theclose of the year.

One of the reasons for the trend mentionedabove is increasing number of rulings infavour of biosimilar companies on “principle-based’ litigation. As an example, Sandozwon its dispute against Amgen at theSupreme Court (June 2017) which ruledthat it was not necessary for the biosimilarsponsor (BS) to engage in a patent dancewith the reference product sponsor (RPS)– a landmark judgement in many wayssince the patent dance was construed asan important step in the BPCIA approvalpathway allowing the RPS to gain moreaccess to the biosimilar design andmanufacturing processes. The SupremeCourt also ruled that the 180 day notice tothe RPS can be provided any time beforeor after the USFDA approval of thebiosimilar – again a watershed momentconsidering that a plain read of the BPCIAindicated a six month exclusivity for theRPS after the FDA approval – a windowmost RPS were actively looking to litigatein as this would have been the highest losswindow for the BS with all clinical trialscompleted. Other cases favouring BSinclude (i) Hospira’s win over Amgen

(August 2017) for biosimilar of Epogenwhere Amgen had disputed that themanufacturing process of Hospira was inviolation of its patent but the court ruledagainst Amgen since it hadn’t listed downthat patent violation as part of the patentdance; and (ii) Apcotex’s win over Amgenfor the biosimilar of Neulasta where Amgenhad disputed that the information forprotein concentration provided by Apcotexduring the patent dance was untrue and inviolation of its patent, but the court ruledthat so long as the concentration wasproven different from the existing Amgenpatent during trials (and under a thresholdrange), the patent dance information is onlyrepresentative and hence a case for patentinfringementdoes not arise.

On the other side of the spectrum is thefirst BPCIA damages award case, which alsopanned out in 2017 (award in September2017) and interestingly for the samebiosimilar of Epogen which was mentionedabove, with the BS (Hospira) having to payUSD 70 Mn to the RPS (Amgen). Theinteresting facets of the case were that theAmgen patent had expired by the time ofthe trial and Hospira’s biosimilar wasneither approved by the USFDA norlaunched. None the less, Amgen haddisputed that Hospira had made morebatches of the biosimilar (and wasstockpiling these) than required for theUSFDA approval and had sought damagesof USD 170 MM, which the jury found tobe true (for 14 of the 21 batches) andawarded USD 70 Mn in the RPS’ favour.


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August 2012

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December 2012


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July 2013

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October 2012

* New cases filed compared to the Feb, 2017 case on different patents** Updated till January 18, 2018

Litigating CompaniesFiling

Date**Biologic at Issue

Number of Patents Under Litigation

Genentech v/s Amgen Feb’17 Avastin (Bevacizumab)0 (case filed for an

alleged BPCIA violation)

Amgen v/s Coherus May’17 Neulasta (Pegfilgrastim) 1

Janssen v/s Samsung Bioepis May’17 Remicade (Infliximab) 3

Janssen v/s Celltrion May’17 Remicade (Infliximab)

Abbvie v/s Boehringer Ingelheim Aug’17 Humira (Adalimumab) 8

Amgen v/s Mylan Sep’17 Neulasta (Pegfilgrastim) 2

Amgen v/s Genentech* Oct’17 Avastin (Bevacizumab) 25

Genentech v/s Pfizer Nov’17 Herceptin (Transtuzumab) 40

Genentech v/s Sandoz Dec’17 Rituxan (Rituximab) 24

Celltrion v/s Genentech Jan’18 Herception Transtuzumab) 35+

Celltrion v/s Genentech Jan’18 Rituxan (Rituximab) 35+



In a nutshell, while the application to approval timeline for biosimilars in 2017 hascome down to an average of 10-12 months (7 months at minimum and 20 months atmax), companies had massively underestimated time and resources to be spent onlitigations in the US for their biosimilar approvals. It was evident that the RPS were in nomood to let go off their biologic product’s grip over the market and this trend will onlyget more pronounced and more time consuming with disputes over an increasingnumber of products and patents, represented in the table above.

Pricing may be the end game in developing markets, even in the EU – but the US is different

When a small molecule generic waslaunched in the past, it was observedthat the extent of price erosion for theoriginator could be as high as 80-90%in some cases. For biologics also, theEuropean experience hasdemonstrated that biosimilar entranceultimately affects innovator prices, aswell as prices for follow-on biologics.Such reduction in prices spurs earlyadoption of the biosimilar on a largescale.

Consider the case of Germany, where insurersincentivize hospitals and clinics to use cheaperalternatives when possible. While that alonedoes not guarantee biosimilar uptake, the drugepoetin (biosimilar to the biologic erythropoietin)enjoyed early and rapid success, and quicklygained substantial market share - So what madeepoetin such a successful biosimilar? In this case,it was a combination of price and marketacceptance. Epoetin was introduced at adiscount of 20% off net price, a clear but notradical discount to the innovator product. Thisdiscount, however, prompted early adoption bythe Kuratorium für Dialyse undNierentransplantation (Curatorium for Dialysis

and Renal Transplantation; KfH), the largest network of dialysis centres in Germany, whichmanages 30% of Germany’s dialysis patients. The KfH uses a limited, centralized set ofGroup Purchasing Organizations (GPOs) to negotiate with manufacturers, and thusdelivered a large set of accessible patients. Although there was no mandated substitution,uptake was spurred by peer-to-peer education among practicing nephrologists andassociations regarding epoetin and its efficacy. But in the end, it was the price discount andapproval by a leading national network, along with coordinated delivery via a network ofproviders, which allowed this biosimilar to outperform.

Similar is the story of pricing ofbiosimilars in the developingmarkets – ultimately it boilsdown to the fact that given thecost of clearing the regulatoryhurdle is low in these markets,

the cost benefits can be passed on to the consumer which in turn will result in a spurt inadoption (either payer led or consumer led) and will force the BS to reduce prices further ina bid to remain competitive. The fact that there is also an overcrowding of competition forcertain biologics in non-US markets means that there is and will continue to be pricingpressure to garner market share as is evident from the number of biosimilars at variousstages of development for some blockbuster biologics as shown in the chart above.

-32%

-36%

-21%

-13%

-5% -6%

EPO G-CSF HGH Anti-TNF Fertility Insulins

Pe

rce

nt

chan

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of

20

16

pri

ces

com

par

ed

w

ith

ye

ar b

efo

re b

iosi

mila

r e

ntr

ant*

*Change is between prices for the class in year before biosimilar entrance and 2016 in the European Economic Area (EEA).

24 24 23 19 1811 7

158 7

13 127 6

Rituxan Herceptin Avastin Humira Enbrel Remicade Lantus

Biosimilars in development/on market Number in Phase 2 trials or later

78

45

34

5

25

34

0

10

20

30

40

50

60

70

80

90

2007 2008 2009

Mill

ion

s (€

)

Innovators Biosimilar


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There are three reasons why a similartrajectory for biosimilar pricing hasn’tpanned out in the US: (i) regulatory andlitigatory hurdles demand lot of resourcesfor clearance; (ii) only three biosimilars havebeen commercialized of the nine approvedfor different reference biologics; and (iii)there is very limited competition existingtoday. As an example, Zarxio from Sandozand Inflectra from Pfizer/Celltrion werelaunched at 15% discount over the RPSproduct. Samsung Bioepis and Mercklaunched Renflexis at a 35% discount,nowhere near the 50-60% discount levelswhich would cause physicians and payersto evaluate the risky switch from thebiologics to biosimilars - all of this has led tothese biosimilars having a low single digitmarket share in their respectivecategories.

In a nutshell, while biosimilars ride on theprice differential positioning globally, webelieve the US market is still far off from thekind of price erosion that merits large scaleadoption – and if this plays out over thenext 24-36 months with the biosimilarsnot gaining volume traction, companiesmay need to evaluate their futurestrategies given that the R&D for the sameis highly capital intensive.

The EU may be a good template forevaluating impact of interchangeability – Butthe US doesn’t even have a RegulatoryGuidance for the same

What is an interchangeable biosimilar asper the BPCIA?

A biological product found to be biosimilar;that can be expected to produce the sameclinical result as the pioneer in any givenpatient; and if the product is administeredmore than once to an individual the risk interms of safety or diminished efficacy ofalternating or switching between use ofthe product and the pioneer is no greaterthan the risk of using the pioneer withoutsuch alteration or switch.

A biosimilar found to be interchangeablemay be substituted for the pioneerwithout the intervention of “the healthcare provider who prescribed thereference product”.

Major proponents of the US biosimilarstory use the evolution of the concept ofinterchangeability in the EU to extrapolatea similar outcome in the US – for example,the EMA approves a biosimilar basis

applicable guidance and allows memberstates to take individual calls onautomatic substitution. Several nationalregulatory authorities, including theDutch Medicines Evaluation Board, theFinnish Medicines Agency, HealthcareImprovement Scotland, the Irish HealthProducts Regulatory Authority, and PaulEhrlich Institute in Germany, havealready taken national positions toendorse the interchangeability ofbiosimilars under the supervision of theprescriber. France allows for automaticsubstitution of select biosimilars overthe reference product under certainconditions. Such proponents howeverextrapolate such outcome withoutnecessarily a regard for the differencesin regulatory environments governinguse of biosimilars in the two regions.

As mentioned above, the BPCIA expresslydefines what an interchangeable biosimilar is– the EU on the other hand, doesn’t have anysuch standard definition. The 351(k)application in the US allows only forestablishing bio-similarity. Additionally, ifinterchangeability is desired, there is aseparate application but here is the catch –the regulatory guidance for an approvalpathway for interchangeability is still not inplace. This despite there being 14 applicationsfor interchangeable biosimilars filed by 9companies. The FDA issued the draftguidelines for biosimilar interchangeability inJanuary 2017 with recommendation forswitching studies to show that the patient canalternate between the biologic and theinterchangeable safely. The draft madeprovisions for public comments by May 2017– 53 comments were received in all frominnovator companies, biosimilar companies,healthcare providers, insurers and otherinterested organizations. However, till date nofinalized guidelines havebeen issued for thesamenor have any interchangeable biosimilars beenapproved.

Another issue that needs to be thought ofwhile proposing a fully interchangeablemechanism in the US in the near future isthe cost. Given that separate applicationsneed to be made for each indication,interchangeability, even if it does come in,will come in at significant capital outlaywhich may limit the ability to cause priceerosion in comparison to the originalbiologic. And given that the products aresimilar and not equivalent, physician’s


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willingness to cause the patient to switch islittle – especially given that minor changesin the treatment protocol could result inmajor ramifications in the health and well-being of the patient, that too in a litigationhappy society like the US. An additionalbarrier to the adoption of biosimilars maybe consequential clinical differencesbetween biosimilars and their referencebiologics. A recently published trial showedthat nearly 25% of patients withautoimmune diseases (rheumatoid arthritis,psoriatic arthritis, ankylosing spondylitis)discontinued biosimilar treatment whenconverted from the originator, havingreported worsened subjective symptoms. Infact, the potential for patient pushbackagainst biosimilars may lead physicians tochoose the establishedinnovatorbiologic.

Uncertainty as to which indications areappropriate for biosimilar use poses stillanother challenge. Approval for oneindication for a biosimilar can be followedby documented effectiveness in treatingother indications. A biosimilar, however,lacks the same clinical history as a biologic,and so it is often unclear whether thesimilarity of a biosimilar would translate tothe same additional indications beingtreated by the innovator’s product.

Additionally, as was seen in the case ofJohnson and Johnson’s original biologicRemicade, when Inflectra tried to lowerprices by as much as 35%, J&J which has asignificant amount of market share,preserved Remicade’s preferred status by (i)introducing corresponding price reductions,(ii) signing contracts with insurers requiringthem to cover only cases where Remicadehas been used first before trying othertreatments for new patients; (iii) allegedlycutting rebates on it’s portfolio of otherproducts for insurers which took away thesavings for insurers from Inflectra adoption,among others. The combination ofaggressive innovator protection policies,physician familiarity, and confidence inJ&J’s product helped the company retain adominant share of the market. In fact, Pfizerand J&J are locked in a bitter legal battleover use of what Pfizer claims to be anti-competitive policies from J&J. Anotherstrategy that innovator biologic companiesare following is to cut rebates for insurersfor the reference biologic product –meaning that the insurer now has to paymore for 70% of the biologic even though

Represents 5M people

the 30% volume of the biosimilar isbeing procured at a lower cost –effectively increasing the cost of overallprocurement for the payer.

As the example of Remicade shows,innovators can incrementally reduce pricesand maintain preferred status byleveraging their majority market sharewhile unencumbered by the need for newsales forces and other switching costs. Thesame cannot be said for a comparableprice reduction for the biosimilar, and sosuch an adaptive pricing and marketingstrategy can pay off when competing withdiscount biosimilars.

Biosimilar makers have hoped that payeruniverse will come in and recommend andpay for biosimilars at some stage – but asmentioned above, unless the product canresult in significant cost savings (40-60%)and has a long documented history, itwould be unwise to rely on the insurers toprefer the biosimilar over the referencebiologic. A primary study of insurers in theUS for Infliximab again shows significantbias towards Remicade compared to thebiosimilar Inflectra – indicating that severalthings need to change before the pushfrom the payer universe can be expectedto come in favouring biosimilars.

In a nutshell, while interchangeability isinevitable, under the current regulatoryregime, effective and meaningful level ofswitching is still some years away. Further, ourread is that first successful interchangeablebiosimilars will be the ones that are used forrelatively minor aspects of an ailment rather thanaimed as the primary cure for the ailment itself –e.g., treating a chemotherapy side effectrather than being a cure forcancer itself.

Insurer Lives Covered Infliximab

United Healthcare Remicade preffered

Anthem Remicade preffered

Humana Remicade preffered

AetnaRemicade prefferedInflectra preferred as of Jan 2018

BCBS - Illinois, Michigan

Remicade preffered

Cigna Remicade preffered

Centene Inflectra preffered

Kaiser Permanente

Inflectra preffered


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http://www.vivekhp.com/vhpl/profile.htm

http://www.vivekhp.com/vhpl/profile.htm


So what does all this translate into forbusiness for Indian Companies?

MNC Competition Not Going Away: A lookat the biosimilar approvals and pipelinegives a fair indication of who the majorplayers are – Pfizer, Amgen, MerckSandoz, Samsung Bioepis, BoehringerIngelheim and others - largemultinationals with deep pockets. A lookat the pipeline of some of thesecompanies reveals an interesting trend –a focus on oncology with biosimilarstargeted at different types of cancer.What is also interesting to note is thatsome of these MNC majors have forgedalliances to develop biosimilars – Pfizerand Celltrion for Inflectra, SamsungBioepis and Merck for Renflexis andAmgen and Allergan for Mvasi.Companies like Amgen, Genentech andCelltrion have also been at the forefrontof most of the litigation to protect theirbiologic market share and are nowworking on a biosimilar pipeline of theirown. Amgen for example has animpressive pipeline for biosimilars forBevacizumab, Cetuximab, Infliximab andTranstuzumab – all drugs for which atleast one of the target indications iscancer of some kind.

Indian Companies First to Develop; But EUand US presence very limited: Historically,most Indian drug makers have beensmall-molecule generic manufacturers, &increasing competition in the globalgenerics space over the last five yearshas forced them to differentiate. To thatend, the domestic market has beenflooded with biosimilar launches.World’s first rituximab biosimilar(Reditux by Dr. Reddy’s Laboratories),adalimumab biosimilar (Exemptia byZydus Cadila), and trastuzumabbiosimilar (CanMab by Biocon) were alldeveloped and launched in India. Othercompanies to have a strong biosimilarportfolio include Hetero Drugs, TorrentPharmaceuticals, Intas Pharmaceuticals,Emcure, Cadilla Healthcare and Lupin,among others. Add to that Syngene’sBiologicals vertical on the services side.However, all of these companies(exception of Biocon) have beenemerging market players with limitedexposure to US / EU.


Biocon is one of the only Indiancompanies to have a US biosimilarpresence through its tie-up with Mylanand Sandoz. For the US, whereregulatory confusion is high anddevelopment costs plague affordabilityof biosimilars, we believe that Indiancompanies could be at the core of thestrategy for international giants and thatthe partnership could be mutuallyeffective. We believe that partnershipslike Intas-Apotex and Biocon-Mylan /Biocon-Sandoz will continue to beforged since it means that theinternational partner gains access to theIndian partner’s biosimilars, which havebeen developed in a cost-effectivemanner, and the Indian partner hasexpanded its ability to commercialize itsproducts in Western markets. Webelieve such association will also helpdomestic companies address theperception issue as regards the safetyand efficacy concerns about Indianbiosimilar products and build credibilitymuch faster compared to the brandedgenerics cycle. Additionally, it alsoprovides an effective hedge against thebehemoth of potential US litigation.

The Emerging Market Strategy v/s theRegulated Market Strategy: From the 50odd companies actively exploring thebiosimilar market in the emergingmarkets, there are less than tencompanies that have a tie-up with aglobal major for exploring sales to theregulated markets. Unlike the genericdevelopment and manufacturing whichis relatively easier and is a far lower timeand cash guzzler, biosimilars are capitalintensive R&D products with a low hitrate to commercialization. Further,between the emerging market and theregulated market itself, there aredifferences in factors that impact thegrowth of the biosimilar market – whilethe emerging markets are essentiallyprice sensitive, the adoption in regulatedmarkets is not a linear function of pricealone. Factors such a payer propensity tocover the biosimilar, physician educationand adoption probability and innovatorprotectionism will play a big role ingrowth of the market. With thatbackground, we believe that most Indiancompanies will continue to play the


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EM game and may probably venture increasingly into the EU in due course, but the USmarket is far away from any meaningful contribution to sales and margins.

The Final Word

Biosimilars will likely become an increasingly important part of the pharmaceuticalecosystem. However, they continue to face barriers to adoption, including questionsof interchangeability, a typical lack of approval for all the reference biologic’sindications, the need for biosimilar manufacturers to negotiate with payers, thechallenge of overcoming unique patent dynamics, and innovators’ establishedpositions within the physician community.

As these challenges play out in the coming years, manufacturers of biosimilars willbecome more adept at navigating the complex US drug market. To achieve theirgoals, they must demonstrate strong, evidence-based clinical value (such as switchingstudies) to convince payers and providers of their product’s value and reliability, aswell as ensure a high-quality drug and robust supply.

Although it is not clear who the winners and losers will be in the biologics andbiosimilars market, what is certain is that the landscape is shifting. The Hope and theHype have prepared the pitch – it is now time for the Reality to do the batting.

Biosimilars Generics

Similar to, and not identical toreference product

20-30% discount over reference product

$100-$200M in development costs

8-10 year development timeline

No interchangeability or automatic substitution*

80-90% discount over reference product

$1-$5M in development costs

3-5 year development timeline

Interchangeability with reference product

Bioequivalent and identical to reference product



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http://www.slashsupport.com/index.html

http://www.slashsupport.com/index.html


Company Transaction type Launch date Deal size

Initial Public Offering February 2018 USD 153 Mn

Company Description Buyer / Investor Transaction Date Deal size

Invested into By March 2018 USD 20 Mn

Invested into By February 2018 USD 21 Mn

Invested into By January 2018 USD 7 Mn

Company Description Buyer / Investor Transaction Date Deal size

Acquisition (announced but not closed)

Competing binding offers from (i) Manipal

Hospitals and TPG combined; and (ii)

Hero Group and the Burman family and a

non binding offer from IHH

April 2018 Outcome awaited

Outright Acquisition April 2018 USD 306 Mn

Outright Acquisition January 2018 Undisclosed

RECENT HEALTHCARE & LIFESCIENCES INDIA TRANSACTIONS

Source: Deal DatabasesDeals between Jan’18-April’18

M&A Transactions in the SectorA

Equity Capital Market Transactions in the SectorC

Private Equity Transactions in the SectorB

RNT Capital Partners

26April 2018 – Spark Healthcare & Lifesciences NewsletterSource: News Publications

FOLLOW-UP: REGULATION IN HEALTHCARE

Known best for introducing several decisions such as capping prices ofstents and essential drugs, NPPA chairman Bhupendra Singh wastransferred to the National Authority for Chemical Weapons Conventionin the Cabinet Secretariat.

Interestingly, his predecessor Injeti Srinivas was also unpopular with thepharma industry for his proactive measures to implement price controland was also transferred before the expiry of his term.

Move comes amid growing clamourof excessive regulatory activism

NPPA HEAD BHUPENDRA SINGH TRANSFERRED

The government is expected to form a working group to focus on creatingan essential diagnostics list as per a press release issued by the IndianCouncil of Medical Research (ICMR) on March 12, 2018.

While the first phase of the initiative will focus only on improving accessand reliability of these tests in the public healthcare system, at a laterstage the idea is to bring down the prices of such tests in private sectordiagnostics as well as per a senior unnamed government official.

Is this just the start of price regulation in diagnostics – if yes, PEs couldlook to platformize and list before margins start coming under pressure.

Is this stage 1 in the effort to bringdown price of such tests?

INDIA TO CREATE NEW ESENTIAL LIST TO IMPROVE ACCESS TO LIFE_SAVING DIAGNOSTIC TESTS

On March 5, 2018, the NPPA again asked device manufacturers and importersto part with price data for 19 of the 23 devices notified as drugs under theDrugs and Cosmetics Act. The price information requested for includes pricesfor these devices at several points in the value chain and is an attempt by theNPPA to understand and rationalise profit structures for several intermediariesin the value chain from the maker/importerto the customer.

On April 11, 2018 NITI AAYOG recommended (and the key to note here isthat this recommendation is for both scheduled and non-scheduled drugs)that the maximum trade margin at first point of sale for drugs should be 24%(i.e. stockist, distributor or at hospital) for scheduled drugs and 30% for non-scheduled drugs. DPCO to be soon amended to incorporate this change andceiling price fixation by the NPPA to be as per this formula.

Are more price cuts on the anvil or is this just a recommendation that won’tsee converting itself to law – time will soon tell!

NPPA gives medical devicescompanies ‘last chance’ to submitprice data;

NITI AAYOG recommends cap ontrade margin for scheduled and non-scheduled drugs

ANOTHER ROUND OF PRICE CUTS ON THE ANVIL?

On the first anniversary of the stent price regulations, much against popularanticipation, the government further reduced the prices of drug eluting stents.

The move comes after some MNCs threatened to not introduce technologicallyadvanced devices and equipment in India given lack of incentive and hadpublicly voiced desires to withdraw already introduced products.

The NPPA on Feb 22, 2018 announced that it would not oppose any suchmove and by doing so has cleared decks for the MNCs to walk the talk.

NO MOVE TO STOP WITHDRAWAL OF STENTS

Major symbolic gesture withgovernment daring MNCsthreatening to pull out their high-endstents from India to walk the talk!

ULTRASOUND, OTHER IMAGING EQUIPMENT NEXT IN LINE?

Included as ‘medical devices’ pavingway for further action, including pricecaps

The Drug Technical Advisory Board (DTAB), the apex body advising theCDSCO (the central drug regulator), has on February 12, 2018 includedultrasound machines, CT scanners, X-ray machines and MRI machines underthe purview of the Drugs and Cosmetics Act so that the government cannow regulate their import, manufacture and sale.

Undertaken under the pretext of prevention of misuse of sex selectiontechniques, the classification as ‘medical devices’ paves way for priceregulation regime for these categories of equipment similar to those ofstents and knee implants. Whether and how the government moves in thisregard ahead remains to be seen.


Indian manufacturers of needles and syringes under the aegis of All IndiaSyringes and Needles Manufacturers Association (AISNMA) approachedthe NPPA to take action against MNC companies not sticking by the 75%trade margin voluntary cap introduced by them.

Domestic manufacturers allege that hospitals have started shiftingcontracts to multinational companies that are willing to print MRPs thatgive them higher trade margins.

Once a united industry, its now us v/s them with the regulator called in tobecome judge!!!

NPPA’s divide and rule policy bearsfruit

MNC vs Local

MNCs NOT PLAYING BY SELF-REGULATION RULES PROPOGATED BY INDIAN COMPANIES

Ingen Capital, Fidelity Trading Corp and Union Quimico Farmacéuticahave submitted bids at par to liquidation value to acquire distressed drugmaker Orchid Pharma, news reports suggest.

Ingen Capital is a manager of fixed income and distressed asset funds thatinvest globally in transportation infrastructure, renewable power utilitiesand healthcare. Fidelity Trading Corporation is an offshore fund and UnionQuimico is a subsidiary of Hyderabad-based Vivimed Labs.

When bids for Orchid were invited initially, 25 applications were receivedbut interest clearly seems to have fallen off.

Gets bids from three suitors but atliquidation value

Insolvency

NCLT PROCEEDINGS FOR ORCHID PHARMA UNDERWAY – RESPONSE TEPID

Slowdown in sales due to drug price erosion in the US is pushing home-grown pharmaceutical companies to evaluate opportunities in Europe, thethird-largest market for Indian drug makers after the US and Africa.

Torrent putting together a bid for Sanofi’s European business (Cadila andAurobindo were also rumoured to be in the fray), Aurobindo and Dr.Reddy’s expanding in Europe through acquisitions in 2017 and evendevices manufacturers looking at several acquisition targets in Europe areclear indication that companies are wanting to defray the US exposurerisks and are out with a shopping bag in Europe!

Move aimed to diversify and reduceUS dependence

M&A Hunger

INDIAN COMPANIES BOOK VISAS TO THE EUROPEAN UNION

While Sun Pharma is the only Indian player with an advanced specialtypipeline, most leading Indian players have declared intent to step upinitiatives. Several small & mid-sized pharma/biotech companies have beenreceiving NME approvals in recent years and novel drug discovery is nolonger considered an exclusive domain of big pharma.

Specialty activities are likely to remain US-centric with focus onophthalmology, dermatology, oncology, neurology and sub-therapies withinthese segments. Given the significantly higher R&D skills and financialresources required, Indian players are taking the inorganic route and expectpick up in M&A/licensing of promising phase II/early phase III assets.

INDIAN PHARMA’S SPECIALTY MOVES

Moving from becoming an option to anecessity for Indian firms

Specialty Pharma

HERE COMES AMAZON!

Breaks into drug sales withPerrigo’s store-brand OTCmedications

e-pharmacy

While industry watchers were eagerly anticipating Amazon’s move intoprescription drugs, the e-commerce behemoth snuck into OTC sales withhelp from store brand expert Perrigo. It rolled out a line of consumer healthproducts, called Basic Care — consisting of 60 Perrigo-made treatments.

Industry insiders claim that the company has already built an internal PBM,which could be an early step toward applying its capabilities in the largermarket.

Now, later or not at all? Amazon's (potential) move into meds spawns a slewof scenarios!!!


LATEST NEWS AND ANNOUNCEMENTS


FROM OUR EQUITIES DESKInstitutional Equities

Highlights

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The report evaluates progress made by Indian players w.r.t. key challenges faced by thesector in the last 2-3 years 1) GMP compliance 2) Pricing pressures 3) Complex genericapprovals. The conclusion is that these headwinds are unlikely to ease materially in the near-term and a turnaround in the medium-to-long term will require significantly better executionvs. what we have witnessed in the past, both on GMP compliance and pipeline execution.

That said, consensus estimates fully reflect the near-term challenges in the US and forseveral frontline pharma stocks, the more stable domestic & EM businesses account forsubstantial part of current valuations, with back-ended improvements in the US fromspecialty/complex generic pipelines providing reasonable risk-reward.

GMP compliance – one step forward, two steps back: Negative outcomes in recentinspections at key facilities have dented confidence in Indian pharma’s progress on theGMP front. Players with a strong track record in FDA inspections historically, have seenGMP violations at key facilities in recent months. Repeat nature of observations andinability to resolve issues completely at critical sites, even post 12-15 months ofremediation and engagement with 3rd party consultants have disappointed investors.Shifts in the nature of inspectional observations flagged by FDA at Indian sites haveadded to the concerns. Next 6-12 months are critical for Indian players, as investors lookfor completion of remediation activities, re-inspections and final clearance of key non-compliant facilities.

Pricing challenges – far from over: With the 3 buying consortiums accounting for ~90%of generic buying, potential for further consolidation of the generic channel is limited.However, return of a more favourable generic pricing environment will requireconsolidation on the supplier/manufacturer side.

Complex generics – gradual progress: Indian pharma’s execution in complex genericopportunities has been mixed. Segments such as transdermals, long-acting injectables andinhalers remain challenging for Indian players and progress has been limited despitemultiple years of R&D efforts. Further, competitive intensity has increased sharply insegments where Indian players have invested significantly, such as derma, ophthalmology,oncology and hormonal drugs.

Consensus estimates fully reflect the near-term challenges in the US and for severalfrontline pharma stocks, the more stable domestic & EM businesses account forsubstantial part of current valuations. Potential upsides from back-ended improvements inthe US from specialty/complex generic pipelines provide reasonable risk-reward.

Indian pharma’s US woes – Unabating, but priced in1

Key snippets from some interesting notes by Spark’s Equities Team

Indian Hospitals – Ready to Consolidate2

Hospitals account for 70% of India’s healthcare market of which private hospitalsaccount for 70% again. The hospital industry is quite fragmented with top corporatehospital chains accounting for <10% of the total installed private beds, implying significantscope for consolidation.

Most leading players (including listed ones) have expanded aggressively over last 4-6years, partially aided by significant PE investments in the sector (~USD 2.5 Bn between2012 and 2016). Focus on acquisitions/ greenfield bed additions, coupled with regulatoryactivism, have led to muted financial performance for most players in recent years.

However, the segment continues to grow given (i) shifting demographics in India; (ii)Changing disease profiles and rising prevalence of communicable diseases; (iii) risingincome levels; and (iv) improving health insurance coverage (private and state funded).

Expect pace of greenfield bed additions to moderate with scope for consolidation ofoperations at new hospitals to drive material improvements in operational andprofitability metrics – gross block per bed remain high, should reduce going forward asasset-light models gain traction.

Source: SPARK Research

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Amongst 2 Indian Houses in Top 5

Healthcare & Lifesciences


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Director

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Laasyaa Chadaga

Vice President

[email protected]

Shreyan ML

Vice President

[email protected]

Shreyas Subedar

Assistant Vice President

[email protected]

HEALTHCARE AND LIFESCIENCES TEAM

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