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Outlook 2011 presentation

  1. 1. Global Bio-Pharmaceutical OUTLOOK 2011! ! B/203, Alkapuri Arcade, R.C.Dutt Road, Vadodara-390007, INDIA. Phone: +1|212| 343-6096, +91|265| 232-7096, E-mail: mp@mpadvisor.com!
  2. 2. Rising StarWhat is Going Right For the sector?What Are the Challenges?Is investment in innovative therapeutics warranted? Which innovative therapeuticshas or will make an impact on the quality of our lives in the next two to three years?What therapy areas present investment opportunities?What events in the sector will win thumbs down or be an outright –ve?Value creation: Our portfolio and top pick recommendations
  3. 3. What Is Going “Right”?• Moving beyond the “wait and watch” for Proof-of-Concept (PoC), Big pharma are giving importance to Proof-of-Relevance *-Paradigm shift in Partnering Deals: Tap Them Young• While the HC Reform bill served a blow to profitable Pharma and Biotech companies in US, it has boosted the Spirit of Research for the non-profitable biotech/ biopharma companies, Rising stars (RS). R&D may turn the corner as Obama has increased the R&D tax credit by 20% and made it permanent..• Drug approval in 09 and 2010 was not depressing and some novel approaches have made it to the market- Provenge (Prostate cancer vaccine) Prolia (PM, osteoporosis), Gileniya (oral MS drug). The report discusses important upcoming regulatory and clinical milestones*Proof-of-Relevance: To identify the indisputable clinical and commercial value of early stages compounds.
  4. 4. What Are the Challenges?• Regulatory Pathway and Reimbursements- Our Focused Sector Report discusses these in depth• Biosimilars and Patent Expiry- How Close and Real is the “Bio-generic Era”?• Safety continues to be the key factor in approval of drugs• Will Lupus, Obesity, Melanoma etc, See a New Drug?- Analysis and Our Take on the Outcome of the regulatory events.• Binary Events- Another Intermune like Debacle in 2011? Select milestones in 2011 which could make or break a Company are included in the Report.
  5. 5. Therapy Areas Offering Investment Opportunities• HCV- Protease Inhibitors to The Rescue - Will sweep the HCV market, as they did in the case of AIDS. At least two compounds will be approved (telaprevir, boceprevir) before 2012. Analysis of the therapy Area and Leading Companies- Vertex, Pharmasset. Market Dynamics and unmet Need.• Autoimmune/ Inflammation diseases have seen the best outcome –both in targeting unmet needs and better patient friendly treatment options. Oral drug (INCB28050, R788, RDEA594, Gilenya) options are likely to make way for many diseases, such as, RA, MS; where injectables and biologics are the only options. Lupus and Gout will finally see approval of safer and more efficacious products (RDEA594, Benlysta, Epratuzumab) by 2011-14.• Rare Genetic - Orphan diseases continue to be pursued as a preferred area by Innovators - premium pricing, low regulatory bar, etc. are incentives. Besides ERT (Enzyme Replacement Therapy), drugs for MPN (Myeloproliferative Neoplasms), IPF, HoFH (Homozygous Hypercholesterolemia) should be approved by 2011-14.• Melanoma – MAbs may finally deliver –With 120,000 diagnosis of melanoma annually, and 300 agents investigated thus far, it is amazing that effective products for melanoma remain elusive. Benlysta Approval???
  6. 6. Mature BiotechResembling Global Pharmas and Specialty Pharmas of last decade “Is the age of the biotech monopoly about to end ?”
  7. 7. Mature Biotech – Issues CY 2010 affected all Pharma companies by “Obamanisation and Implementation of the Health Care Reforms (HC)” wiping off their market value significantly in the first half of 2010.• Drying new product launches, thin pipeline and intensifying competition• New Drugs Approved, but will they boost the sales or is the wait going to be longer?• Patent Expiry Impact is Modest and Built into the Current Price; However outcome of Para IV Filing from Global Generic Players can surprise and will remain a “Hanging Sword” for the innovator. Report includes the patent expiry, sales table of major biologics and regulatory pathway being framed in US and for mAB in EU.• Life cycle management approach by making better biologics, me toos. Report highlights the 2nd generation tools and technologies for making better biologics, mAB based drugs.•
  8. 8. Mature Biotech – Issues• Discounted pricing for patented follow-on drug launches could become a norm• Re-imbursement issues: • CMS support to MCOs and PBMs for price negotiations should limit pricing flexibility • Off label re-imbursement cuts • German/ EU reference pricing, NICE & Japanese health reforms seeking stringent cost control• FOB or Biosimilars: • Coming closer to reality as guidelines already placed in EU and in the works in US. • Lack of products to make up for the biosimilar erosion and sales loss.• M&A and In-licensing remains key for future growth • Compete with cash rich Global Pharmas • Fewer opportunities with inflated valuation
  9. 9. Silver Lining• Mature Biotech Can still afford to choose good products in the making…• Outsourcing is the Mantra for Fueling the Pipeline• Healthy cash position and depressed valuations = opportunity to buy back shares and improve valuations.
  10. 10. Valuation Methodology• MP Advisors’ Proprietary Sum-of-The-Parts Valuation enables us to quantify the difference between the current equity value and the value arrived using our valuation method comprising three parts, i.e., Part A, Part B, and Part C as described below:• Value the marketed products till their respective patent expiries (Part A);• Value the late stage pipeline as of today (Part B) (Consider only the late stage PhIII and registered products).• Value the management’s ability to convert early stage R&D activities into mainstream products and company’s strategic approach- historical and visionary, by giving a premium to their future cumulative R&D investment (Part C).• The difference between the current equity value and Part A plus cash and other income value represents the gap that needs to be met through the company’s late stage R&D pipeline (Part B) and other strategic efforts (Part C) and drives our recommendations
  11. 11. 3Bs:Biologics, Bio-Generics, and Better-biologics: A Value Proposition
  12. 12. Dawn of the Biologics/Bio-Generics Era• Worldwide sales of all biologic drugs, including therapeutic proteins, vaccines, and mAbs, reached ~$130 billion (2009 IMS)• Evolving pharma landscape: Gradual strengthening of the biologic drug portfolio in preparation of the patent cliff as well as improving the profitability• We predict a shift towards more R&D and higher valued M&A in biologics over the next few years, as the regulatory pathway for approvals of “Me Toos, Biosimilars” including mAbs comes into effect• Potential market for biosimilars: >$30b in the second half of the decade as multiple patents expire• Affordability to accelerate the demand• Over time, we expect Affordable Biosimilars to take a significant market share and/or force Innovators to cut prices significantly 12
  13. 13. Maturing Technology Platforms For Better Biologics• Second Generation Monoclonal Antibodies• Antibody Drug conjugation (ADC)• Protein Engineering: Humaneering, Glyco-engineering, Half-Life Extension technologies etc. 13
  14. 14. Regulatory Pathway For Biogenerics EU and USA 14
  15. 15. Global Pharmaceuticals – 2011 OutlookOpportunities - Emerging Markets and Innovation - Taking longer to deliver Challenges - Patent Expiry and Regulatory pressures - Imminent Global Pharma’s Cutting Cost to Manage the Gap 15
  16. 16. Highlights for 2011 – Global Pharma’s Nearing the Patent Cliff Global pharmaceuticals – Emerging Market Strategy Outcome from Major Clinical Studies/Events expected to reshape Competitive Dynamics across several therapy classes New Drug Approvals for 2011 and their potential Healthcare Reforms How will patent expiry impact margins for Global Pharma companies 16
  17. 17. Global Pharma - Emerging Market StrategyWho is doing it’s best in Emerging Markets?Who will emerge eventually in Emerging Markets?Pricing Mantra – Who has got it Right?Branded Generics Strategy – Will it Deliver?China – Growing ProminenceNotable Launches from Global Giants 17
  18. 18. Outcome from Major Clinical Studies/Events expected to reshape Competitive Dynamics across several therapy classesDyslipidemiaStroke Prevention in Atrial FibrillationAcute Coronary SyndromeHypertensionDiabetesMetastatic MelanomaWet Age AMD 18
  19. 19. New Drug Approvals in 2011 and their Potential 19
  20. 20. Healthcare Reforms• What will be the impact?• Who shall be worst hit?• Who is immune? 20
  21. 21. Health Care Reform: Doughnut Hole Discounts – Impact on Therapy Class Share Of Part D Enrollees Who Reached Doughnut Hole And Catastrophic Coverage % that reached gap but Companies likely to bear % that reached % of Part D enrolleesTherapy Class not catastrophic the brunt because of major catastrophic coverage who use the drug coverage presenceFor Alzheimers 49 15 4 PfizerOral anti-diabetics 41 10 12 Merck, Astrazeneca, BMYProton-pump inhibitors 40 11 18 Astrazeneca, JNJAntidepressants 35 10 18 Lilly, Pfizer, AstrazenecaAngiotensin receptor Novartis, Sanofi, 35 7 17blockers AstrazenecaStatins 33 6 40 AstrazenecaOsteoporosis drugs 32 7 15 Roche, GSK, NovartisACE inhibitors 30 5 28 Sanofi AventisSource: MP Advisors, Company reports, Georgetown University/ IMS health LRX database 2007 21
  22. 22. Patent Exposure: Global Pharmaceuticals Cumulative 2008 WW WW Sales Sales of Products Total WW Expiry - 2010-12 Cumulative 2013-14 CumulativeCompany Expiring between Pharma Sales 2010-14 as 2010 2011 2012 2013 2014 Patent Exposure% Patent Exposure% 2010-14 ($b) % of 2008 ($b) SalesLLY 12.2 17.0 71.9 10.1 29.4 6.3 10.2 15.9 45.8 26.1NOVO 4.0 6.2 63.9 20.6 0.0 0.0 0.0 43.3 20.6 43.3AZN 17.8 31.6 56.3 8.9 9.9 18.7 2.3 16.5 37.5 18.8PFE/WYE 34.8 63.1 55.2 7.6 26.1 10.7 6.3 4.5 44.4 10.8BMY 8.1 17.7 45.6 0.0 31.6 7.5 6.5 0.0 39.1 6.5SAN 17.3 40.3 42.9 10.6 10.9 14.6 4.6 2.3 36.1 6.9JNJ 9.7 24.6 39.6 0.0 6.4 0.0 14.7 18.4 6.4 33.1NOVN 10.8 28.3 38.3 0.0 4.0 26.7 7.5 0.0 30.7 7.5MRK/SGP 13.0 38.1 34.1 9.3 0.0 15.1 2.3 7.5 24.4 9.8GSK 10.5 36.7 28.7 21.7 0.0 6.7 0.3 0.0 28.4 0.3ABT 3.6 16.7 21.5 0.0 8.0 0.0 0.0 13.8 8.0 13.8ROG 2.3 36.0 6.4 0.0 3.5 3.2 0.0 0.0 6.7 0.0Total ($b) 144.12 356.2 40.4 Source: MP Advisors, Company Reports 22
  23. 23. Emerging Markets : Will Take Longer To Deliver Size Of Emerging And Developed Markets GDP ($b) Per Capita Population inCountry Mkt Size ($b) Income $ million Prescription drugs Prescription spending as % (Nominal) Spending per Capita of Per capita income DEVELOPING COUNTRIESChina 15 4,327 3,241 1335 18 0.55%India 5 1,206 1,026 1175 6 0.57%Russia 5 1,676 11,887 141 49 0.41%Brazil 12 1,572 8,188 192 44 0.54%Turkey 9 729 10,268 71 124 1.21%South Africa 9 276 5,633 49 39 0.70% DEVELOPED COUNTRIESUS 281.6 14,441 47,039 307 1141 2.43%Japan 57.2 4,910 38,661 127 448 1.16%Germany 34.4 3,673 44,793 82 756 1.69%UK 22.6 2,680 43,934 61 311 0.71%France 37.2 2,866 44,781 64 796 1.78%Canada 16.6 1,499 45,424 33 1000 2.20%Source: MP Advisors, Company Reports 23
  24. 24. Indian Pharma - Tomorrow’s Global Generics 24
  25. 25. Para IVs – The New India Advantage Snapshot of Indian Cos. Para IV Challenges No. of Para IVs where 30 No. of products No. of Para No. of FTF Indian cos. mths stay will expire in 12 settled / won / IVs claimed mths unlitigated Sun Pharma 19 13 6 3 Dr Reddys 17 16 5 6 Lupin 14 5 4 3 Ranbaxy 13 13 8 5 Wockhardt 8 5 3 Nil Glenmark 6 3 3 2 Aurobindo 5 3 2 Nil Torrent 5 4 1 3 Orchid 4 3 Nil 2 Cadila 3 2 Nil Nil Source: MP Advisors, Company ReportsIndian Pharma companies are involved in 50% of the ongoing Para IV litigations! 25
  26. 26. Para IVs – The New India Advantage Rank Drug Name Innovator Sales 08 $m Cos. as FTFs 1 Lipitor Pfizer 12401 Ranbaxy 2 Plavix Bristol Myers 9004 Apotex 6 Diovan Novartis 5740 Ranbaxy 8 Nexium AstraZeneca 5200 Ranbaxy 10 Zyprexa Eli-Lilly 4697 Dr Reddy’s 15 Seroquel AstraZeneca 4452 Teva 16 Singulair Merck 4336 Teva 17 Actos Takeda 3958 Ranbaxy 18 Effexor XR Wyeth 3928 Teva Sandoz / Teva / 19 Atacand AstraZeneca 3702 Mylan 20 Gleevec/Glivec Novartis 3670 Sun Pharma Source: MP AdvisorsIndian cos. have 180-day exclusivity in 6 of the top 11 products under litigation 26
  27. 27. Domestic Formulations – Growth Guaranteed 20 16 → GMP guidelines in July 05 8 → Excise duty on MRP in Jan. 05 8 12 1 8 7 1 8 % 1 10 9 9 8 9 1 4 9 4 5 0 0 0 1 (1) (3) (2) (1) (1) -4 8% 5% 7% 9% 18% 13% 13% 17% -8 2002 2003 2004 2005 2006 2007 2008 2009 Volume Value New Products Source: IMSGMP norms earlier and GLP norms now to help consolidation of a highly fragmented market 27
  28. 28. Contract Manufacturing – Generics Gain The MostWhy manufacturing alliances happen only with generic cos. and not with contract manufacturer?• Generic cos. are present in various manufacturing technologies with competitive cost efficiencies as against a contract manufacturer that is limited to a handful of technologies.• Generic cos. are anyways selling the manufactured product to one or the other generic market and thus have well oiled manufacturing operations. As against this, a contract manufacturer will have to go through a lengthy validation procedure.• For a generic company, most of the time, contract manufacturing would be a way to leverage spare capacity and thus can offer much more competitive pricing as against a contract manufacturer that has to recover entire overheads from the contract manufacturing deal.• Most of the facilities of generic manufacturers are already validated by regulated market’s authorities – something that is not so easily found with a pure play contract manufacturer. Gain For Generics is Loss for Contract Manufacturer 28
  29. 29. Acquisitions – Can One More Big One Happen?Why are Global companies interested in Indian Pharma?• Manufacturing cost efficiency• Chemistry skills• Growing India pharma market• Indian cos. presence in critical emerging markets like Russia, Africa. 29
  30. 30. Japan Pharma 2011 日本の製薬会社 Top Picks : Daiichi Sankyo, Takeda, Shionogi and Torii! 30! !
  31. 31. Summary• In 2009 and 2010, our thesis for Japan Pharma Inc was based on drive to reduce healthcare cost in Japan thru government lead incentives for genericization.• The Generics thesis has played out for now and spotlight for next 18 months will be on the clinical & regulatory outcome from Innovators.• Hybrid Pharma will start from 2011. We believe that the new business model will start showing its tangible and significant numbers from FY/12. Daiichi Sankyo is the only company in Japan in Hybrid Pharma.• Consolidation in Japan Generic may Start: Foreign/ non-generic companies have started taking Japan generic as one of the growth drivers.• Early Stage Pipeline of Japanese Companies shows that cancer is priority: Japanese majors have focused on acquiring companies or in-licensing compounds in Onco therapy. Takeda, Astellas, Daiichi-Sankyo, Eisai, Chugai and Kyowa Hakko Kirin – each of them possess decent number of cancer compounds.• Japanese Companies have Lost Their ‘Cash Rich’ Status: Except Takeda and Chugai, none of the Japanese companies carry >20% of their market-value in form of cash. 2011-12, Innovation milestones will drive the valuation of stocks 31
  32. 32. Segments Specific ‘Key Success Factors’Segment Key Success Factors Top PicksInnovatorsDomestic focused Low % sale coming from long listed products Late stage R&D – own as well as in-licensed. Torii Internationalization capabilities Willingness to consolidate Strong marketing abilities in Japan such that it improves the chances of licensing-in good productsGlobal Higher overseas exposure Lower long listed drugs contribution Daiichi Sankyo, Takeda, Shionogi Rich PhIII pipelineGenerics GP1/DP2 Strong marketing infrastructure with sales force and rapport with GP / DP Oral formulations etc. DPC3 Distribution capabilities Injectable facilities, availability of all strengths of drug Cost effectiveness, stable supply 1. General Practitioner; 2. Dispensing Pharmacy; 3. Diagnostic Procedure Combination JP Specific Drivers Continue To determine Success 32
  33. 33. Large Pharma – Rich Pipeline PhI PhII PhIII candiid candid candidCompany ates ates ates Major Focus CommentsTakeda 19 9 13 Cancer Novel, varied targets for cancer Cancer & R&D portfolio w ith some novel first in class targets,Astellas 20 15 8 metabolic like survivin suppressant, GPR119 agonist Neurology & Antibody against folate receptor alpha, taregtingEisai 0 10 7 cancer cancer, can be a useful anticancer agent Diabetes, Neurology,Mitsubishi Tanabe 11 10 5 Good novel targets in different therapeutic class Cardio & immunology Cancer & R&D porfolio consisting of antibodies for cancer, w ithDaiichi Sankyo 7 10 5 infectious some good target like PPARY diseases Metabolic & Neuropeptide Y Y5 receptor, a very attractive targetShionogi 8 9 4 infectious for obesity, but success rate low diseases Has tw o first in class targets, Chemokine receptor 4Kyow a Hakko Kirin 13 6 2 Cancer antagonist & A33 for cancer Novel validated targets for cancer, w orking onChugai 9 10 1 Cancer Raf/MEK pathw ay Diabetes & First in class targets like TLR7 & PPARα/Y can beDainippon Sumitom 7 4 0 immunological attractive disordersSource: MP Advisors; Company Reports Japanese Companies show that cancer is a priority 33
  34. 34. Cost Cutting : Japan vs. Other Sectors GPM SG&A R&D OP M NP M % of Sales (% of Sales) % of sales of Sales of Sales % %Takeda 80.02 31.50 19.95 28.57 18.96Astellas 70.17 33.48 21.55 15.13 9.83Daiichi Sankyo 70.84 39.13 20.17 11.53 5.55Eisai 78.73 46.42 21.73 10.58 5.50Mitsubishi Tanabe 63.66 28.21 20.76 15.47 7.75Kyorin 62.50 37.17 11.92 13.41 8.92Dainippon Sumitomo 67.33 40.41 17.84 9.08 5.19Kyowa Hakko 43.47 23.09 10.43 9.95 5.44Shionogi 73.29 34.84 18.61 19.84 12.72JAPAN AVG 67.78 34.92 18.11 14.84 8.87US Global 77.44 28.16 18.77 30.09 22.84EU Global 74.65 30.90 17.03 31.99 22.01M. Biotech 82.15 22.21 17.65 40.92 33.52India 60.59 25.41 4.91 21.78 19.72Diff vs. US-Global -12.48% 24.01% -3.53% -50.69% -61.14%Diff vs. EU Global -9.21% 13.01% 6.30% -53.61% -59.68%Diff vs. M. Biotech -17% 57% 3% -64% -74%Diff vs. Indian 12% 37% 269% -32% -55%*Average of three y ears (2010-2012)Source: MP Advisors; Company Reports Low Margin Business = Better Room for Improvement 34
  35. 35. ‘Sum of Parts’ Relative Standing R&D NPV of Net Cash & NPV Expense Market Mktd Prod marketable Pipeline (1+2)/4 (1+2+3)/4 (FY 03/11 - Cap (4) (1) secu. (2) (3) 16)Global Innovator PharmaTakeda 1580.4 897.0 1153.1 389.1 3070.6 81% 93%Astellas 699.8 176.2 933.9 160.9 1419.4 62% 73%Shionogi 291.8 15.4 233.8 63.2 516.4 59% 72%Daiichi Sankyo 591.5 68.7 922.8 191.3 1289.7 51% 66%Eisai 377.4 -145.7 601.2 137.3 816.9 28% 45%Domestic Innovator PharmaKyorin 55.8 14.0 63.8 6.8 101.7 69% 75%Chugai 315.6 173.1 273.6 73.9 819.9 60% 69%Dainippon Sum 240.7 -79.0 286.3 35.3 291.1 56% 68%Mitsubishi tana 289.0 70.9 394.7 129.8 738.8 49% 66%Kyowa Hakko 190.8 33.4 135.0 46.0 488.3 46% 55%Source: MP Advisors; Company reports Good Opportunities Exists Even if Uncertainties Turn Negative 35
  36. 36. Cash Position of Japanese Pharma Cos Net Marketed Total Total Net Cash Cash cash Company Securitie Cash Liabilities M Cap as % of (1) (1+2)- s (2) (1+2) (3) M Cap 3Takeda 280.5 616.5 897.0 0.0 897.0 3074.6 29.2%Chugai 120.9 52.2 173.1 0.0 173.1 819.9 21.1%Kyorin 16.0 5.0 21.0 6.2 14.8 101.7 14.5%Astellas 184.0 22.2 206.2 30.0 176.2 1419.4 12.4%Mitsubishi tanabe 29.2 77.6 106.9 36.0 70.9 738.8 9.6%Kyowa Hakko NA NA 46.7 13.3 33.4 488.3 6.8%Daiichi Sankyo 101.1 281.5 362.3 293.6 68.7 1289.7 5.3%Shionogi 42.3 72.1 114.4 99.0 15.4 516.4 3.0%Eisai 116.1 88.0 204.1 349.8 -145.7 816.9 NAD Sumitomo 14.7 74.4 89.1 168.2 -79.0 291.3 NASource: MP Advisors; Company Reports Japanese Companies have Lost Their ‘Cash Rich’ Status 36
  37. 37. Domestic Cos Confronting Several Fronts Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 CompanyLong L As % of DO Sales 43.51 38.61 38.39 34.63 48.14 50.16 50.21 46.17 43.61 38.35 AstellasOverseas Sales % 46.77 45.77 43.49 42.08 40.02 42.89 44.15 46.30 48.29 51.21Long L As % of DO Sales 32.12 26.80 18.51 21.82 19.44 23.17 26.82 19.66 18.12 16.65 ChugaiOverseas Sales % 9.72 9.70 6.25 7.05 8.00 9.41 9.51 9.54 9.27 9.36Long L As % of DO Sales 28.98 31.81 47.26 56.14 52.37 48.59 45.79 44.46 43.43 Daiichi SankyoOverseas Sales % 38.6 44.7 50.4 50.9 52.0 54.8 54.2 57.5 58.0Long L As % of DO Sales 16.68 41.04 71.73 70.01 67.55 61.51 57.91 59.96 55.51 51.37 Dainippon SumitomoOverseas Sales % 7.31 7.99 7.27 17.80 36.41 34.62 35.18 32.09 30.15 25.26Long L As % of DO Sales 28.02 26.21 28.69 27.95 45.27 78.57 75.68 74.64 71.40 62.18 EisaiOverseas Sales % 57.30 58.53 64.26 61.58 59.42 55.99 58.49 58.00 60.03 65.13Long L As % of DO Sales 41.40 39.32 32.81 29.71 28.07 27.14 25.63 24.32 23.09 21.91 KyorinOverseas Sales % 4.15 3.70 2.75 2.36 2.12 1.93 1.78 1.74 1.61 1.49Long L As % of DO Sales 23.72 21.15 23.86 34.96 33.04 31.33 32.16 36.53 34.89 33.32 Kyowa Hakko KirinOverseas Sales % 3.44 4.16 6.69 4.89 5.16 5.05 5.00 5.04 5.08 5.11Long L As % of DO Sales 65.11 60.68 60.93 59.41 61.62 57.29 52.71 49.21 59.85 57.77 Mitsubishi TanabeOverseas Sales % 5.81 6.10 5.65 5.20 4.94 4.73 4.46 4.18 3.95 3.83Long L As % of DO Sales 44.85 39.67 49.65 42.22 37.66 32.24 26.95 22.17 18.37 15.74 ShionogiOverseas Sales % 14.44 15.81 24.65 36.33 38.50 39.18 40.05 39.28 39.08 38.26Long L As % of DO Sales 14.93 19.31 19.51 23.00 28.91 27.97 27.37 45.31 44.43 43.64 TakedaOverseas Sales % 33.82 49.69 54.80 53.16 50.51 52.38 45.27 46.43 47.23 49.68Source: MP Advisors; Company Reports High Dependence on Domestic Markets + Long Listed Products Makes Do. Cos Vulnerable to Healthcare Reforms 37
  38. 38. Revised Incentives For Pharmacies and GE Usage Rate Rate of GE (%) Rate of GE (%) (on prescription basis) GE usage rate (o n volume basis) Relative Cumulative Relative number Cumulative Total Until March, 2010 Since April, 2010 number Total Standard for 9.7 9.7 65%≦ 0.1 0.2 calculation on prescription basis Incentive points (¥) 4.3 14 60%≦ 65% 0.2 0.4 5.5 19.6 55%≦ 60% 0.3 0.7GE drug 30%≦ 4 points + 13 points 17 points (170yen) 7.4 27 50%≦ 55% 0.5 1.2usage rate 25%≦ 0 points +13 points 13 points (130 yen) 9.9 36.9 45%≦ 50% 1.0 2.2 20%≦ 0 points +6 points 6 points (60 yen) 13.3 50.3 40%≦ 45% 1.5 3.7 20%> 0 points ±0 points 0 points 16.5 66.7 35%≦ 40% 2.4 6 15.3 82 30%≦ 35% 4.0 10.1Source: MP Advisors; Company Reports 8.1 90.1 25%≦ 30% 7.3 17.4 5.1 95.2 20%≦ 25% 13.3 30.6 2.6 97.8 15%≦ 20% 25.5 56.1 1.3 99.1 10%≦ 15% 30.7 86.8 0.6 99.7 5%≦ 10% 11.5 98.3 0.3 100 0%≦ 5% 1.7 100 42.6 Average rate 18.2 40.1 Median rate 16.0 Generics Investment Thesis: • Increase in incentives for pharmacies has led to a spur in generic sales (~50% increase in 1Q FY 03/11) • Growth will not continue as number of pharmacies (~82% of total) have now reached the ‘bracket’ that gets the maximum benefit of ‘Rx incentive for generics Incentives for Pharmacies are playing out their maximum impact 38
  39. 39. Generic Cos at a Glance Sawai Towa Nippon Chemi 03/10 03/11 03/12 03/13 03/14 03/10 03/11 03/12 03/1 03/14 03/10 03/11 03/12 03/13 03/14 ¥b A E E E E A E E 3E E A E E E E Sales 50.1 61.6 72.3 82.6 90.5 39.0 44.2 49.5 56.2 63.0 24.0 28.6 30.9 33.7 36.1 % Change YoY 13.1 23.0 17.4 14.3 9.5 8.7 13.2 12.1 13.4 12.2 7.5 19.3 7.9 9.1 7.1 COGS 26.3 32.6 38.3 44.2 48.2 18.8 21.3 23.7 26.8 30.0 11.4 14.7 15.8 17.3 18.6 SG&A 11.7 12.8 15.2 17.5 19.1 9.9 11.0 12.3 14.2 16.0 11.8 12.8 13.7 15.0 15.9 % of sales 23.3 20.8 21.0 21.2 21.1 25.5 25.0 24.8 25.3 25.3 47.8 44.8 44.3 44.6 44.1 R&D 3.6 4.2 5.0 5.6 6.4 2.6 3.1 3.4 4.0 4.5 % of sales 7.2 6.8 6.9 6.8 7.1 6.6 7.1 7.0 7.1 7.2 OP 8.5 12.0 13.8 15.3 16.8 7.8 8.8 10.1 11.2 12.5 0.8 1.1 1.4 1.4 1.6 % Margin 17.0 19.4 19.2 18.6 18.6 19.9 19.8 20.4 19.9 19.9 3.2 3.9 4.6 4.0 4.5 NP 5.0 6.6 8.2 9.1 10.0 4.6 5.3 6.1 6.5 7.3 0.3 0.5 0.7 0.7 0.9 % Margin 10.0 10.7 11.4 11.0 11.0 11.8 12.0 12.3 11.5 11.5 1.1 1.9 2.4 2.1 2.4 Source: MP Advisors; Company ReportsGenerics Investment Thesis:• Broadly generic market is divided into two segments: GP/Dispensing market and DPC market• Companies focusing on the GP/Dispensing market: Companies ability to offer better margins remains the key success factor. Growth in dispensing Pharma market due to increase in incentive of pharmacies. Companies like Towa and Sawai focus on these segments.• Companies focusing on the DPC market : Number of DPC hospitals are >1500 and likely to grow further. Stable supply, availability of formulations at different strengths, and a strong distribution channel with wholesalers are key growth drivers. Companies like Nippon Chemiphar, Eisai’s and Kyorin’s generic divisions etc. focus on this segment.• We expect generics penetration to reach ~8% (by value) by 2012 (Government’s target is 15%. The new patent expiries of ~900b yen in next three years will help generic companies maintain current pace of growth. 39
  40. 40. Thank You 40

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