Cost competitiveness is the key in generics.

  • Excelling in the manufacture of complex generics and biosimilars depends on its successful filing for new drugs – be these formulations or active pharmaceutical ingredients (APIs): Speed to market is another key differentiator.
  • All the past USFDA issues (observations & Warning letters) in API & oncology formulations plants are now resolved.
  • COVID observations: 
    • There were incremental sales in certain markets, such as the US, Europe and Russia, thanks to panic buying of medicines. 
    • Some of the sales were impacted and deferred in APIs, in the India business and in a few Emerging Markets.
    • Expected to continue: Buying OTC medicines (over the counter), especially relating to immunity enhancement, vitamins, analgesics, and flu and anti-infective medication.
    • Other than the race for COVID vaccine, one might see some de-prioritization on R&D. (Short/medium-term risk for CDMO players dealing with Big Pharma?)
  • Risk: Significant In-house API capabilities safeguard Dr Reddys from any API disruptions from China.

  •  > 400 generic drugs. Of these, the major ones are (i) gastrointestinal, (ii) oncology, (iii) cardiovascular, (iv) pain management, (v) central nervous system (CNS), (vi) respiratory, and (vii) anti-infective:  primarily injectables and oral solid dosage forms.
  • During FY20, Filed 8 new ANDAs (Abbreviated New Drug Applications) taking the total to 99 generic drug fillings
    •  of which 97 are ANDAs & other 2 NDAs (New Drug Application).
    •  Of these, 97 ANDAs, 54 are Para IV filings and they believe 30 of these have ‘First-to-File’ status. (Major growth area)
      • A generic company is rewarded for a Para IV filing. The first applicant to submit a substantially completed ANDA (Abbreviated New Drug Application) is given marketing exclusivity for 180 days. Exclusivity means that no company is allowed to launch its product during this period.
    • 6 biosimilar products in the market and a pipeline spanning oncology and autoimmune diseases (focused on emerging markets)
    • Risk: Pricing pressure challenges continued in the US, in Europe, and across certain Emerging Markets. (controlled by the launch of new products)
  •  One of the world’s largest manufacturers of Active Pharmaceuticals Ingredients (APIs). 10 DMFs filed in the US. (drug master files to new API approvals).
  • CDMO: Offers end-to-end product development and manufacturing services and solutions to innovator companies (Not the biggest focus)
  • Proprietary Products business focuses on developing differentiated formulations that present significantly enhanced benefits in terms of efficacy, ease of use, and the resolution of unmet patient needs.
  • Aurigene Discovery, a wholly-owned subsidiary, is a clinical stage biotech company committed to bringing novel therapeutics for the treatment of cancer and inflammation.
    • Pioneered customized models of drug discovery and development collaborations with large-pharmaceutical, mid-pharmaceutical companies and Biotechs.
  • R&D expenditure: Rs 1199 crs, or 10.12% of revenue.
  • Risk: There has been an impairment charge of Rs 1675 crs on intangibles for the year largely due to conservative estimation of future cash flows (due to reduced prices & increased competition) from respective products. 
  • OCF: Rs 2984 crs. OCF/EBITDA ~65%.
  • A 21,650 employees, net debt free company. ROE can improve as investments in cost efficiency & new fillings start milking. Key Ratios:
  • Why to invest in Pharmaceuticals?  Over the last decade, the rate of growth of medicine usage has outpaced both population and economic growth. 
    • According to IQVIA reports, niche medicines such as Oncology & Orphan drugs are looking to grow faster in value.
  • Foresee strong growth for CDMOs in the coming years on the back of continued growth in the pharmaceutical industry and companies striving to reduce their fixed costs through outsourcing their manufacturing activities. 
    • On their part, CDMOs are expected to make additional investments to boost their capacities and capabilities in anticipation of future business.
    • Interesting use of AI/ML: Talked about in detail in Syngene’s FY20 AR.
  • COVID Risk: Delays in regulatory approvals due to insufficient personnel and modifications in policies are expected to have an impact on new product launches in the short term.
  • Board expertise in line with standards: Most of them own shares of the co.
  • Risk: Rs 491 crs of goodwill: estimated cash flows are management estimates.
  • Complex capital structure: 53 subsidiaries & 2 associate companies.
  • 8 of the Top 13 institutional shareholders increased stake.

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