Biocon. Institutional Equities. Event Update SELL. USFDA Complete Response Letter To Mylan/Biocon's Pegfilgrastim

Transcription

1 Event Update Biocon Reuters: BION.BO; Bloomberg: BIOS IN USFDA Complete Response Letter To Mylan/Biocon's Pegfilgrastim The US Food and Drug Administration or USFDA has issued a complete response letters to Mylan/Biocon's application for biosimilar Neulasta (pegfilgrastim) citing CMC (Chemistry, Manufacturing Controls) issue. Neulasta is a significant opportunity for biosimilar players as it generates US$4.2bn in global sales of which US$3.6bn comes from the US market. This is the fourth complete response letter given to a pegfilgrastim biosimilar applicant. Ahead of Biocon, three prior abbreviated biologic license application (ABLA) filers (Sandoz, Coherus, and Apotex) on biosimilar Neulasta being handed over a complete response. Clearly the approval hurdles are potentially high (compared to other biosimilars). CMC concerns and not lack of biosimilarity is the reason for CRL: Unlike Coherus or Sandoz, which are required to provide incremental evidence related to immunogenicity and bioequivalence (biosimilarity concerns) as part of CRL, Biocon has been handed over a CRL which cites CMC (Chemistry Manufacturing Controls) data as inadequate. The CMC concerns raised by the USFDA can be similar to the one s raised by the EU authorities 1) CGMP compliance Outstanding manufacturing compliance issues (35 observations from EU authorities and 8 form 483 observations) 2) EMA s Committee for Medicinal Products for Human Use (EU CHMP) concerns - When Biocon/Mylan withdrew the application, EU CHMP was of the provisional opinion that Mylan's pegfilgrastim is not fit for approval as it had outstanding concerns on the pegfilgrastim file. These concerns pertain to: Description of the manufacturing process Control of impurities in the active substance Sterilisation of the final product. CMC issues can take 6 months to more than a year to resolve: CMC issues can take anywhere from six months to more than a year to be resolved. There are several companies whose approvals continued to be delayed for complete response letter. Sandoz has been struggling with plant issues since February 2017 to get Copaxone 40mg approval. It took Portola pharmaceuticals about a year to fix issues and refile their application. Sanofi got a complete response in October 2016 for Sarilumab owing to manufacturing issues which took them six months to fix and refile. Likewise Tesaro got a CRL for ralopitant which they are still fixing and yet to refile. (Exhibit 2 has a larger list of such CRL s citing CMC issues as a cause for delay). Our Assumptions on launch timelines: Because of the legal hurdles, we have been assuming a 2H- FY19 launch (post district court outcome). Amgen has litigated Biocon on various patents ( 707 and 997 patent). These patents are related to methods of protein purification. Typically it takes around a year for district court outcome which is later subject to appeal in federal court. Hence for a final outcome, It can take around two years and theoretically the launch can be delayed until then. As the litigation began in September 2017, the launch can potentially happen in 2H-FY19 (at risk post district court outcome). Neulasta is apparently big but difficult to tap: The Neulasta market opportunity will be diluted for several reasons by the time a commercial launch happens. The key factors that can lower the size of the pie are: 1. Pick up of Immunotherapy impacting Neulasta Of late, Neulasta sales are on the decline (mid single-digit) because of adoption of immunotherapy-based treatment for a growing number of oncology indications. 2. Neulasta may be replaced by superior options - Spectrum Pharma is developing a modified version of pegfilgrastim which is supposed to lower the duration of severe neutropenia in oncology patients (compared to Neulasta) being treated with chemotherapy. The data from Phase-3 trials is due in 1Q2018, and the drug is being evaluated under a special protocol assessment. 3. Potentially a five player market at formation - Coherus Bioscience, Apotex, should also be able to enter the market around the same time as Biocon. Sandoz should enter in 2H Penetration of OnPro Kit has reached 55% - Amgen continues to drive penetration of an on-body injector device for Neulasta by discounting the Onpro device to pre-filled syringes. Currently, the Onpro device has achieved 55% market penetration level. 5. Coherus is also developing an On body injector Device which can potentially put other biosimilar players at a major disadvantage (if they successfully execute). Coherus is also developing an on-body injector device to take Neulasta head on and this will have a relatively significant advantage over biosimilar competitors. 6. Marketing Costs would be significant and market share ramp up will be gradual We anticipate a gradual ramp up in market share for biosimilar players. Since Neulasta is prescribed primarily in outpatient setting, promotion of biosimilars would require intensive marketing efforts. We expect a $20- $30million spend on marketing and promotion of biosimilar pegfilgrastim. 10 October 2017 SELL Sector: Pharmaceuticals CMP: Rs344 Target Price: Rs246 Downside: 28% Vishal Manchanda Research Analyst vishal.manchanda@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$bn) 206.7/ Wk H / L (Rs) 439/268 Daily Vol. (3M NSE Avg.) 3,358,683 One Year Indexed Stock Performance Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Price Performance (%) Biocon NIFTY CNX NIFTY INDEX 1 M 6 M 1 Yr Biocon 0.6 (6.0) 9.5 Nifty Index Source: Bloomberg

2 Our estimates: We currently expect Biocon/Mylan to reach the market in 2H-FY19 and compete with four other players for a market share. We forecast peak sales of US$100mn for Biocon s Pegfilgrastim. Coherus Bioscience may take the lead among biosimilar players because of various advantages like a USbased manufacturing set-up (preferred by consumers) and potential benefit of an on-body injector device (if they successfully execute). Exhibit 1: Neulasta market Formation Company name Launch timeline Market share Price erosion Amgen Launched 35% - Coherus Bioscience 2H % 40% Biocon 4Q % 40% Spectrum Pharma 4Q % 20% Apotex 4Q % 40% Sandoz 2H % 40% Cinfa Biotech 2H % 40% Pfizer 2H % 40% Source: Nirmal Bang Research Exhibit 2: CRL issued to various firms citing manufacturing issues and timelines of resolution Company Name Drug CRL issued Current Status AstraZeneca ZS-9 May-16 Refiled October 2016 AstraZeneca ZS-9 Mar-17 Working to resolve Momenta/Sandoz Glatopa 40 mg Feb-17 Working to resolve Nicox Zerviate Oct-16 Refiled March 2017 Nicox/Valeant Vyzulta Jul-16 Refiled February 2017 Opko Health Rayaldee Mar-16 Approved June 2016 Portola Pharmaceuticals AndexXa Aug-16 Working to resolve Sanofi/Regeneron Sarilumab Oct-16 Refiled April 2017 Tesaro Rolapitant Jan-17 Working to resolve Source: Company, Nirmal Bang Research Exhibit 3: Key financials Net sales 31,430 33,810 39,216 45,909 52,278 EBITDA 7,489 7,678 9,795 10,889 13,339 Net profit 5,917 6,091 6,881 5,972 7,042 Adjusted EPS (Rs) EPS growth (%) PER (x) P/BV (x) EV/EBITDA (x) RoCE (%) RoE (%) Source: Company, Nirmal Bang Research 2 Biocon

3 Financial statements Exhibit 4: Income statement Net sales 31,430 33,810 39,216 45,909 52,278 % growth Raw material costs 12,561 13,240 14,771 18,175 20,255 Staff costs 5,334 6,101 7,470 8,302 9,753 R&D expenses 1,688 2,655 2, Other expenses 4,358 4,136 4,456 8,544 8,931 Total expenditure 23,941 26,132 29,421 35,020 38,939 EBITDA 7,489 7,678 9,795 10,889 13,339 % growth Other income ,571 2,200 2,100 Interest Gross profit 18,869 20,570 24,445 27,734 32,023 % growth Depreciation 2,210 2,487 2,772 4,015 4,806 Profit before tax 6,874 7,513 8,497 7,714 9,092 % growth (9.2) 17.9 Tax 957 1,422 1,616 1,743 2,050 Effective tax rate (%) Net profit 5,917 6,091 6,881 5,972 7,042 % growth (13.2) 17.9 Adjusted EPS (Rs) % growth (13.2) 17.9 Source: Company, Nirmal Bang Research Exhibit 6: Balance sheet Equity 1,000 1,000 1,000 1,000 1,000 Reserves 31,622 39,338 47,377 52,149 57,390 Net worth 32,622 40,338 48,377 53,149 58,390 Minority Interest 1,121 2,658 3,761 4,760 5,920 Total debt 10,281 24,673 22,054 23,412 23,019 Deferred tax liabilities Other non-current liabilities 5,931 4,204 3,939 3,802 3,802 Liabilities 49,955 71,873 78,131 85,468 91,478 Net block 15,982 16,811 35,529 40,054 40,135 Capital work-in-progress 15,582 20,597 5,327 9,885 9,803 Non-current Investments , Other non-current assets 6,610 7,196 10,721 5,783 5,783 Current investments 2,478 8,747 10,650 4,285 4,285 Inventories 4,756 5,424 6,353 6,504 7,177 Debtors 6,833 7,145 8,832 11,242 12,404 Cash 9,204 15,386 10,443 18,439 23,333 Other current assets 1,479 3,007 4,199 3,091 3,091 Total current assets 24,750 39,709 40,477 43,561 50,290 Trade payables 4,126 6,098 7,397 6,958 7,678 Other current liabilities/provisions 9,238 6,610 8,414 6,856 6,856 Total current liabilities 13,364 12,708 15,811 13,814 14,534 Net current assets 11,386 27,001 24,666 29,746 35,756 Total assets 49,955 71,873 78,131 85,468 91,478 Source: Company, Nirmal Bang Research Exhibit 4: Exhibit 5: Cash flow FY1 PAT 5,917 6,091 6,881 5,972 7,042 Depreciation 2,210 2,487 2,772 4,015 4,806 Other income (943) (792) (1,571) (2,200) (2,100) (Inc.)/dec. in working capital 275 (3,164) (705) (3,450) (1,116) Cash flow from operations 7,459 4,622 7,377 4,337 8,632 Capital expenditure (33,774) (8,331) (6,220) (13,098) (4,806) Net cash after capex (26,315) (3,709) 1,157 (8,761) 3,826 Other investing activities 29,582 (5,936) (5,477) 15,391 2,100 Cash from financing activities (2,107) 15,827 (623) 1,366 (1,032) Opening cash balance 8,044 9,204 15,386 10,443 18,439 Closing cash balance 9,204 15,386 10,443 18,439 23,333 Source: Company, Nirmal Bang Research Exhibit 5: Exhibit 7: Key ratios Y/E March FY15 FY16 FY17 FY18E FY19E Profitability & return ratios EBIT margin (%) Net profit margin (%) RoE (%) RoCE (%) Working capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Working capital days Current ratio (x) Quick ratio (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x) Source: Company, Nirmal Bang Research 3 Biocon

4 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Rating track Date Rating Market price Target price (Rs) 10 June 2016 Sell July 2016 Sell August 2016 Sell February 2017 Sell 1, May 2017 Sell 1, July 2017 Sell Rating Track Graph Not Covered Covered 4 Biocon

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