Transcript Generic

Generic Pharmaceuticals
Finance & Investment Club
Healthcare Sector
Summer 2012
Senior Analyst: Roy Tong
Executive Summary – Generic Pharmaceutical Manufacturing
Generic Drugs
Industry in Growth
Stage
• Growth in revenue outpaces that of GDP
• Acceptance of Generics evident in growing domination of sales mix
at the expense of brand names
Generics Growth
Fuelled by Low Prices
• Lower cost to manufacture than brand names
• Sales further driven by patent expiry of brand names
Use of Generics Aided
by Government
Spending and Reform
• Increased government Medicare and Medicaid spending leading to
more consumer access to prescription drugs as opposed to OTC
• Most insurances (both private and public such as Medicare) do not
cover brand names when generics are available
Aging Population and
Unhealthy American
Lifestyle
• Large aging population increasing – elderly more vulnerable to
diseases that require medication to treat
• Unhealthy American lifestyle, too much fat and calories, inadequate
exercise and fiber, breed obesity and other diseases
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Industry Definition – Generic Pharmaceutical Manufacturing
• Generic pharmaceutical and medicine manufacturers develop prescription drug
products that are used to prevent or treat illnesses in humans or animals
• Generic drugs are produced, marketed and distributed without patent protection, yet
at the same time comparable to brand listed drug products (if existent) in dosage,
strength, administration, quality, performance and intended use
• Firms are allowed to manufacture generics of brand name drugs AFTER the
expiration of patents protecting the branded drugs, and are able to do so at a much
lower cost due to the bypassing of discovery costs
Ligand Pharmaceuticals
NASDAQ: (LGND)
Avanir Pharmaceuticals
NASDAQ: (AVNR)
Sagent Pharmaceuticals
NASDAQ: (SGNT)
Source: Yahoo Finance Industry Center, Various Firms’ 10K & IBISWorld Analysis
Catalyst Pharmaceuticals
NASDAQ: (CPRX)
Hi Tech Pharmaceuticals
NASDAQ: (HITK)
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Health Care Sector Breakdown
Industry Breakdown by Market Cap ($BLN)
Breakdown by Market Cap
20.1%
28.5%
Health Care
$2,384.26B
(100%)
25.3%
23.1%
Drug Manufacturers
and Related
$1,423B
(61.23%)
3.1%
Selected Companies Market Cap
Generic Drug
Manufacturer
$45B
(1.89%)
LGND
$317.78M
SGNT
$364.84M
AVNR
$399.33M
HITK
$450.88M
CPRX
$48.57M
Total
$15.81B
Source: Yahoo Finance Industry Center & Various Firms’ 10K Analysis
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Industry at a Glance
Revenue
$52.8B
Annual Growth
(07-12)
5.4%
Profit
$7.8B (14.7%)
Expected Growth
(12-17)
6.3%
Exports
$19.6B
Businesses
1,103
Breakdown by LTM Revenue (Total: $427.28M)
7.10% 2.48%
54.38%
36.03%
0.00%
Medicinal and Botanical
Biological Products
Products
6%
10%
In-Vitro Diagnostic
Substances Products
Pharmaceutical Prep for
6%
Psychotherapeutic Drugs
6%
Pharmaceutical Prep for
Central Nervous System
Drugs
11%
Product
Segmentation
Pharmaceutical Prep for
Cardiovascular Drugs
12%
Pharmaceutical Prep for
Metabolic Drugs
14%
Source: Yahoo Finance Industry Center, Various Firms’ 10K and IBISworld Analysis
Pharmaceutical Prep for
Other Drugs
35%
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Generic Drug Manufacturers Revenue Generation
Manufacturers
Research and Development Partners
Pipeline
Pre Clinical
Trials
Pass
Stage I
Marketed
and Sold
Royalties
or
Licenses
Pass
FDA
Approval
Stage II
FDA
Review
Pass
Stage III
New Drug
Application
(NDA)
Pass
Institutions
Through
Partner
Sales Team
or Retailers
Direct through
Sales Team
Source: Various Firms’ 10K and Firms’ Website Analysis
Retailers
End User
3rd Party
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Geographical Distribution of Generic Pharma Manufacturers
•
Mid-Atlantic and West
regions with most
manufacturers but sales
branches typically located
close to end market
•
Advantage of locating near
other manufacturers include
local specialize workforce,
experienced business
services & availability of
facilities that are specialized
and expensive to build
•
Sales of generics follow
population trends –
Southeast, home to
significant portion of elderly,
accounts for largest region
in terms of revenue
Source: IBISworld Analysis
7
2011 Revenue Generation Breakdown by Segments
9%
42%
40%
20%
58%
31%
Health Care
Products (OTC)
8%
100%
Source: Various Firms’ 10K Analysis
100%
ECR
Pharmaceuticals
(Branded)
6%
Hi-Tech Generics
86%
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2011 Operating Expenses Breakdown by Segments
11.61%
21.58%
78.42%
30.14%
58.25%
8.57%
19.67%
24.46%
21.58%
44.36%
55.64%
53.96%
71.75%
Source: Various Firms’ 10K and Firms’ Website Analysis
* No
selling
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Product Development Stages
8
2
(22%)
(29%)
(71%)
5
(78%)
28
0
33
(39%)
33
(34%)
(61%)
51
(66%)
63
(100%)
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Source: Various Firms’ 10K and Firms’ Website Analysis
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80
800
70
700
60
600
50
500
40
400
30
300
20
200
10
100
0
0
2003
2004
2005
2006
2007
2008
2009
Generic Drugs Revenue
2010
2011
2012
Medicare Spending
2013(est) 2014(est) 2015(est) 2016(est) 2017(est)
Medicaid Spending
•
Revenue – Medicare Spending Correlation: 0.98
•
Based off anticipated US government spending on Medicare and Medicaid (which can be found from
records and projections from the US Government Office of Budget and Administration), we can reason that
a comparable growth rate will be found in projected revenue of the generic drugs industry
Projected Revenue (Billion $) = 6.601 + 0.112*Medicare – 0.68*Medicaid Spending (Billion $)
Accurate within +/- 3 Billion $
•
•
$ in Billions
$ in Billions
Time Series Analysis
Source: Office of Management and Budget, IBISworld & BUFC Analysis
•
Revenue – Medicaid Spending Correlation: 0.86
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Trend 1 – Growth of Generics Revenue > GDP Growth
125%
• The value that industry (revenue)
adds to the US economy is growing
at a much faster pace than US
GDP
• Rapid introduction of products and
brands coincides with growing
customer acceptance of products
• This is seen in how market share
has grown substantially at CAGR of
5.4% for past 15 years compared to
brand name drugs’ decline
120%
115%
% of 2007
• Generic pharmaceutical
manufacturing shows key features
of an industry in its Growth stage
Generics Revenue
110%
105%
100%
US GDP
95%
90%
2007
2009
2010
2011
% Distribution of Brand vs Generic Sales Mix
80
CAGR: 5.4%
70
60
50
40
30
20
10
0
1995
Source: US Census Bureau, Mintel & IBISworld Analysis
2008
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
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Trend 1 (Con’t) – Growth of Generics Revenue > GDP Growth
Top Selling Drugs to Lose Patent by End of 2012
Brand Name
Generic Name
US Sales
(billions)
Company
% of
Revenue
Plavix
Clopidogrel
6.1
Bristol-Myers (BMY)
48%
Actos
Pioglitazone
3.5
AstraZeneca (AZN)
53%
Advair
Flucticansone
4.03
GlaxoSmithKline (GSK)
34%
• Patent expirations have huge impact on sales, as brand name drugs quickly lose
market share once generic versions are on the market
• Drugs representing more than $140 billion in sales will lose patent protection between
2012 and 2017
• The patent expiry of “blockbuster” drugs would continue to stimulate sales in the
generic industry
Source: Mintel, IBISworld & Frost and Sullivan Analysis
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Trend 2 – Competitive Edge in Low Costs
180.00
•
•
•
•
•
Lure of generics are obvious, with a
74% difference in average retail prices
as of 2010
Virtually all major pharmacy chains offer
generics at extremely inexpensive
prices, leading to price wars
Result of this has been an increase in
sales of generics, often at the expense
of brand names
In 2010, 93% of physicians prescribed
generics when they were available –
compared to 83% in 2003
Some 75% of prescriptions dispensed in
2011 were generic drugs – compared to
40% in 2000
Source: US Census Bureau, Mintel & IBISworld Analysis
160.00
Average Retail Prices of Brands vs Generic ($)
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Pharmacy
Chain
Offer
Price
Walmart
30 Day
$4
CVS
90 Day
$9.99
Kroger
30/90 Day
$4/$10
United
Healthcare
Provides for
co-payments
for Medicare
Part D
$2
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Trend 3 – Government and Private Insurance Coverage
Does Not Cover
Prescription Drugs
7%
Prescription Drugs
Covered but Doctor Will
Not Prescibe It (i.e. Xanax
for Anxiety)
12%
I Don’t Know
3%
Doctor Willing to
Prescribe Drug, But Not
Covered (i.e. Viagra for
Sexual Dysfunction)
16%
Covers
Prescription Drugs
90%
Will Pay for Certain Brand
Names, Does Not Cover
Generics
13%
Wil Not Pay for Brand
Name if Generic is
Available
59%
• Of the pool of respondents in a Mintel study, 90% of the total indicated that their
insurance covers prescription drugs
• Furthermore, close to 60% of respondents indicated that their insurance would not
pay for Brand Name drugs should a Generic be available
Source: Mintel & IBISworld Analysis
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Trend 3 (Con’t) – Federal Health Care Spending & Reform
• As a result, industry demand
increases with the population’s ability
to afford the industry’s products
Federal Medicare & Medicaid Spending
700
Spending in Millions
• When Medicare and Medicaid receive
more funding from the government,
more consumers gain prescription
drug coverage
800
CAGR: 6.7%
600
Medicare
500
Medicaid
400
300
200
100
CAGR: 8.7%
0
• Coverage by these government aids
usually will not cover the cost of brand
name drugs if generics are available
• Health Care reform in 2010 expected
to benefit generic pharmaceutical
manufacturers - PPACA
Source: Office of Management and Budget, Mintel & IBISworld Analysis
2006
2007
2008
2009
2010
2011
2012
(est)
2013
(est)
2014
(est)
2015
(est)
Patient Protection and Affordable Care Act
(PPACA)
Section 10609
Prevents brand-name
manufacturers from
making label changes
to the brand-name or
listed drugs, thereby
delaying generic
products
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100,000
28%
90,000
27%
80,000
26%
70,000
60,000
25%
50,000
24%
40,000
23%
30,000
%
Population Over 55 Years Old
Trend 4 – Aging Population & Unhealthy Lifestyles
22%
20,000
21%
10,000
0
20%
2006
2011
>55
2016(Est)
>55 % of Total Population
•
American population is an aging one, with Americans aged 65-74 estimated to see the greatest
hike from 2011-2016, followed by 55-64s
•
This means that the 2 fastest growing demographics are at or approaching the age when the
aging process will place them at greater risk for a variety of age-related ailments
•
The elderly are more vulnerable to certain diseases, including Alzheimer’s, heart disease,
diabetes, cancer etc, which require preventive or treatment measures provided by
pharmaceuticals
Source: Mintel & IBISworld Analysis
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Trend 4 (Con’t) – Aging Population & Unhealthy Lifestyles
Unhealthy American Lifestyle
Insufficient Exercise
70% of Population is
inactive, 12% of
respondents in CDC survey
meet weekly recommended
amount of 150 mins of
moderate-intense exercise
Too Many Calories
Daily caloric consumption
up from 2172 a day to 2775
over past 30 years
Too Much Fat
Average American diet is
34% fat, 12% being
saturated, above AHA
recommendations of no
more than 7% saturated fat
Not Enough Fiber
Adult Americans consume
only 50% of optimum
amount of fiber
Source: Mintel & IBISworld Analysis
• Lack of exercise and poor diet
primarily responsible for increase in
number of diseases
• 67% of population is
overweight/obese, with cancer and
stroke strongly associated with
obesity
• Some 81 million Americans (34%)
have heart disease, and 92.7% have
at least 1 risk factor for the disease
(obesity, high blood pressure, high
cholesterol, diabetes, smoking)
• According to NIH, diets high in fat
result in higher mortality rates and
incidences of colon, breast and
prostate cancer
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Trend 4 (Con’t) – Aging Population & Unhealthy Lifestyles
Leading Causes of Death
Diabetes
71,382
Alzheimer's Disease
74,632
Accidents
123,706
Respiratory Diseases
127,924
Stroke
135,952
Cancer
562,875
Heart disease
616,067
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
• A result of high disease counts has been an increase in the number of prescriptions dispensed,
up 3.2% from 2007 to 2009, almost double the increase in US population in the same time period
•
Those affected by chronic disease and require chronic medication, a large portion of which are
older adults, resort to skipping/reducing doses when faced with increased medication costs
which can lead to expensive hospitalizations and adverse health outcomes
•
However, patients who initiate therapy with lower cost generic medications have higher rates of
adherence, making generics appealing to health care providers who want to ensure treatment
compliance and avoid unnecessary spending
Source: Mintel & IBISworld Analysis
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Comps Financials
Closing
% of 52 P/E EV/EBIT
Debt/Eq LTM Quick
Price
EPS
wk High Ratio
DA
uity
ROE Ratio
(Aug 28)
16.36
82% 32.08 85.3x 0.51 3.31 60% 0.71
Company
Market Cap
(In Millions)
Ligand (LGND)
326.17
Avanir (AVNR)
403.1
2.96
73%
(5.8)
(4.8x) (0.51)
0
(85%) 5.93
Catalyst (CPRX)
46.73
1.52
77%
(7.24)
7.6x
0
(170%) 7.47
Sagent (SGNT)
233.69
14.68
55%
(15.29) (17.9x) (0.96) 0.03
Hi Tech (HITK)
460.14
35.26
79%
9.82
4.5x
3.59
0.01
20%
4.74
Industry
45,000
-
-
50.1
-
-
-
7.6%
-
High
460.14
35.26
82%
32.08
85.3x
3.59
3.31
60%
7.47
Low
46.73
1.52
55%
(15.29) (17.9x) (0.96)
Median
326.17
14.68
77%
(5.8)
4.5x
(0.21) 0.01
(19%) 4.74
Mean
293.97
14.17
73%
2.71
14.9x
0.48
(39%) 4.15
(0.21)
0
0.67
(19%) 1.89
(170%) 0.71
*does not include industry values
Source: Yahoo Finance Industry Center, Google Finance, MacroAxis & Various Firms’ 10K Analysis
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Risks
Risk 1 – OTC, Complementary & Alternative Medicine
• Greater motivation to self-treat in order to save time and money with a trip to the doctor
• Greater Availability of OTC remedies that were once available only with a prescription to treat
minor illnesses such as colds, allergies, headaches or coughs
• Desire for natural healing (CAM) to avoid potential side effects from prescription drugs
Risk 2 – External Competition from Brand Names
• Many brand competitors try to prevent or delay approval of generic equivalents by attempting to
extend patent protection
• Brand competitors sometimes launch authorized generics concurrent with 1st generic launch
• Brand competitors also seek to lower prices of brand name drugs after patent expiry to compete
with generic equivalents
Risk 3 – Other Health Care Reforms or Changes to Current Policies
• “Evergreen” loophole in health care regulation that allows innovator drug companies can extend
market exclusivity for branded drugs through strategies like authorized generics
• Branded-Generic patent settlements paid to firms to compensate generic producers for keeping
generics off the market
• Changes to current policies with elections coming up and potentially new directions could
adversely affect the generic drug industry
Source: IBISworld, Mintel & Various Firms’ 10K Analysis
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Conclusion and Recommendation
Industry: Positive
• Growth stage industry fuelled by continual acceptance of products, low prices of goods
and federal health care spending
• State and behavior of American population set to have positive effects on prescription
drugs and therefore generic industry in the next 5 years
Industry Risks to
Overcome
• Competition from brand name manufacturers that attempt to keep generics off the
market for a longer period of time
• Must stay responsive to potentially new government regulations and health care
reforms, especially during election years
Why Recommended
Firm(s)
• HITK is profitable, with 4.7 Quick Ratio showing good financial health and liquidity in
addition to having minimal debt (0.01 Debt-Equity Ratio)
• LGND with diverse revenue generation, yet could mean complicated business model
• Both with ROE well above industry average and poised to take advantage of trends
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Q&A
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Executive Summary
Industry Definition
Health Care Sector Breakdown
Industry at a Glance
Revenue Generation
Geographical Distribution
Revenue Generation Segments
Operating Expenses Segments
Product Development Segments
Time – Series Analysis
Trend 1 – Growth of Generics
Trend 1 – Patent Expiry
•
•
•
•
•
•
•
•
•
•
•
Trend 2 – Generics’ Prices
Trend 3 – Insurance Coverage
Trend 3 – Government Spending
Trend 4 – Aging Population
Trend 4 – Unhealthy Lifestyles
Trend 4 – Leading Causes of Death
Comps
Risks
Conclusion and Recommendation
How to Calculate Patent Expiry
What are CAMs?
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How to Calculate Patent Expiry in USA
For Patents filed before 08/06/1995 (INID Code 22)
• Add 17 years to patent issue date shown on front page of patent (INID code 45) to
obtain 1st date
• Add 20 years to the application date of the earliest related application shown on the
front page of patent (INID codes 62 or 63) to obtain 2nd date
• Later of the two dates is the expiry date
• Add any applicable extensions of adjustments to the patent term, and then account for
any terminal disclaimers to obtain the full-term expiry
For Patents filed on or after 08/06/1995 (INID Code 22)
• Add 20 years to the date of the earliest related application show on front page of
patent (INID codes 62 or 63) to obtain the expiry date
• Account for any terminal disclaimers to obtain full-term expiry
Source: http://www.genericsweb.com/
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What are CAMs?
Complementary & Alternative Medicines
• A group of diverse medical and health care systems, practices, and products that are
not generally considered part of conventional medicine
• Complementary medicine refers to the use of CAM together with conventional
medicine, such as using acupuncture in addition to usual care to help lessen pain
• Alternative medicine refers to the use of CAM in place of conventional medicine
Categories of CAM
• Natural Products – “natural products”, many sold OTC as dietary supplements, include
probiotics
• Mind & Body Medicine – focus on interaction among brain, mind, body. Techniques
include meditation, postures, yoga, acupuncture, breathing exercises, tai chi etc
• Manipulative & Body Based – focus on the structure and systems of the body including
bones and joints, soft tissues etc, such as spinal manipulation or massage therapy
• Other CAM – these include movement therapies such as pilates etc to promote
physical, mental, emotional and spiritual well-being. These also include manipulation of
energy i.e. magnet therapy
Source: http://nccam.nih.gov/health/whatiscam
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