Finance & Investment ClubHealthcare SectorSummer 2012
Senior Analyst: Roy Tong
Generic Pharmaceuticals
2
Executive Summary – Generic Pharmaceutical Manufacturing
• Growth in revenue outpaces that of GDP• Acceptance of Generics evident in growing domination of sales mix
at the expense of brand names
Generic Drugs Industry in Growth
Stage
• Lower cost to manufacture than brand names• Sales further driven by patent expiry of brand names
Generics Growth Fuelled by Low Prices
• 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
Use of Generics Aided by Government
Spending and Reform
• 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
Aging Population and Unhealthy American
Lifestyle
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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 PharmaceuticalsNASDAQ: (LGND)
Avanir PharmaceuticalsNASDAQ: (AVNR)
Catalyst PharmaceuticalsNASDAQ: (CPRX)
Sagent PharmaceuticalsNASDAQ: (SGNT) Hi Tech Pharmaceuticals
NASDAQ: (HITK)
Source: Yahoo Finance Industry Center, Various Firms’ 10K & IBISWorld Analysis
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20.1%
25.3%
3.1%
23.1%
28.5%
Health Care$2,384.26B
(100%)
Drug Manufacturers and Related
$1,423B(61.23%)
Generic Drug Manufacturer
$45B(1.89%)
Health Care Sector BreakdownIndustry Breakdown by Market Cap ($BLN) Breakdown by Market Cap
LGND $317.78M
AVNR $399.33M
CPRX $48.57M
SGNT $364.84M
HITK $450.88M
Total $15.81B
Selected Companies Market Cap
Source: Yahoo Finance Industry Center & Various Firms’ 10K Analysis
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Breakdown by LTM Revenue (Total: $427.28M) Biological Products
6%In-Vitro Diagnostic
Substances Products6%
Pharmaceutical Prep for Other Drugs
35%
Pharmaceutical Prep for Metabolic Drugs
14%
Pharmaceutical Prep for Cardiovascular
Drugs12%
Pharmaceutical Prep for Central Nervous
System Drugs11%
Pharmaceutical Prep for Psychotherapeutic
Drugs7%
Medicinal and Botan-ical Products
10%
Industry at a Glance
7.10%2.48%
36.03%54.38%
Source: Yahoo Finance Industry Center, Various Firms’ 10K and IBISworld Analysis
Revenue $52.8B
Profit $7.8B (14.7%)
Exports $19.6B
Annual Growth (07-12) 5.4%
Expected Growth (12-17) 6.3%
Businesses 1,103
Product Segmentation
6Source: Various Firms’ 10K and Firms’ Website Analysis
Pre Clinical Trials
Generic Drug Manufacturers Revenue Generation
Stage I Stage II Stage III
Manufacturers Research and Development Partners
New Drug Application
(NDA)
PassPassPass
PassFDA
ReviewMarketed and Sold
Through Partner
Sales Team or Retailers
Direct through Sales Team
Institutions
Retailers
3rd Party
End User
Royalties or Licenses
Pipeline
FDAApproval
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Geographical Distribution of Generic Pharma Manufacturers
Source: IBISworld Analysis
• 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
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100%
Hi-Tech Generics86%
Health Care Products (OTC)
7%
ECR Pharmaceuticals (Branded)
6%
58%
42% 40%
31%
20%
9%
100%
2011 Revenue Generation Breakdown by Segments
Source: Various Firms’ 10K Analysis
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19.67%
71.75%
8.57%
55.64%44.36%
2011 Operating Expenses Breakdown by Segments
Source: Various Firms’ 10K and Firms’ Website Analysis
21.58%
53.96%
24.46%
21.58%
78.42%
30.14%
58.25%
11.61%
* No selling
10
5
2
28
8
Product Development Stages
(22%)
(78%)
63
33
(66%)
(34%)
(71%)
(29%)
33
51(61%)
(39%)
8
(100%)
Source: Various Firms’ 10K and Firms’ Website Analysis
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Time Series Analysis
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(est) 2014(est) 2015(est) 2016(est) 2017(est)0
10
20
30
40
50
60
70
80
0
100
200
300
400
500
600
700
800
Generic Drugs Revenue Medicare Spending Medicaid Spending
$ in
Bill
ions
$ in
Bill
ions
• Revenue – Medicare Spending Correlation: 0.98 • Revenue – Medicaid Spending Correlation: 0.86 • 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 $
Source: Office of Management and Budget, IBISworld & BUFC Analysis
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• Generic pharmaceutical manufacturing shows key features of an industry in its Growth stage
• 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
Trend 1 – Growth of Generics Revenue > GDP Growth
2007 2008 2009 2010 201190%
95%
100%
105%
110%
115%
120%
125%
% o
f 200
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Generics Revenue
US GDP
1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100
10
20
30
40
50
60
70
80% Distribution of Brand vs Generic Sales Mix
CAGR: 5.4%
Source: US Census Bureau, Mintel & IBISworld Analysis
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• 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 $140 billion in sales will lose patent protection between 2012 and 2017
• The patent expiry of “blockbuster” drugs would continue to stimulate sales in the generic industry
Trend 1 (Con’t) – Growth of Generics Revenue > GDP Growth
Source: Mintel, IBISworld & Frost and Sullivan Analysis
Brand Name Generic Name US Sales (billions) Company % of
Revenue
Plavix Clopidogrel 6.1 Bristol-Myers (BMY) 48%
Actos Pioglitazone 3.5 AstraZeneca (AZN) 53%
Advair Flucticansone 4.03 GlaxoSmithKline (GSK) 34%
Top Selling Drugs to Lose Patent by End of 2012
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Trend 2 – Competitive Edge in Low Costs
Source: US Census Bureau, Mintel & IBISworld Analysis
• Lure of generics are obvious, with a 74% difference in average retail prices as of 2010
• Virtually all major pharmacy chains offer generics at extremely inexpensive prices, leading to price wars
• Result of this has been an increase in sales of generics, often at the expense of brand names
• In 2010, 93% of physicians prescribed generics when they were available – compared to 83% in 2003
• Some 75% of prescriptions dispensed in 2011 were generic drugs – compared to 40% in 2000
1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
180.00Average Retail Prices of Brands vs Generic ($)
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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Wil Not Pay for Brand Name if Generic is
Available59%
Will Pay for Certain Brand Names, Does Not Cover Generics
13%
Doctor Willing to Pre-scribe Drug, But Not
Covered (i.e. Viagra for Sexual Dysfunction)
16%
Prescription Drugs Covered but Doctor Will
Not Prescibe It (i.e. Xanax for Anxiety)
12%
Covers Prescription Drugs90%
Does Not Cover Prescription Drugs
7%
I Don’t Know3%
Trend 3 – Government and Private Insurance Coverage
• 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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2006 2007 2008 2009 2010 2011 2012 (est)
2013 (est)
2014 (est)
2015 (est)
0
100
200
300
400
500
600
700
800
Medicare
Medicaid
Spen
ding
in M
illio
ns
Federal Medicare & Medicaid Spending• When Medicare and Medicaid receive
more funding from the government, more consumers gain prescription drug coverage
• As a result, industry demand increases with the population’s ability to afford the industry’s products
• 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
CAGR: 6.7%
CAGR: 8.7%
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
Trend 3 (Con’t) – Federal Health Care Spending & Reform
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Trend 4 – Aging Population & Unhealthy Lifestyles
2006 2011 2016(Est)0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
20%
21%
22%
23%
24%
25%
26%
27%
28%
>55 >55 % of Total Population
Popu
latio
n O
ver 5
5 Ye
ars
Old
%
• 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
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
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 CaloriesDaily 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 FiberAdult Americans consume
only 50% of optimum amount of fiber
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Trend 4 (Con’t) – Aging Population & Unhealthy Lifestyles
Source: Mintel & IBISworld Analysis
Heart disease
Cancer
Stroke
Respiratory Diseases
Accidents
Alzheimer's Disease
Diabetes
0 100,000 200,000 300,000 400,000 500,000 600,000 700,000
616,067
562,875
135,952
127,924
123,706
74,632
71,382
Leading Causes of Death
• 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
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Comps Financials
Company Market Cap (In Millions)
Closing Price
(Aug 28)% of 52 wk High
P/E Ratio
EV/EBITDA EPS Debt/
EquityLTM ROE
Quick Ratio
Ligand (LGND) 326.17 16.36 82% 32.08 85.3x 0.51 3.31 60% 0.71
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 (0.21) 0 (170%) 7.47
Sagent (SGNT) 233.69 14.68 55% (15.29) (17.9x) (0.96) 0.03 (19%) 1.89
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) 0 (170%) 0.71
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 0.67 (39%) 4.15
Source: Yahoo Finance Industry Center, Google Finance, MacroAxis & Various Firms’ 10K Analysis
*does not include industry values
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RisksRisk 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
•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: Positive
•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
Industry Risks to Overcome
•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
Why Recommended Firm(s)
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Q & A
• 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 USAFor 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