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Archive for the ‘Pharma and Lifesciences’ Category

Apollo group well on its way to creating a pharma distribution behemoth

Posted by fairval on January 21, 2018

Keimed Private Limited, the pharma distribution business aligned to Apollo Hospital group, ended FY17 with revenues of Rs 35B (~USD 540m). This makes it by far the largest distributor, in the totally fragmented pharma distribution market in India. No other distributor is even close to Rs 10B. Among the top distributor names in many cities, you will find subsidiaries of Keimed, gained through acquisitions.

The pharma distribution space in India is badly fragmented. In a domestic market size of around USD19B (Rs 1200B), Keimed’s market share is barely 3%. There are believed to be over 40,000 distributors in India, catering to 800,000 chemists (the retail market is fragmented too). If you look at these numbers, the average appears to be 20 chemists per distributor! In general, a distributor doing say USD 2m per annum is considered a reasonably successful distributor.

A fragmented distribution, fragmented retail and relative fragmented formulation side of the pharma business is an obvious recipe for chaotic state of affairs. The scenario is further complicated by that fact that, unlike in FMCG, where a company will have a dedicated distributor for a certain region, it is free-for-all in the pharma market. Any distributor can sell to any chemist (albeit within restrictions imposed by AIOCD, but that’s another story altogether). Also, a distributor will stock for multiple companies.

A chemist deals with anywhere between 30-50 distributors, maybe more. He will try to stock as little as possible, often just 2-3 days of stock. Order of say 2 strips are common (meaning, a distributor has to break open a case, and sell strip wise – complicating logistics and track and trace).

This fragmented and chaotic state of affairs has several negative side effects. Very few distributors or retails have any respectable IT. Too much time and effort is lost in inefficiencies. More pernicious are things like serious disregard for cold chain. Most distributors switch off their freezers when they go home. In several states, there is no electricity for half the day in any case. They can’t afford generators or other forms of power backup. This probably renders a large bunch of vaccines ineffective. Then, there is the temptation to sell spurious drugs. Around 30% of all drugs sold at retail pharma counters are believed to be spurious.

There is huge need for scale players in pharma distribution. Keimed started more than a decade ago, and has grown via a series of quietly made several acquisitions. For ex, it owns Meher Distributor, Mumbai’s largest distributor. Similarly, it owns Vardhman Pharma Distributor, Bangalore’s largest distributor. Its model is not to take 100%, many of its acquisitions are owned 51%, the original owners continue to run the show. In fact, within the pharma market also, most people don’t know about that these distributors are owned by Keimed. Keimed’s financials are quite good. ROCE/ROE are more than 20%. Given its size and growth trajectory, this is a company which could list in another 2-3 years.

Part of Keimed’s success could also be the ability to supply to hospital and pharmacies by the listed company – Apollo Health Enterprise Limited (AHEL). Apollo Group has a successful pharma retail business as well – Apollo Pharmacies. That is a part of the listed company Apollo Health Enterprise Limited (AHEL), it is division of AHEL. This business reported revenue of Rs 28B in FY17.

In FY17, Keimed reported Rs 15B of sales to AHEL, in its ‘related party’ disclosure. So around 43% of its revenues came from AHEL as a customer. That is a huge advantage for Keimed.

Keimed is not owned by AHEL however. The ownership is in personal names, of which Shobhana Kamineni (vice chairperson of AHEL) appears to own the larger share. Japanese company Mitsui now owns 20% of common equity, having invested in 2015.



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Size of Indian Dentistry

Posted by fairval on November 5, 2017

India Business Reports released a report on Indian dental market. This pegs the size of Indian dental clinic revenues at around Rs 20,000 crore, or USD 3.1B. This is higher than other estimates floating around, which IBR believes have under-estimated the size of the market.


It has been consistently reported that there is a massive oversupply of dentists in India. While this is certainly true at this time, IBR believes these concerns are overdone; this is a temporary phase. India can add almost 25,000 dentists per year till 2050 without reaching levels of penetration of dentistry in already seen in developed countries.


Dental health in India has a long way to go. However, no effort is being made either by the government or by dental associations to promote awareness. A concerted program of dental awareness would help promote healthy growth of dentistry.

More info on http://www.indiabusinessreports.com

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The thuggery of AIOCD needs to be stopped

Posted by fairval on October 14, 2015

Chemists in several large cities today shut their shops in a ‘strike’ called by their powerful industry body – All India Organisation of Chemists and Druggists (AIOCD). The strike was to protest against online pharmacies, a few of which have been springing up in recent years.

Online pharmacies have been around in India since the last 2-3 years. But so far, most of them (bar one, which managed to raise PE funding) were tiny, under-funded players, who carried out their business in a modest way. These players have also attempted their business in amateurish fashion, not making adequate effort to confirm to the law of the land. Some of them were selling medicines without prescription, while many openly promote substitution. Both of these are illegal activities.

AIOCD could muzzle the early entrants quite successfully. Its modus operandi with these players was quite simple – find a legal violation in their procedures, and approach legal authorities and get them to shut down (or seriously scare) the online pharmacy. Even marketplace Snapdeal got caught out by AIOCD, when it was found allowing sale of medicines without prescription. That was a stupid error by Snapdeal, but it wasn’t the first online player to make it (which makes it even more stupid).

As a result, so far there has been no significant online pharmacy player. Existing incumbents have mostly been too scared of AIOCD to advertise. They think the moment they try to grow big, AIOCD will find a way to shut them down.

In the last couple of months, though there has been a change. Finally, couple of serious players have entered the market. These are Netmeds, an outfit from Chennai, and more importantly, PM Health and Life Care, an outfit promoted by experienced IT veteran – Phaneesh Murthy. Both of these know are openly advertising on mass media, something which no earlier entrant had either the guts, or the resources to do.

It does appear AIOCD has realised that the serious players are now in the business. Both Netmeds, and PM Health have reasonable understanding of the pharma retail business. They have made sure their business model is quite robust. Which means AIOCD could not try their earlier tactic – find the online player violating a legal guideline, and pin them down on it.

AIOCD knows there is no legal way to can shut down law abiding online pharmacies – namely PM Heatlh and Netmeds. Hence the strike.

But it is time the government takes action against AIOCD. There are several grounds to do this:

  1. This a strike for a flimsy reason. The law of the land does not prohibit online pharmacies. So what business does AIOCD have to call a strike?
  2. The neighbourhood chemist does all kinds of violations of the Drugs and Cosmetics Act (the applicable law). Shouldn’t AIOCD be prosecuted for it?
  3. India has a very high percentage of spurios drugs in the markets. By some estimates as much as 15-20%. That is one in five. This is scary, and many lives are regularly lost because of this. As the industry body, AIOCD certainly bears some culpability

Professional online players can seriously help the consumer – by giving assurance of quality drugs.

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What is SEBI doing about Elder Pharma?

Posted by fairval on October 11, 2015

This blog has written earlier about what appears to be a rather large scam afoot at Elder. In Jan’15 we wrote

What is cooking at Elder Pharma?

The basic premise was – Elder got over Rs 1700 crore post tax from slump sale of certain assets to Torrent. But it wrote off Rs 1100 crore of that. WTF? Just before that came out, independent directors started resigning. The CFO resigned soon.

And it is common knowledge that the company has been in a financial mess and has been defaulting.

Now, Mumbai Mirror reports that The Bombay High Court has cleared the prosecution of top Elder Pharmaceuticals Ltd bosses, including TV actor and chief operating officer Anuj Saxena and his brother and chief executive officer Alok Saxena, for the company’s failure to honour fixed deposits worth Rs 155 crore. Full story here —

Elder Pharma bosses face prosecution for not repaying deposits

This is good news. Finally, someone is going after the promoters. But, there are bigger issues ere:

  1. Just who is following up to check if large amounts of money were siphoned off? That is a separate criminal act
  2. What is SEBI doing?
  3. Should auditors etc, who signed the Rs 1000 crore+ write off, be prosecuted as well
  4. Several independent directors resigned. But did they report any of their suspicions to SEBI? Clearly, there was a reason why so many of them resign within a few days of each other

No major paper has followed up this story. So much for quality of journalism here.

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Is Sun Pharma losing the plot?

Posted by fairval on September 11, 2015

A one-off event can be called an exception; twice, maybe a co-incidence; but when something happens 3-4 times in a row – then it is hard to wish it off. At Sun Pharma, materially significant write-offs seem to be becoming a feature of the business.

Since FY13, Sun Pharma has written off Rs 4025 crore (Rs 40.25 billion or ~USD 700m). To get a sense of how big this is, consider this: it is almost equal to the 2 year net profit (FY14 and FY15) of India’s second most valuable pharma company – Lupin. In the 3 year period, FY13-15, the amount is equivalent to almost 30% of Sun’s reported net profit.


The write-offs have been due to 3 separate causes so far:

  1. Rs 31 billion or roughly USD 550m was written off over FY13 and FY14 to settle a lawsuit related to acid-reflux drug Protonix, and was paid to Pfizer Inc. Japan’s Takeda Pharmaceutical
  2. The write-off of Rs 2.40 billion or USD 40m in FY15 was on account of Sun’s acquisition Ranbaxy; this was to settle litigation concerning its participation in Texas Medicaid
  3. In Q1 FY16, an amount of Rs 6.85 billion (~USD 110m) has been written off as part of restructuring costs involving Ranbaxy acquisition.  The company has guided there is more to come on this count.

Some of this reflects a problem of size. Sun’s revenue reached Rs 274 billion in FY15 (USD 4.4 billion). Sun has chased growth aggressively in its entire history. Its 3 year revenue CAGR for period ending FY15 was 50%,  while 5 year CAGR was 46%, by far the highest in the Indian pharma sector. The sizeable merger done with Ranbaxy in FY15 of course bumps the CAGR this up. But even without this, Sun is used to growing at 30% plus CAGR.

The increasing larger base makes hyper-growth an increasing difficult problem. Even if Sun was to grow at 20% now, it needs to create almost USD 900m of new revenue.

Pharma sector requires far greater risk taking than most other sectors. Greater risks could mean continuing stumbles, which could reflect in recurring writeoffs. So the current 4 year phase may not be an aberration, but a fact of life for Sun.

In financial terms, the implication could well be that profit CAGR will trail revenue CAGR, unless Sun goes through a phase of strong EBITDA expansion, which would again be tough to pull off at this stage and size.  This is already true. Compare the revenue CAGR posted above against net profit CAGR for the same periods. 3 year profit CAGR was 15%, and 5 year was 27% for the period ending FY15. That is way less than revenue CAGR.

Is the stock market factoring the write offs? To some extent, yes. Sun’s stock is down over 21% between April’15 and now, the biggest loser in the pharma space. Some analysts continue to have a Sell rating on the stock even at the lower price, though there continue to others who are strongly recommending the stock.

A foreign broker’s BUY report rates the stock at 28x FY17 eps. This is effectively 34x FY16 eps. A stock which has given 27% net profit CAGR for the last 5 years, should it get a forward PE of more than 30x? Difficult to justify, unless the assumption is that the write-offs will disappear, and there will no more stumbles. At India Business Reports (IBR), we think that’s tough.

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Government showing intent for VC fund to support pharma R&D

Posted by fairval on August 31, 2015

In a post in May’15, I had written about the abysmal environment for VC funding for pure-play pharma R&D setups in India. I had written – ‘The Government allocates say USD 250m per annum for VC investments in pure-play pharma/biotech R&D firms, gives it to say 5 funds like ICICI, Kotak etc; they invest on a purely commercial basis’.

It seems there is an outside chance that something this could actually come about. Last week, papers reported that ‘the centre is planning to launch a venture capital fund of Rs 1,000 crore under the Department of Pharmaceuticals (DoP) to support start-ups in the research and development in the pharmaceutical and biotech industry’.

A DoP taskforce which submitted a report recently on ‘Enabling Private Sector to Lead the Growth of Pharmaceutical Industry’ has a specific recommendation: Create and fund an organization to support and promote biopharmaceutical innovation, R&D and national and international academia industry partnership

However, this is not a new plan, it has been in the works for sometime now. In Oct’14, the DoP had released the Detailed Project Report (DPR) for setting up Venture Capital Fund for R&D in pharmaceuticals. At that time, the plan was for the government to provide an amount of Rs 500 crore in a fund of funds mode.

Some of the terms the government has in mind may not be so practical. Government proposed that each Pharma Fund commit to investing at least such amount in Indian companies for their Pharma R&D activities (Innovative Pharma Companies) as is, the higher of Rs.150 crore; and 4 times the amount sought as investment from the government.

This is not going to work. There is no fund which is willing at this point to put even Rs 50 crore into pharma R&D, and the 4:1 ratio does not quite sound right. Government needs to look at a lower ratio. That may prompt some private sector funds to think about setting up pharma R&D funds.

So optimism, but with a caveat: given the pace at which government’s work, it could take a while. It may not also come about if terms like 4:1 ratio do not find any takers.

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Incredibly shallow VC scene for Pharma R&D in India

Posted by fairval on May 17, 2015

India pharma is touted as a big success, but what it does is not much better than Indian IT – low cost work with negligible innovation. There is no simply appetite for pharma R&D in India – not amongst companies, and perhaps as a corollary, not amongst VCs either.

At Wisdomsmith we took on fund raising mandates for 2 R&D firms in the last one year (Wisdomsmith Advisors’ main sector of focus is pharma/healthcare). One was looking for seed funding, and the other for Series A. While we could find and investor for the seed one (strategic), the Series A one has been a struggle. None of the pharma focussed VC funds we talked to, are currently investing in pure play R&D companies.

This despite our firm belief that our client could emerge as the most exciting pharma R&D company in India. This company is doing some globally cutting edge work, has a brilliant business model, and is close to a major breakthrough. It has raised seed funding, has got several government R&D grants, has shown incredible progress from meagre funding, but when it comes to Series A, no takers.

We then talked to several US based biotech funds we know. They said – “great company, but we can’t invest in India. No focus on India”. In other words, if you are a US based biotech VC, India is not on your horizon. And mind you, there are maybe 30 such funds in the US, focussed ONLY on pharma/biotech deals, quite willing to back early stage companies. But not one of them is looking at India.

The purpose of this post is not to rant. I wanted to present some data to show how bad the situation is – the vast chasm in funding ability of a pure play R&D biotech in India (basically zero), versus the US.

Check the chart below. The 10 year data below shows that atleast 60 pharma/biotech startups get Series A funding EVERY YEAR in the US. In India, how many got last year – NONE. Over 700 (747 to be precise) starts-ups got Series A funding in the US over the last 10 years. How many in India? Maybe 10.

(And this is just Series A. Total deal count in this period is ~2000, some of which would be follow-on. In India, all rounds put together may not cross even 20)

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

And where does the Series A money go? As can be seen from the chart on the left, mostly for new drug discovery (~82%), not for ‘Drug Improvement R&D’. Annually, over USD 1B. In contrast, in India, VC funds have invested maybe around USD50m in 10 years in backing R&D firms.

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

Source: Venture Funding of Therapeutic Innovation, by David Thomas and Chad Wessel

The chart on the right further shows the risk taking ability in the US. More than half the money goes into pre-clinical stage companies. In India?…well, let’s not talk about it.

Will this change? Quite unlikely, in the foreseeable future. Unless we have something like-

  • The Government allocates say USD 250m per annum for VC investments in pure-play pharma/biotech R&D firms, gives it to say 5 funds like ICICI, Kotak etc; they invest on a purely commercial basis
  • Pharma promoters like say those of Sun/Lupin/Zydus etc set up funds to back third party pure-play R&D companies. While they may have burnt money inside their companies, that does not mean they will lose in a VC like set up. Perhaps doing R&D internally was a wrong idea in the first place.
  • It could also be a combination of the 2. Government can match $ for $ money deployed by privately set up VC funds.

Posted in PE/VC, Pharma and Lifesciences, Research and Development | 2 Comments »

What is cooking at Elder Pharma?

Posted by fairval on February 5, 2015

This blog has hinted earlier that something’s not quite right at Elder. Ever since the sale of part of domestic business to Torrent was announced in Dec’13, things have gone downhill at Elder.

Check the series of events:

30 June’14 – Transaction closure announced

30 June’14 – Independent director, Dr. Raghavachari Srinivasan resigns

1 Aug’14 – Independent director, Dr. J. S. Juneja resigns. He was also the non-executive chairman

11 Aug’14 – Independent director, Mr. Michael Bastian, resigns

1 Dec’14 – Independent director, Dr. Jayaram Subramanian, resigns

2 Dec’14 – New CFO appointed (old CFO left somewhere earlier, data not available)

8 Dec’14 – Company takes permission for AGM extension (financial year ends June)

11 Dec’14 – Independent director, Mr. Saleem Shervni, resigns

Why should it bother us?

Someone like SEBI or the stock exchanges like BSE or NSE should wake up and check why such wholesale exit of independent directors is going on, and why did the CFO leave.

All the more so, when the grapevine suggests that Elder is still in default of some outstanding debt, despite getting Rs 2000 crore (pre-tax) from Torrent. The company took a write off of over Rs 1100 crore from the money received from Torrent. Was this write off genuine, or should minority shareholders feel cheated?

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Are we in a recession?

Posted by fairval on September 18, 2013

Just what is growing in the Indian economy now? This is becoming an increasing hard question to answer. Latest data shows, even for the so called defensive sectors – FMCG and pharma – growth has pretty much stalled.

Check this: An ICICI report says:

Domestic revenues of Indian FMCG plays grew just 10.6% in Q1FY14 – the slowest in the past 16 quarters.


Also, if you see the chart, volume growth was barely 2.5% in this quarter. Of the 10.5%, 8% is explained by price rise.

Similarly, my partner Anil Khanna sent me this AIOCD-AWACs data, which shows pharma sector grew just 1.1% in value terms in August. MAT (moving annual total) growth is 8.2%.


(Souce: AIOCD AWACs)

In volume terms, pharma market was down 7.5% in August, suggesting an inflation factor of around 8%, similar to the FMCG inflation. I don’t have MAT volume data, but if we apply an 8% inflation to MAT data, it suggests pharma sector is flat over the last 12 months.

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How much more for Indian pharma?

Posted by fairval on August 8, 2013

In the last 2-3 years, the key outperforming sectors were FMCG and Pharma. As this blog pointed out a 2 posts ago, FMCG story is over. How long more for pharma?

In all likelihood, pharma should continue to roll. For one, there are several earning drivers. The main one – exports to the US, seems to have a lot of steam left.

A recent Nomura report presents some good data on Indian pharma in the US market. The first chart shows the Indian pharma companies now comprise 25% of US pharma market by volume. (an interesting comparision would be how much share Indian IT has of the US market)


India’s share in ANDA approvals is even high, at around 40% now. This suggests that export momentum will continue for some time. At what point would US start to worry about too much dependence on one country could be an issue. One theory going around lately is that the US Fed is targeting Indian pharma (spate of alleged quality issues at Indian plants)


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