Decoding Panacea Biotec Limited: India’s leading Vaccine Developer

Summary:

Universal Immunization Program (UIP) in India is one of the largest public health programs in the world. It targets vaccinating ~30.4 million pregnant women and ~26.7 million newborn annually. More than 12 million immunization sessions are conducted annually. Under UIP, the Government of India is providing vaccination free of cost against 12 vaccine preventable diseases. Hence, the demand for vaccines is quite robust in India. With very few suppliers in the market, this creates an opportunity for India’s leading vaccine developer – Panacea Biotec Limited. 

Panacea Biotec is a leading manufacturer of pediatric vaccines and has played a pivotal role in eradication of Poliomyelitis from India and many other countries, being one of the largest suppliers of oral polio vaccines to UNICEF, the Government of India and other developing countries. In the last two decades, the Company has supplied more than 10 billion doses of polio vaccine in India and developing countries and supplied vaccines for more than 150 million immunizations by supplying fully liquid wP based combination vaccines. With this in mind, let’s have a detailed look at the company prospects:

About Company:

Set up in 1984 and IPO’d in 1995, Panacea Biotec is a research based Biotechnology company doing Research and Development, Manufacturing, Sales, Distribution and Marketing of Pharmaceuticals, Vaccines and Biosimilars. The company’s portfolio includes prescription products in niche therapeutic areas such as pain management, diabetes & cardiovascular management, oncology, renal disease management, osteoporosis management, anti-tubercular, gastro-intestinal care products and vaccines.

The company operates under two reported segments:

1. Vaccine Business:

Panacea Biotec is the sixth largest vaccine manufacturing company in India. Further, it is one of the leading players in key pediatric vaccines in the nation. Quite interestingly, the company has played a pivotal role in eradication of polio by supplying billions of doses of WHO prequalified oral polio vaccine over the last two decades. It has a robust vaccine portfolio with high market potential built upon a strong R&D foundation. 

The vaccine business is further subdivided into two parts:

1. Domestic Private market: It consists of vaccines not covered under the government immunization plan. It is a small volume and high value kind of business meaning the company can earn a very handsome margin on its drug. The brand portfolio includes EasySix , Easyve-TT® and Easyfour-TT®. Panacea Vaccines is expected to launch the world’s first fully-liquid wP-IPV based Pentavalent vaccine, Easyfour-Pol® during the current financial year to further augment its position in the segment

As of 31st March 2021, the company had more than a thousand pediatricians covered with 558+ distributors and 148 salesforce. This sub sector alone constituted 36% of the total revenue of the company and the product EasySix accounted for 95% of Private Market sales

2. Institutional Market: It is a Tender based volume driven market where WHO pre-qualifications are required to bid in these tenders. This constitutes 63% of the total revenue. The company is expected to push for WHO pre-qualification of its hexavalent vaccine (EasySix) for UN agencies procurements. Further, the company is supporting global cause of providing affordable vaccines to the children across the globe and it works closely with global organizations like WHO, Government of India, GAVI, UNICEF, PAHO, CEPI, Bill & Melinda Gates Foundation (BMGF) and Clinton Health Access Initiative (CHAI), etc. The Company is a member of Developing Countries Vaccine Manufacturers Network (DCVMN), a public health driven international alliance of manufacturers and shares common vision and mission of combating infectious diseases and accelerating access to affordable high-quality vaccines.

Besides supplying pentavalent vaccine Easyve-TT®, the Company will once again be supplying the Bivalent oral polio vaccine (bOPV) to UNICEF from the current financial year. The Company will also be seeking WHO pre-qualification of its pipeline products to be able to supply the same to UN agencies and other national Governments. 

2. Pharmaceutical Formulation Business:

Panacea is the tenth largest pharma company in India. In this segment, the company deals with Organ Transplantation, Oncology and Diabetes management through 4 SBUs – Transplant & Immunology, Oncotrust, Diacar, Alpha and Procare. The Key Products are Mycept, PanGraf, Alphadol, Toff Plus, Glizid-M, Nimulid, PacliAll which are sold in India and also exported to 30+ countries. The formulation business has 70 brands with 11 brands among Top 3 in the represented market as of March 31st 2021. The group consists of a specialist sales force of 730+ personnel and over 2,200+ distributors. 

Geographical Presence:

Panacea Biotec exports its products to over 30 countries including the United States, Germany, Russian Federation, Sri Lanka, Philippines etc. For FY21, International revenue accounted for ~50% of the total revenue and the rest ~50% was from the domestic market

Manufacturing Facilities:

The company has two manufacturing facilities. First one is a Vaccines Formulation Facility at Baddi, HP and the other one is Drug Substance & Biosimilar facilities at Lalru, Punjab. The Lalru plant is dedicated for manufacture of Bacterial vaccines, Viral vaccines, and Recombinant vaccines while the Baddi plant is dedicated for manufacture of oral solids (tablets and capsules), semi-solids (Ointments, cream, gel) and liquids (Syrups, solution and suspensions) thus catering to the formulation business of the company.

Transfer and sale of business:

As a part of the business reorganization, the Company has transferred its pharmaceutical formulations business to its wholly owned subsidiary viz. Panacea Biotec Pharma Limited by way of slump sale on going concern basis with effect from February 01, 2020. 

Also, in February 2022, Panacea sold its domestic formulation business to Mankind for INR 1,872 crores. The sale of the domestic formulation brand portfolio is in line with the company’s strategic plan to become debt-free and focus on exports of pharmaceutical formulations in the US and other international markets besides the vaccine business in global markets.

Share price insight:

• With the current price of INR 133 as of September 29, 2022, Panacea is hovering near the low of its 52-week range of INR 300  – INR 121
• The stock recorded a 5-year negative return of 36% as compared to the Nifty Pharma return of 40%.

Financial Snapshot:

The company has reported total income of INR 122.91 crores during the period ended June 30, 2022 as compared to INR 135.68 crores during the period ended June 30, 2021 thereby depicting a dip of 9.4%. While the net profit grew by 2.1% from INR -57.35 crores for the period ended June 30, 2021 to INR -56.14 crores for the period ended June 30, 2022. The decline in revenues is mainly on account of absence of sales of pharmaceutical formulations which contributed INR 49.38 Crores during Q1FY23.

Meanwhile, the company has reported EPS of Rs.-9.17 for the period ended June 30, 2022 as compared to Rs.-9.36 for the period ended June 30, 2021. The vaccines constituted 55.4% of the total revenues while the formulations accounted for 44.6% 

Interestingly, the company has paid off its debt and is now virtually debt free. With excessive cash in hand the company will re invest it in its development and hence even a small jump in profits will result in good returns on capital employed and equity. The downsides are less and upsides are quite enormous from this point.

What we like:

1. Experienced promoters and management team:

The Company has been in the pharmaceutical business since 1984 and has a long track record of operations of more than 30 years. The company is promoted by the Jain family headed by Mr Soshil Kumar Jain who has an experience of more than 50 years in the pharmaceutical industry. He is assisted by Dr Rajesh Jain and Mr Sandeep Jain in looking after the operations of the company. The senior management team of PBL comprises well-qualified and experienced members. 

2. The company is on its way to create its turnaround story:

Panacea has a core vaccine business and a domestic and international formulation business. It has had a troubled balance sheet for many years and this has arrested their growth ambitions. Interest costs have been very high over the years. The debt in 2021 was about INR 900 Crores and the market cap was INR 1000 Crores. 

In February, they sold their domestic formulation business to Mankind for about INR 1900 Crores which helped them get cash equivalent of INR1900 Crores for one of their businesses, while the total EV at that time was INR 1900 Crores. They paid back their debt, and currently have INR 583 Crores cash on books. They will invest the rest of the money in R&D and future capacity expansions which will help them retain their position in the market. 

3. Robust product pipeline of promising niche products to fuel long-term growth:

They have been one of the pioneers of India’s vaccine industry and have registered vaccines in 16+ countries. Their pentavalent vaccine is WHO approved and is supplied to WHO and in the private market. They also have a contract with Sputnik, to develop the “Sputnik -V” vaccine. Among other projects, they are likely to launch a vaccine for dengue over the next couple of years, which as you can imagine has a massive addressable market.

4. Established R&D capabilities and extensive distribution network:

Panacea is Amongst Top 50 Innovators In India. As of March 31, 2022, Panacea Biotec Group has led over 485 patent applications in over 65 countries including India, which include patent applications, pending grant and patent applications which were prosecuted. 

As of March 31, 2022, the Group has been granted over 462 patents globally out of which 36 are active. Some of the countries where patents have been granted are India, USA, Germany, Mexico, Brazil, ARIPO (14 African countries), Japan, Russia, Canada, Ukraine, Korea, Nigeria, Indonesia etc. Panacea Biotec Group has led 518 trademark applications for registrations, out of which 173 have been registered in India, 293 have been registered outside India and 52 applications are pending registration as on March 31, 2022. Further, the Group has 95 registered copyrights as on March 31, 2022

Factors to consider:

1. Long gestation period on R&D Projects:

R&D projects involve longer development time and medium to high investment as is the norm in the vaccine and pharmaceutical industry. As a result of this, the present profitability is affected whereas the output may come in medium to long term future periods

2. High dependence on institutional business in Vaccine Segment:

 A significant part of the vaccine business revenues comes from tender driven institutional business. Panacea Biotec has decided to focus on expanding into private markets in India as well as in ROW (Rest of the World) countries through strategic tie-ups to have a diverse sales base and reduce its dependence on institutional business.

3. Revenue concentration on few products:

In the vaccine segment, the revenue generation is mainly dependent on two products i.e. pentavalent and hexavalent vaccine. Any future disruption in any of these products may impact the future financial performance. The Company has expedited development of new products to expand the product portfolio and drive future growth.

4. Dependence on few imported suppliers of drug substances:

However, Panacea Biotec is focusing on reducing its dependence on foreign suppliers by developing in-house drug substances at Lalru.

Recent Highlights:

1. Contract Manufacturing of Sputnik-V Vaccine:

During the year under review, the Company has entered into a contract manufacturing agreement with Human Vaccine Limited Liability Company, Generium Joint Stock Company and Dr. Reddy’s Laboratories Ltd. (“Dr. Reddy’s”) to fill and finish the Sputnik-V vaccine.

2. Collaboration with CEPI and THSTI to develop broadly protective Betacoronavirus vaccines:

The Company has partnered with the Coalition for Epidemic Preparedness Innovations (“CEPI”) and the Translational Health Science and Technology Institute (“THSTI”), an autonomous institute of the Ministry of Science and Technology, Government of India, for development of vaccine candidates that could provide broad protection against SARS-Cov-2 variants and other Beta Coronaviruses.

3. Sale of Pharmaceutical Formulations Brands of the Company:

With a view to become debt free company and to focus on exports of Pharmaceutical formulations in US and other international markets, the Company and PBPL have entered into definitive agreements on February 28, 2022 for sale of Pharmaceutical Formulations Brands of PBPL in India and Nepal to Mankind Pharma Limited at an aggregate consideration of INR 18,720 million plus GST.

4. Collaboration with Indian Council of Medical Research (“ICMR”):

The Company has signed a Memorandum of Agreement with ICMR to conduct Phase III clinical trial of DengiAll®, a single dose live-attenuated tetravalent vaccine for Dengue disease, in India. Under this collaboration, the Company will be responsible to provide the adequate number of doses of DengiAll® to ICMR for the said clinical trial purpose.

Future Growth Strategy:

Vaccine Business:

Short to medium term:

1. Scaling up vaccine sales in the private market in India including through launch of new vaccines.
2. Increasing participation in institutional vaccine business with UNICEF, PAHO, etc.
3. Expediting development of tetravalent Dengue vaccine DengiAll®, Pneumococcal Polysaccharide Conjugate Vaccine NucoVac®11 and other vaccines and launch thereof in India and Institutional markets.
4. Expanding manufacturing capacities to meet the future growing demand of vaccines.

Long term:

1. Scale up of sales of DengiAll® vaccine and NucoVac® 11 vaccine in the private market in India and launch of these vaccines in developing countries.
2. Supply of hexavalent vaccine to UNICEF, PAHO and other international markets.

2. Pharma Business

Short to Medium Term:

1. Growth in exports of pharmaceutical formulations to emerging markets in Latin America and the Middle east.
2. Scaling up of existing niche generic businesses in the USA.
3. Launch of Paclitaxel protein bound particles for injectable suspension, Cyclosporine and other products, which are currently under approval, in the USA.
4. Filing more ANDAs / dossiers in USA, Europe and other emerging markets.

Long term:

1. Launch of more products in the US, EU and other emerging markets.
2. Scaling up of new business opportunities in the domestic market.

Industry Analysis:

India enjoys a key position in the global pharmaceutical industry. It is the world’s largest supplier of generics, accounting for 20% of global exports and supplies over 40% of the demand for generic products in the US. India ranks 3rd worldwide for pharmaceutical production by volume and 14th by value. The country has an established domestic pharmaceutical industry, with a strong network of around 3,000 drug companies and ~10,500 manufacturing units. Indian pharmaceutical exports stood at US$ 24.44 billion in the financial year 2020-21 and US $22.21 billion in the financial year 2021-22 (until February 2022).

According to the Indian Economic Survey 2021, the domestic market is expected to grow 3 times in the next decade. India’s domestic pharmaceutical market stood at US$ 42.0 billion in 2021 and is likely to reach US$ 65.0 billion by 2024 and further expand to reach ~US$ 120.0 billion by 2030.

Currently, India is currently among the leading producers and suppliers of vaccines globally. It represents about 60% of the total vaccines supplied to UNICEF and over 50% of global demand for vaccines. The Indian vaccine market attained a value of ~INR 95.0 billion in 2020. The market is further expected to grow at a CAGR of 18% to reach a value of approximately INR 256.5 billion by 2026.

The future growth of the pharma industry will be mainly driven by areas like immunology, oncology, cardiology and neurology which are the fastest-growing therapeutic areas at present and will continue through 2026. The biologics market is growing at a significant rate and is expected to continue outstripping that of small molecules in the coming decade. The three largest biologic therapy areas include oncology, auto-immune and diabetes.

Further, an ageing population in many developed markets will create increasing demand for over-the-counter (OTC) medicines, generics and branded pharmaceutical products. In particular, demand for chronic disease medicines will grow in the mid and long-term. Pharmaceuticals demand in emerging markets is set to increase due to improvements in healthcare systems and growing disposable household incomes.