Panacea Biotec: A Turnaround Story

After three consecutive years of negative EBITDA, Panacea Biotec looks set to script a successful revival. Dr Rajesh Jain, Joint Managing Director tells us how By Viveka Roychowdhury

The 11th survey of the biotechnology industry in India, released by the Association of Biotechnology Led Enterprises (ABLE) in June 2013, showed that the sector recorded Rs 23,524 crore in FY 2012-13, with 15.08 per cent growth, the lowest in recorded by the industry in the past 11 years. Biopharma, clinical trials and contract research sectors accounted for 82 per cent market share while the bioagri sector, which had been growing over 20 per cent during the last few years, crashed to a meager 5.2 per cent growth. In spite of these figures, the industry has set a goal of achieving $100 billion revenues in 2025.

Individual companies too have gone through trying times in the last two years but share this confidence. Take for instance, Delhi-based Panacea Biotec. Incorporated as Panacea Drugs in 1984 and listed in 1995 as Panacea Biotec, the company’s name change reflects the changed focus from pharmaceuticals to biotechnology in its first decade.

As it caught the biotech bandwagon, Panacea Biotec’s focus on vaccines saw it grow into India’s third largest biotech company as per the June 2011 ABLE Survey as well as rank amongst the top 40 pharma companies in India as per IMS TSA MAT March’ 2011.

Panacea Biotec grew into one of India’s largest vaccine manufacturers and became a member of the Developing Countries Vaccine Manufacturers Network (DCVMN) which was formed in 2000. It developed and launched the world’s first fully liquid pentavalent vaccine in 2005, got WHO prequalification three years later and by June 2011, had supplied over 45 million doses used in around 31 GAVI/non-GAVI countries.

Besides vaccines, its product portfolio also spanned pain management, diabetes management, renal disease management, osteoporosis, anti-tubercular, and gastrointestinal care products.

The speed breaker

But the company hit a speed breaker when its DTP-based combination vaccine (Easy Five, and Ecovac 4) and monovalent Hepatitis B vaccine (Enivac HB) were delisted by the WHO following a routine site audit by a WHO team in July 2011. The delisting was based on certain observations in the Quality management systems (QMS) at the Lalru manufacturing facility (Punjab) but since there was no evidence of quality defects in the vaccines already distributed in the market, there were no product recalls.

More bad news was to follow. Another routine site audit by WHO of the oral polio vaccine (OPV) manufacturing site in Delhi in September lead to recommendations for some incremental measures to strengthen the QMS at the site, and the company had to cease OPV production as well. By February 2012, WHO had de-listed Panacea Biotec’s OVP as well.

Dr Rajesh Jain

Releasing the financial results for the quarter and nine months ended December 31, 2011, Dr Rajesh Jain, Joint Managing Director, Panacea Biotec had said, “We have taken several corrective and preventive measures and are in active touch with WHO in this respect. We are confident that with these corrective and preventive measures, we will be able to get re-listing of our pentavalent vaccine in the list of WHO prequalified vaccines soon.”

The recovery

Things started to look up in September 2012 when the Drug Controller General (India) approved the OVP facility at New Delhi and the company could resumes OPV supplies to GoI by the end of that year. By this time, the company had also completed the up gradation of QMS, and invited WHO for a re-inspection of the Lalru and Baddi (Himachal Pradesh) facilities.

It was almost two years from the de-listing, before the company’s manufacturing facilities received the go ahead from the WHO inspection team. In a release dated September 19, 2013, Jain announced that WHO had completed the evaluation process of pre-qualification (PQ) of its pentavalent vaccine EasyfiveTT and would intimate UNICEF, the procurement agency for global markets, of the positive outcome of this inspection. After a complete overhaul of the Lalru and Baddi facilities, in tune with a more robust quality management system, Panacea Biotec was ready once again to supply to both global and national agencies.

Upgradation involved designing systems and work flows, paying attention to even minor issues like housekeeping rules and discipline. “In the end,” Jain said, “It was a collective and collaborative effort for change and has o continue with even greater enthusiasm to the next level in the coming years.”

But these two years took a toll on the company’s balance sheet. The accumulated losses of these years resulted in the erosion of more than 50 per cent of its peak net worth. The continued losses also led to a cash flow problem, as reported to the Board for Industrial and Financial Restructuring (BIFR). The company’s ranking in 11th ABLE listing slipped to the 23rd position, though some would argue that the ranking is not completely comparable to past years as the survey has expanded to include diagnostic companies as well.

Turnaround strategy

But it finally seems that the worst is behind Panacea Biotec. The company now has a long- term supply order from UNICEF for 2014-2016, and has also won a national tender in Philippines for supply of Easyfive-TT vaccine in addition to the Government of India order for OPV. The current market cap of Panacea Biotec Rs 927 crores as on December 31,2014 as per closing price on the NSE.

The management’s proposal to restructure its corporate debt was approved in September last year and is under implementation. Secondly, the company has undertaken several risk mitigation measures, as per the half yearly results statement. The company has already filed six ANDAs in the last two years, with more in the development pipeline and it is clear that out-licensing of filed and to be filed ANDAs will be a key future growth driver. Even in this endeavour, the strategy is to focus on difficult to make specialty generics which require expertise in formulation and drug delivery. These become entry barriers to other generic players so with less manufacturers, price erosion is reduced. The company seems to have a healthy pipeline in this sphere, with approximately 30 products including 505(b)(2) NDA products (NDDS products) selected for strategic collaborations with US-based companies for launch in the US and EU markets.

With over 50 brands in the pharma segment, the formulations business segment grew eight per cent in YoY in HYFY15 while the vaccines segment, with four key brands, registered a growth of 194 per cent. The hexavalent, pneumococcal, dengue and S-IPV vaccines will be key growth drivers. The company is also strategically targeting emerging markets like Philippines, Sri Lanka, Vietnam, Egypt, Iran, Bangladesh, Nigeria, Peru, Uganda and Pakistan amongst others. The focus is on countries with a sizable birth cohort of around three to five million and tenders in these markets will allow the company to expand in geographies independent of UNICEF tenders.

The strategy looks to be paying off. The company earned a positive EBITDA of Rs 504 million during H1FY15 after three years of consecutive negative EBITDA. Jain expects the trend to continue in the second half of this financial year. Going purely by these numbers, if compared to the previous year, he says it is clear that Panacea Biotec is already a turnaround story. A negative EBITDA and stagnant sales of last year have been replaced by a positive EBITDA and increasing sales, according to Jain. Manufacturing, utility and engineering, and HR costs are down and all this makes the company a lot more viable today than a year back, he reasons.

Building for the future

Last December, the company announced three collaborations in line with this strategy. The first announced on December 12, was a strategic alliance with Canada’s largest pharma company, Capote, for research, development, license and supply of two drug delivery-based generic products in the US, Canada, Australia and New Zealand markets. The products use Panacea Biotec’s proprietary platform nanoparticle, liposomal and microparticle drug delivery system. This was an expansion of an existing collaboration and sales of the innovator products are worth around $1 billion in the US market.

This was followed by a similar deal with US-based Rising Pharmaceuticals for an oral controlled release product in the CNS space. The market size of the innovator drug is $300 million in the US and the approximate timeline to the ANDA submission of this product March 2016.

The third collaboration was announced on December 24, with a leading Indian pharma company with extensive global operations, for the development and supply of a modified release immunosuppressant generic product in the US market. Innovator sales of this product are currently around $350 million.

As Jain points out, these are all difficult-to-develop generic products using complex technology, which will be a high entry barrier for other generic manufacturers.

In the case of the Rising Pharmaceuticals deal, the product is under US FDA review and while Jain expects competitor generics, their strategy is such that they expect to be either the first to launch or at least among the top three or top six generic manufacturers of this drug. They expect to launch soon after the US FDA approval, which could be within this year or early 2016.

As Jain explains, since these are difficult to manufacture complex generics, they require a very specific manufacturing set up tuned to this product. That hurdle is solved by Panacea Biotec’s oral drug delivery platform technology.

The Delhi-based company is set to net research fee milestone-based payments to the tune of $13 million over the next 18 months from these deals. It has already received $2.5 million in the first quarter while close to $1 million was expected in the third quarter of this FY. Of course, these payments are subject to completion of certain product development and manufacturing milestones by Panacea Biotec.

The icing on the cake is that post commercialisation of the product, Panacea Biotec and their partner companies will share profits at a pre-agreed ratio. Jain explains that Panacea Biotec will transfer the goods on cost basis, which includes manufacturing costs and the partner will be able to see the difference between the cost and the selling price which is very dynamic in the US market. The profit sharing ratio will differ from deal to deal. For instance, the profit sharing is in the ratio of 50:50 in the Apotex-Panacea Biotec deal, but could be higher in favour of the latter in certain cases, says Jain. These milestone payments are sure to ease the cash flow problems that the company has faced in the past two years. In addition, the company is clearly not banking on one product partnership and is spreading its risk across many deals.

On another front, Jain points out, “The R&D centres which were a cost on the bottomline have now started contributing to the topline, with R&D costs down and R&D income on the rise.”

“I believe the turnaround story has already happened and it will gain momentum quarter after quarter. If you look at the next FY, it will be very positive in terms of both topline and bottom line, and should become profit plus as well. That is the target for us,” says Jain. Only time will tell if this turnaround story has a happy ending.