Boost Your Portfolio With Sparc
INTRODUCTION
Sun Pharma Advanced Research Company Limited (SPARC) is engaged in research and experimental development on natural sciences and engineering which is also known as ‘Pharmacy’. Thus, the company operates in the Pharmaceuticals Research & Development segment. SPARC was formed in 2007 as a result of a demerger from Sun Pharmaceutical Industries Limited which is a global leader in specialty generics. The company strives to build an enduring innovation engine built on strong scientific execution, high value analytics and aggressive portfolio management.
INDUSTRY OVERVIEW
Global spending on medicines is expected to grow at a compounded annual growth rate (CAGR) of 3-6 per cent in the coming five years which will reach over US $1.5 trillion by 2023. Due to the economic slowdown, all developed markets show moderation in growth. Overall, the spending of pharma and biotech companies on R&D is expected to be US $177 billion by the end of 2019 compared to about US $171 billion in 2018. For 2019, the global pharma industry’s R&D pipeline is expected to be around 16,181 drugs with a growth of 6 per cent as compared to a growth of a mere 2.7 per cent in the previous year.
The US is a key market for Indian pharmaceutical companies. Pricing is a challenge that most Indian companies face in the US market as the launch prices are kept in focus and newly introduced drugs in the specialty segment are often costlier. Thus, Indian pharmaceutical companies have increased investments in R&D in the recent years. Indian pharmaceutical companies are undergoing a gradual shift in their approach to shift from a classical, generic drug manufacturer to a research driven innovative firm. Global pharmaceutical companies have hence also shown interest in establishing operations in India for R&D, manufacturing and distribution through captive operations or collaborations. This has led to a rise in collaborations of Indian and global pharmaceutical companies.
While many established pharmaceutical companies which have been witnessing declining cash-flows, healthy and steady revenue and profitability growths are still a challenge for them. But on the other hand, most of the research-based pharmaceutical companies have been reporting an uptick in revenue and profits. This is largely due to the revenue generated by research companies by licensing their innovative products and novel technologies to large companies for commercialization.
KEY PRODUCTS
SPARC’s key products include Xelpros, Elepsia XR, Baclofen GRS, Paclitaxel Injection Concentrate for Nanodispersion (Taclantis), Salmeterol - Fluticasone Dry Powder Inhaler (DPI), SUN-K706, Brimonidine OD, Tizanidine ER, Minocycline Topical and SUN-597 Topical. Xelpros is a Benzalkonium Chloride (BAK)-free Latanoprost eye drop product developed with its Swollen Micelle Microemulsion (SMM) technology. Sun Pharmaceutical Industries Limited (SPIL) launched Xelpros in the US receiving a milestone payment on USFDA approval and commercialization of Xelpros. Elepsia XR is a once-a-day tablet formulation of Levetiracetam which is an antiepileptic agent. Baclofen GRS is a once-a-day formulation of Baclofen, a centrally acting, antispasmodic drug. Taclantis is a Cremophor and Albumin free formulation. The company completed pivotal study comparing Taclantis to Abraxane in metastatic breast cancer patients. The result of the study suggested that it met all pre-defined endpoints following which SPARC filed NDA with USFDA for approval. It also initiated discussions with potential partners for out-licensing of Taclantis. Its DPI is a premetered 60 doses, breath activated device to administer the combination of Salmeterol and Fluticasone by inhalation. Other key products of SPARC include the ones for the treatment of ocular pain and inflammation, Parkinson’s disease, for autoimmune disorders, treatment of Resistant Chronic Myeloid Leukemia (CML) and other pain treatments. As SPARC received successful outcomes for its research and approvals, FY19 was a instrumental year for the company.
FINANCIALS
On the standalone financial front, the net sales for the second quarter of FY20 were Rs17.19 crore, which is a decrease of 71.98 per cent as compared to net sales of Rs61.35 crore for the second quarter of FY19. The company incurred an operating loss of Rs60.91 crore for the second quarter of FY20 which is more than the operating loss of Rs0.64 crore incurred in the corresponding quarter of the previous fiscal year. The company incurred a net loss of Rs63.16 crore for Q2FY20 which is more than the net loss of Rs2.58 crore incurred in the same quarter of the last fiscal year.
Looking at the annual trend, the net sales were reported to be Rs182.87 crore for FY19 which is a substantial increase compared to net sales of Rs78.26 crore for FY18. In FY19, the company incurred an operating loss of Rs137.87 crore which is comparatively lesser than the operating loss of Rs197 crore incurred in FY18. For FY19, SPARC reported a net loss of Rs145.43 crore as against a net loss of Rs197 crore incurred in FY18.
The company’s financials for FY19 were affected due to regulatory changes and pricing issues. But still as a result of higher revenues the company is able to reduce its losses. As SPARC has a strong market presence and draws consumer confidence, the company has been able to reduce its losses and get on the growth trajectory.
OPPORTUNITIES AND THREATS
The company is expected to maintain a healthy growth in the coming years. Much of the expansions will be driven by innovations, focused on significant unmet needs in key therapeutic areas and productive collaborations with regulatory agencies. In the future, the regulatory environment is expected to experience some positive changes and evolve towards increased acceptance of real time monitoring, surrogate biomarkers driven endpoints and novel trial designs which will help to accelerate availability of new life-saving therapies. Strategic collaborations and partnerships between pharma companies and universities pose as a growth driver with a wide spectrum of knowledge available to academic innovators and small biotechs for the capital intensive nature of drug discovery by industry and innovators. With an increasing importance of collaborative R&D in drug discovery, companies have come together to share resources to capitalize on their respective strengths in order to create a stronger infrastructure and share data and intellectual property to improve quality and speed of innovation.
Rising R&D costs pose as a challenge to deliver value-based outcomes. Pricing pressure has resulted in a substantial streamlining of product pipelines by the company. This has adversely affected the company’s operational and financial performance. Thus, pharma companies are needed to manage their resource allocations and risks to stay competitive in the market despite facing such setbacks. SPARC has been able to maintain its key position in the market despite these changes by adopting newer strategies which are in-line with the market changes which leverage validated biology leading to a large portfolio over years. The company lately has received two USFDA approvals and one NDA submission. The company has adopted an approach of go/no-go decisions for its portfoilio management process which results in higher threshold to advance a program to clinical testing.
R&D in pharmaceutical areas has its own significant risks as it is expected to explore undiscovered oaths and evaluate untested paths. The company focuses on developing programs that have manageable risks but certain risks and uncertainties arise which are related to product development, regulatory approval, market acceptance, scope of patent and proprietary rights, competition and technological change. SPARC’s revenue and earnings, cash flows can have an impact from fluctuations in foreign exchange rates and interest rates which poses as a threat for the company’s growth. Hence, the company undertakes a thorough risk management process for identifying the main risks to business and its possible impact for taking necessary actions at the correct time to mitigate some possible risks.
SPARC continues to pursue its vision of developing novel drugs for unmet medical needs in the area of oncology, ophthalmology, neurodegeneration and autoimmune disorders. As the company intends to work extensively with its collaborators to expand its product pipeline and work towards minimizing the ‘time to market’ for its development programs, we recommend a BUY on the stock.