Secondly, the value of an indigenously developed vaccine is higher in the current scenario of sudden global disruptions.
A 9 July update from Zydus mentioned that their version of the Covid-19 vaccine, tentatively named as ZyCoV-D, had progressed from conception to process and formulation development to animal studies between February and July 2020. The animal studies had been completed by end June and the company had applied to the DCGI (Drug Controller General of India) for permission to conduct early trials in human subjects.

The trials are conducted in three phases: the first phase is safety and toxicity studies to see whether the new medicine (or vaccine) can be given to human beings, the second phase examines the efficacy to create a significant benefit in a given medical condition, and third phase is conducted to study both in a much larger number of people.
 
Strong immune response

Zydus has now completed the Phase I trials and Phase II is underway in about 1,000 subjects. In the pre-clinical phase, the vaccine was found to elicit a strong immune response in multiple animal species like mice, rats, guinea pigs and rabbits. The antibodies produced by the vaccine were able to neutralise the wild type virus thus indicating the protective potential of the vaccine candidate. No safety concerns were observed for the vaccine candidate in repeat dose toxicology studies by both intramuscular and intradermal routes of administration. In rabbits, up to three times the intended human dose was found to be safe, well tolerated and immunogenic,” the company officials said on 15 July.

However, the company management says the timeline of when the vaccine will actually be out in the market is a little uncertain at present. “It depends on whether the government gives us Emergency Use Authorization or they want larger safety studies to be done,” a top company official said.

One of the reasons why Zydus was able to embark upon this venture was that as a company they were already manufacturing a number of other vaccines – for malaria and hepatitis, apart from a conjugate vaccine to protect people against typhoid. Besides, their product portfolio also includes a number of biosimilar drugs (the biotech equivalent of patent-expired generic drugs). However, even now, and perhaps the next few years, Zydus will continue to be a fringe player in the international vaccine market. Compared with the overall global vaccine sales of $60 billion by 2024, Zydus would have a modest share of just $150 million (Rs1,125 crore).

“Yet we were quite conscious that a vaccine, however successful, was not going to be enough to tackle Covid-19. Some people would get infected anyway, and for them we needed a range of medicines as well,” observes Patel. Hence other teams within the Zydus family began working on Remdesivir, an anti-viral drug, while yet others examined existing drugs which could be repurposed for use in treating the disease. Among the most important of these, Hydroxychloroquine, originally used for the treatment of malaria but found to be effective in Covid-19 under the right clinical circumstances. Another is Dexamethasone, which is also part of the company’s product portfolio.

Hydroxychloroquine unfortunately received much adverse publicity in international media, first because it was used in the US in improper dosages, then on account of US President Donald Trump’s endorsement and finally because an article published in Lancet, the prestigious medical journal, had to be withdrawn in disgrace (Editorial, Business India June 1-14). Indian doctors, however, have been using Hydroxychlororquine for decades as a preventive in malaria-prone sections of the country. Nevertheless, the Zydus chairman says he assured the Indian government that his company would be able to produce and supply Hydroxychloroquine in sufficient quantities anywhere in the world.

Both Hydroxychloroquine and Dexamethasone exert their beneficial action by moderating the human body’s immune reaction to the viral infection. The immune response is not specific to the Corona virus but happens in any kind of external invasion. But if the response is more than that required to tackle the infection, it tends to attack the body’s own tissues and organs through what is known as a Cytokine Storm. Most of the deaths in Covid-19 are apparently because of this overreaction of the body itself.

Like Hydroxychloroquine, Dexamethasone is also a well-known drug, which has been used for the past many years in various forms of eczema, other allergies, asthma, etc. Hence its adverse effects and the necessary precautions are both well known to prescribing doctors everywhere.
 
Agreement with Gilead Life Sciences

Zydus is also manufacturing Remdesivir, which was part of the multi-country SOLIDARITY trial sponsored by the World Health Organization (WHO), about two-three months ago. Incidentally Hydroxychloroquine was also part of the same WHO trial but was removed after the Lancet article reported dangerous adverse effects. When Remdesivir was earlier tested for the treatment of the Ebola Virus Disease (EVD) that affected some parts of Africa, it turned out to be safe for use in human beings but not effective enough in curing EVD. Its usefulness in destroying the Corona virus is yet to be established scientifically.

When early trials of Remdesivir in treating Covid-19 began to show promise, the patent holder Gilead Life Sciences licensed the manufacturing rights to drug companies across the world. Zydus was one of the Indian companies that obtained the rights. The others are: Cipla Ltd, Hetero Drugs, Jubilant Life Sciences and Mylan Laboratories in India and Ferozsons in Pakistan.

“In June 2020, Zydus entered into a non-exclusive agreement with Gilead Sciences Inc., to manufacture and sell Remdesivir, the investigational drug, which has been issued an Emergency Use Authorization by the US Food and Drug Administration (FDA) to treat patients suffering from severe symptoms of Covid-19. The API for the drug has been developed and manufactured at the group’s API manufacturing facilities in Gujarat,” a 13 August release from Zydus announced.

Apart from vaccines and medicines, Zydus has also come out with testing kits known as COVID KAVACH with a technology transfer from ICMR. By 21 May, the company had already supplied the first batch of 30,000 test kits to ICMR completely free of cost. The kits were developed mainly at the National Institute of Virology (NIV), Pune which is a unit of ICMR.

Speaking on the development, Pankaj Patel, chairman, said, “This reaffirms our commitment to do everything that we can to help the nation fight this healthcare challenge. We believe that the need of the hour is to be prepared in every way that we can with the latest diagnostic technologies and that is why we are providing the initial supplies at no costs.”

Even as they were devoting much of their time, attention and resources to vaccines, medicines and testing kits for Covid-19, the company had to face a number of challenges just to keep going. Much as the new products were vital to the Covid battle, they could not neglect the day to day aspects of logistics, supply chain, and distribution of products.

The challenges were on two fronts – first, protecting their own supply chain of raw materials and ingredients, and second, distribution and marketing of existing products. On the first count, the Zydus management, like other pharma companies across the country, was better prepared than other industry sectors. As a regular practice, they would maintain an inventory of about 30 days’ output with the company itself and a further 45 days’ worth with the stockists and distributors. In addition, they would keep enough raw materials and other inputs to last them about 60-90 days. The system of “just in time” inventory management that other manufacturing sectors follow in generally frowned upon!

Working hand in hand with chairman Pankaj Patel, 67, is his son, Dr Sharvil Patel, 42, who serves as managing director. Sharvil joined the company sometime after the turn of the century after completing his specialisation in Chemical and Pharmaceutical Sciences from the University of Sunderland, UK and obtaining a doctorate from the same University.

Incidentally, Zydus Cadila was formed exactly 25 years ago when the original Cadila was split up to form Zydus Cadila (listed on the stock exchanges as Cadila Healthcare) and Cadila Pharmaceuticals. While Pankaj Patel inherited Cadila Healthcare from his father, Ramanbhai Patel, who was one of the original co-founders, the other company went to Dr Rajiv Modi, the son of Indravadan Modi. It adopted the name Cadila Pharmaceuticals and has remained a privately held company to this day.
 
New business streams

As managing director, Sharvil overseas the entire operations of the Zydus group. This includes manufacturing, quality issues and the India formulations business (that is Zydus Healthcare Ltd). His areas of responsibility also cover the new business streams emerging from the New Chemical Entities, new pharmaceutical technology (in the generic space), vaccines and biological products. Besides, he also supervises the Animal Health and Diagnostics divisions, apart from officiating as the chairman of Zydus Wellness, which deals with consumer health products such as Complan, Nutralite, Sugar Free, etc.

The father-son duo have brought the company a long way during the past decade. While its gross revenues in 2009-10 was just Rs3,614.2 crore (net profit: Rs505.1 crore), the company’s total income for FY20 was Rs14,367 crore (net profit: Rs1,204.4 crore). While the topline recorded a modest growth from Rs13,165.6 crore in FY19, the net profit in the previous year was higher at Rs1,898.7 crore. According to an investor presentation published by the company in February 2020, they have provided a total shareholder return of 19 per cent CAGR (Compounded Annual Growth Rate) over the past 15 years. In Q1 of the current financial year, the company reported a topline of Rs3,640 crore (net profit: Rs454 crore) which was a modest 4 per cent higher than Q1 of the previous year. Of this, the US sales fetched Rs1,623 crore (44 per cent, while sales within the Indian market added Rs1,486 crore (40 per cent of total) during the quarter.

The company’s top management, however, measures their progress by another metric as well. “In 2010, we were a significantly smaller company, and did not have much success in the newer area of pharmaceutical products,” says the Zydus chairman. In the intervening years, the company came out with a large number of biological products and vaccines, which are in evidence at the present time. Also, while they were mostly India-centric until 2010 or thereabouts, they have created a presence in the international market, particularly the US as well as the Emerging Markets.

In fact, according to latest reports, the US market sales account for almost 45 per cent of the company’s total sales, while the India sales add up to just 27 per cent. Going forward too, the management expects the sum total of US plus India sales would continue to garner about 80-85 per cent of their topline. This is despite the fact that the company’s R&D budget varies around 7-8 per cent, which is slightly on the lower side in comparison with peers such as Lupin and Dr Reddy’s Laboratories.
 
Challenging times

The Zydus management is quick to admit that the past five years have been quite challenging, not only for them but the entire pharmaceutical industry as well. In the US market, major challenges which have confronted the Indian drug companies are: pricing pressures, customer consolidation by big players, supply chain disruptions and increased generic competition. There is however a system of FTF (first-to-file) authorisation permitted by the US FDA. According to this, the first company whose generic product gets FDA approval (after the original patent expires) is granted exclusive marketing rights for a limited period of six months. This is a huge fillip to pharma majors competing in the generic drugs market. Once this period is over, the market is thrown wide open for anybody to manufacture and sell the drug.

In June 2017, a Business India cover story reported that India’s pharmaceutical industry was facing its severest strain in recent years after outperforming the market for the previous five to seven years (2010 onwards). This was on account of a double whammy – pricing challenges and increasing regulatory pressures in the US, stringent price control and other curbs within India. Annual industry growth crashed from 13.6 per cent to just 9 per cent in 2016-17. That year Zydus Cadila had annual sales of Rs9,625 crore (Profit: Rs1,488 crore), of which the India business accounted for Rs3,770.9 crore (39.17 per cent compared to the FY20 figure of 27 per cent. That year, the Zydus share price hovered between Rs350 and Rs450, touching a high of Rs505 in November 2017. Over the following two years, that is 2018 and 2019, the company’s share price underwent a steady erosion to settle in the vicinity of Rs250. The current share price is Rs376 (52-week high-low: Rs411.6- Rs212.70).

By January 2020, the overall situation had improved somewhat (Business India Focus: December 30, 2019) though the industry was still not out of trouble. In the intervening period, the company’s Moraiya plant where many of the products were manufactured for the US and other markets has come under a cloud. Some 45 per cent of the US sales came from products emanating out of the Moraiya plant. Following increasing strictures from the US FDA, the Zydus management has now started shifting the production of many of the highly sophisticated injectable products to another factory located at Liva, near Baroda.

Responding to the various challenges in the marketplace, the Zydus management has begun an exercise in restructuring its product portfolio. It has decided to separate the total spectrum of products into major clusters – mass products and specialty products. The approach to promoting the two categories would be starkly different. The specialty products would involve interacting with highly qualified clinical specialists, the sales staff belonging to those teams would require a lot more of scientific and technical training.
 
Mixed response

The investor community has also produced a mixed response to Zydus’ performance in the Covid-affected scenario. Based on its assessment of the FY20 results, equity research house Prabhudas Liladhar reduced the 12-month target price to Rs329 from a June 2020 CMP (current market price of Rs362). It commented that HCQ (Hydroxychloroquine) and Remdesivir were likely to prove unprofitable in the near future. They also altered their previous recommendation of “sell” to “reduce” thus reflecting a slightly optimistic outlook. On the other hand, HDFC Securities, another prominent research firm, has graded the scrip as “neutral” and noted multiple headwinds ahead. “Although Cadila has 105 ANDAs filed with the US FDA, several of the lucrative products were supposed to be manufactured at the Moraiya facility. We believe the pending regulatory issues would require about six to eight months,” the HDFC analysts said.

The observations of other equity research firms about the Q1 FY21 results announced just last month were decidedly more enthusiastic. Thus MOSL (Motilal Oswal) remarked that the decline in domestic formulation and consumer healthcare was more than offset by lower operating cost. “CDH is progressing well to build,” the MOSL report said. Accordingly, they recommended their clients to buy the stock and predicted a 16 per cent upside to the CMP of Rs396. In a similar fashion, ICICI Securities anticipates a 19 per cent appreciation for the share price from the CMP of Rs396 to 12-month target price of Rs470.

“The Q1 revenues were in line with I-direct estimates whereas profitability was better-than-expected due to lower marketing, promotional expenses and higher gross margins. On the US front, the company plans to venture into complex injectables (45 filed ANDAs + 14 in-licensed products), which is likely to provide a meaningful traction from FY23-24 onwards. Similarly, addition of biosimilars for Emerging markets (like LatAm, MENA markets and Southeast Asia) are expected to provide growth impetus, going ahead,” the report said.

By most indications, Zydus Cadila is on its way to recovering its past glory. Even in 2016-17, when the entire Indian industry was down in the dumps, the Zydus share price was a rare exception. It appreciated by an astounding 52 per cent that year! It is quite possible that in the post-Covid world, Zydus could regain its past glory within the next six to 12 months.