, Macquarie Research: Pharma & Healthcare: Key Takeaways

Upcoming patent expiry cycle in the regulated markets provides a strong
market opportunity for Indian generic players to capitalise on, in our view. The
US market provides the biggest opportunity over the medium term and given
the large pipeline of ANDAs pending approval and strong distribution
franchise, we believe large Indian players such as Sun; Dr. Reddy; Ranbaxy
and Lupin are well positioned to capitalize on the opportunity. Stride’s (STR
IN, Not rated) focus on speciality injectables and Glenmark’s strong edge in
the dermatology & oral contraceptive space make them other niche plays on
the upcoming patent expiry cycle.
􀂃 Emerging market (EM) presence a long term strategic edge: Indian
players have historically been strong in the emerging markets with >40% of
the industry top line coming from emerging markets including India. Industry
now sees these markets as priority regions and companies are adjusting
business model (strategic alliances or own front-end presence) according to
strengths in the individual markets. In our view, RBXY, DRRD, GNP and
SUNP are among the better proxies to play the EM pharma growth story
among Indian players.
􀂃 Outsourcing advantage India: MNCs are increasingly seeking to outsource
to cost-effective manufacturing bases in Asia. India is emerging as an
attractive destination in the Contract Research and Manufacturing Services
(CRAMS) business segment due to cost efficiency coupled with skilled
manpower and technical capacity. With an improving macro outlook and the
inventory destocking cycle of clients now behind, CRAM players are expected
to put a better show in FY11. Jubilant (JOL) and Orchid (OCP IN, Not rated)
are aggressively pursuing global outsourcing opportunities.
􀂃 Innovation – a free option: Several Indian players have been investing in the
development of their own innovative products. We view Glenmark as best
positioned to unlock value going forward through its NCE initiative. GNP has
generated ~US$150m in out-licensing income from five deals with large
partners in the past, and this is unmatched by its peers.
􀂃 Healthcare delivery: Increasing purchasing power, fast rise in lifestylerelated
diseases and increasing health awareness in India make the Indian
healthcare story structurally robust. Fortis is among the leading hospital
chains aggressively pursuing the domestic healthcare delivery market.
Outlook
􀂃 We maintain our positive view on the Indian pharma & healthcare sector. The
BSE healthcare index has outperformed the BSE Sensex by 5% YTD and
currently trades at 21x FY12 Bloomberg consensus earnings.