Citi :Pharmaceuticals and Healthcare: 2011 Sector Outlook

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Exciting Growth Phase to Continue
 Strategy — We remain overweight on Indian pharma & healthcare despite
the strong outperformance in CY10. With multiple growth drivers (US
generics, emerging markets, CRAMS) playing out simultaneously, we expect
earnings trajectory to be strong & return ratios robust over the next 3-4
years. We prefer generics to CRAMS in the near term. Preferred Picks:
ARBN.BO, RANB.BO & LUPN.BO


 Global Generics: High Growth Phase — We expect strong growth over the
next 2-3 years, on the back of patent expiries in the US & EU (cUS$60bn
over CY10-15). Most Indian firms are better placed (in terms of size,
visibility, readiness of plants & filings) to target this wave than in the past.
Diversification into niche segments (injectibles, controlled subs, OCs,
oncology, sustained release etc) & rising penetration in emerging markets
would also buoy earnings. Most firms have reached critical scale in key
markets and growth is being driven by many more products than before,
limiting the adverse impact of approval delays/competition in a few products.
 CRAMS: Whither Recovery? — CRAMS companies have struggled over the
past two years – on destocking by large customers, slower decision making
(consolidation led), rationalizing of R&D pipelines & drying up of funding of
small/ biotech firms. We had anticipated a pick up from 2HFY11, but recent
trends indicate that this may spill over into FY12. While valuations appear
attractive vis-à-vis generics, we believe it is better to wait for signs of
tangible improvement in numbers before getting aggressive in this space.
 Healthcare Delivery: Secular Growth — We expect demand to remain strong,
driven by favorable demographics. Higher occupancy, better case mix &
some price hikes would improve profitability. Besides the recent policy
thrust (5 yr tax holiday for new hospitals with 100+ beds), greater granularity
provided by companies on financials have helped the street appreciate the
true potential of this industry much better.
 What could go wrong? — Consensus is bullish and valuations reflect this.
Execution risk is the biggest potential negative in our view. Most stocks price
in several potential upsides & delays/setbacks could hurt. Currency (strong
INR) is another risk. While firms are hedged to an extent, economic loss is
difficult to hedge away. Other risks include sluggish recovery in contract
research, pricing pressure in EU & longer FDA approval times.