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Pharma (US Generics business to drive growth) Positive
In CY10, the BSE Healthcare Index gave ~35% returns vis-à-vis Sensex
returns of 13% (as on November 30). We believe the outperformance was
on account of a strong show by pharma companies both in domestic
formulations and exports especially the US Generics, buoyant sentiment on
account of passage of the US Healthcare bill, mega deals such as Abbott-
Piramal and Pfizer-Biocon, scores of inbound and outbound deals and lastly
some major first to file monetisations. We believe this trend will continue in
2011 as well although the margin of outperformance may not be as high as
2010.
⇒ We expect major pharma players to clock ~18-20% kind of growth in
domestic formulations driven by strong growth in chronic therapies
such as anti-diabetics, cardiovascular (CVS), central nervous system
(CNS) and oncology. These therapies account for ~20-25% of overall
domestic formulations. However, in case of major companies that
are part of the BSE Healthcare Index the percentage is slightly higher
i.e. ~40-45%. Rapid urbanisation, changing lifestyles, demographic
transition and growing health insurance coverage are some of the
obvious factors that will drive the chronic growth. For acute
therapies, we see 12-13% growth mainly emanating from an
increase in field force and rural forays
⇒ In 2010, almost all domestic players increased their field force. This
will start yielding a positive effect from the second half of CY11
onwards. This incremental field force will complement the added
capacities since 2009. Similarly, it will also strengthen the
established brand as ~90% of domestic formulations are branded
formulations. With ~65% of the Indian population still out of reach of
basic medication, domestic formulations will continue to have a
steady growth trajectory for a sizable future
⇒ On the exports front, we see a continuance of the three pronged
strategy of risk mitigation adopted by major generic players- 1) to
increase the presence in regulated markets of the US, Japan and EU
by aggressive product filing and making their facilities regulatory
compliant and 2) expanding their presence in the so called
pharmerging countries (BRIC nations ex-India, Mexico, Turkey and
South Korea) via marketing and distribution agreements with the
pharma MNCs and 3) forming alliances for licensing and distribution
with leading pharma MNCs as per their requirements
⇒ US, by far, will remain the most important market for Indian
companies, thanks to the sheer size of the market and the generic
opportunities on account of the impending patent cliff. Between 2011
and 2016 drugs worth ~US$110 billion will lose marketing
exclusivity worldwide. Of this, ~US$90 billion is in the US alone.
Although price erosion and increase in competition will be a matter
of concern, we believe Indian players, on account of their vertically
integrated model and proven capabilities and capacities, are best
poised to fathom the price erosions among others. With close to 120
USFDA approved facilities (second only to the US) Indian generic
players will be the major beneficiaries of the so-called impending
patent cliff
⇒ In fact, CY11 will be a year of major turmoil when drugs worth
~US$25-30 billion will lose patents in that year itself. We believe
Indian generic players have already smelled the opportunity and we
could see the expediting of ANDA filings in spite of delays for getting
approvals from the USFDA. From big players like Ranbaxy, Sun to
smaller players like Natco, all are preparing themselves for this
opportunity. We also see increasing first to file challenges by leading
generic players over and above the normal Para IV filing, which will
lead to growing out of court settlements given the high success ratio
of Indian players (~70%).
⇒ We see good traction coming from the pharmerging markets as
these markets are expected to grow more or less at the same pace
as India and with similar demographic and lifestyle changes
⇒ Another important aspect will be the trade agreement between the
Indian and Japanese government. This includes giving greater
access to Indian generic players in the US$80 billion Japanese
pharma market (second largest in the world). According to this,
Indian companies will be treated at par with their Japanese
counterparts to facilitate the government’s thrust to encourage
generic drugs
We do not see significant headwinds from either currency or crude based
derivatives that may suppress the EBITDA margins of the companies. We
expect companies with a strong domestic presence, robust US franchise
complemented by a good number of FTFs and Para IVs (like Sun
Pharmaceuticals, Dr Reddy’s Laboratories and Ranbaxy Laboratories) to
trade in the range of ~23-25x forward multiple. Also, companies with a
good domestic presence, reasonable US presence and also substantial
presence in other emerging markets (like Lupin, Cadila Healthcare,
Glenmark Pharmaceuticals and Biocon) will trade in the range of ~18-22x
forward multiple. CRAMS players are expected to remain laggards albeit
with modest to reasonable recovery in off-takes at the client’s end
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