Nomura: 2011 Update: Pharmaceuticals

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Pharmaceuticals
 Action
The Healthcare Index (BSEHTC) has outperformed the SENSEX by 20% YTD.
Despite the outperformance, we believe the risk-reward for the sector remains
favourable. We expect the earnings upgrade cycle to continue going into FY13F as
sales for products going off-patent in the US peak and the sector’s premium
valuations continue.
 Catalysts
Product approvals in the US, licensing deals and alliances with global pharma
majors.
Anchor themes
The Indian healthcare sector is a play on four themes: 1) US patent expiries; 2)
secular domestic market growth, 3) participation in other emerging markets
opportunities, including collaboration/alliances; and 4) R&D and manufacturing
outsourcing.

Earnings upgrades to continue in FY13
 US opportunity looms large
We believe that US patent expiries over the next two years will be a significant
growth driver going forward. There are ~2,000 ANDAs pending with the USFDA,
of which ~600 ANDAs are filed by Indian companies. We expect annual product
sales worth ~US$64bn to go generic in FY12 and FY13.
 Domestic market is a secular growth story
The Indian domestic pharmaceuticals market is a secular growth story, with an
expected growth rate of ~16% as per IMS. We expect the larger players such as
Sun Pharma, Ranbaxy, Lupin, Cipla and Dr Reddy’s to outperform the market.
We note these companies have considerably expanded their field force and are
addressing portfolio gaps. Such initiatives should drive growth, in our view.
 Focus on emerging markets offers strong growth opportunity
We believe Indian pharmaceutical majors are now increasingly focusing on other
emerging generic pharmaceutical markets, such as Russia, Brazil and Japan.
Apart from own sales and marketing infrastructure, the emerging markets
opportunity is being addressed through collaboration/alliance with large
pharmaceutical companies. We believe this presents a low-risk strategy for
Indian pharmaceutical companies to scale up their presence in emerging markets.
 Outsourcing opportunity – down but not out
Indian pharmaceutical companies account for 2% of global pharmaceutical R&D
and manufacturing outsourcing as per our estimates. We believe considerable
investments have been made in setting up facilities and developing relationships
with major global pharmaceutical companies. However, given the economic crisis
and mega M&As, the ramp-up in outsourcing fell short of street expectations.
However, we believe the ingredients are in place for growth to revive in FY12F.