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Pharmaceuticals and Healthcare- Sector Outlook
Emerging Market presence and Patent Expiry to drive earnings, Remain Positive: We
remain positive on the Indian Pharmaceutical space from a medium term (2-3 years)
perspective. We believe Emerging Market (EM) to be the next growth frontier for global
pharmaceutical industry. Most of the companies in the Indian Pharma space have a
significant (>50%) revenue coming from the EMs. Patent Expiries would continue to drive
earnings with over US$114bn worth of branded drugs expiring in next four years. Other
themes that we believe would drive earnings would be the outsourcing opportunity and
Biogenerics opportunity (2013 onwards). With a lot of momentum building up, we believe this
decade (2011-2020) can also see some positive surprises on Innovation front.
• Emerging markets – Next growth frontier: Pharma sector in Emerging markets
expected to grow by ~12 % vs low single-digit rates for developed markets. We believe
high GDP growth and imperative need to improve healthcare in EM would drive growth in
Pharma spend. Most of the companies in Indian Pharma space have a significant (>50%)
revenue coming from the Ems. We believe Indian players (having large product portfolio
and ability to manufacture and operate in multiple therapeutic categories) are very well
positioned to grab the burgeoning opportunity.
• Patent expiry cycle would continue to drive earnings for next 4-5 years: In the next
four years over US$114bn worth of branded drugs face a threat from generics. We believe
Indian players are very well positioned to tap the opportunity. FTF opportunities of block
buster drugs (for ex Lipitor) to remain the key for the players. We expect US business of
the Indian players would grow significantly over the next 4-5 years.
• Pharma outsourcing – Advantage India: There exists a significant cost arbitrage in
manufacturing (65% and 50% lower than the US and Europe, respectively) and R&D. With
availability of a large well-trained talent pool, highest number of FDA-approved
manufacturing facilities (~119) outside the US, Chemical capabilities and process
engineering skills, and significant labour cost advantage (~1/10th of the cost in the US), we
believe global pharma outsourcing in India to be very big opportunity.
• Biogenerics – Opportunity of the decade: We believe leadership in Bio-generics
requires technology platforms, market presence, regulatory expertise and a rich portfolio.
We believe with high entry barriers players (like Biocon, Dr Reddy, Ranbaxy) having
established franchise will much better positioned to monetize the opportunity.
Sector Top Picks
Top Buy Recommendation/s
Credible innovation infrastructure is available as a free option: Recent Crofelemer
Phase 3 data and out-licensing of novel TRPV3 to Sanofi (SNY) reinforces our confidence
in GNP’s ability to identify and discover promising lead compounds.
Strong Earnings momentum: US pipeline has a rich mix of oral contraceptives and
dermatology product filings, which, given the entry barrier, should face limited competition.
First-to-file / niche products like Tarka, Dovonex, Oxycodone, Cutivate and Malarone.
Strong Emerging Market (EM) focus (> 50% of top line) provides long-term growth visibility.
Improved Balance sheet: Receding debt overhang (Debt to EBITDA ratio < 2x, Debt to
Equity <1x) and marked improvement in receivable days has addressed Balance sheet
concerns
Valuation: Stock is trading at 15x FY12E adjusted earnings, 25% discount to peers.
Key Near-Term Catalyst
Crofelemer approval by FDA, expected in 2HFY12.
Niche launches in the US: Cutivate and Malarone launch in US 1H FY12
Top Sell Recommendation/s
Cipla (Underperform; TP: 290; Potential Downside: -15%)
Margins sensitive to HIV portfolio (low margin and volatile) and technology income.
NPPA penalty risk underappreciated (NPPA claims Cipla overcharged on drugs under
price control).
Rich valuation: Stock is currently trading at 22x FY12E earnings relative to the sector.
Key Near-Term Catalyst
Appreciation of INR & Lower tech income.
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