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India: Healthcare: Pharmaceuticals
Equity Research
Deep dive into patent cliff - US$3bn opportunity for Top 6 cos
Indian pharma sector’s outperformance to continue in 2011
We expect Indian pharma to continue its outperformance for the fourth
consecutive year in 2011 owing to accelerating revenue growth and
expanding margins. While the sector has seen multiples expand in 2010,
we prefer companies with ability to surprise on the upside. The key driver
for this view is the 50+ potential product launch opportunities arising from
the impending patent cliff of global pharma (US$ 88bn of sales in
blockbuster drugs going off-patent over 2011-14). In this report, we analyze
these opportunities in detail, and forecast 18%/29% sales/EPS CAGR for the
sector over FY2010-FY13E. We reiterate Buy on Lupin, upgrade Ranbaxy to
Neutral, add Aurobindo to C-Buy and Cipla to C-Sell.
50+ product launches; US$ 3bn of revenues for top 6 Indian cos
Our deep dive into the 450 ANDAs pending approval for the top 6 firms
in our coverage has identified 50+ potential generic launches, yielding a
potential revenue of US$3bn in US over 2011E-14E. With these higher
profitability opportunities, we forecast EBIT margins to improve by 150 bps
and CROCI to stay stable at 19%-20% over the next two years. We revise
EPS estimates across our coverage by +39% to -41% over FY2011E-13E.
RBX (upgrade to Neutral) & DRL have best pipeline; Buy on Lupin
We conclude Ranbaxy (US$1.42bn), DRL (US$0.79bn) and Lupin
(US$0.44bn) have the best product pipelines. Hence we upgrade Ranbaxy
from Sell to Neutral and reiterate our Buy on Lupin. Despite its strong outlook,
we remain Neutral on DRL owing to valuations. Since we added Ranbaxy to
the Sell list on July 18, 2008, Ranbaxy is up 17.7% vs. the Sensex up 33.5%,
and has underperformed its Indian pharma peers under our coverage by 83%.
Add Aurobindo to Conviction Buy; Cipla to Conviction Sell
We add Aurobindo (Buy, TP Rs313) to our Conv List as we believe its
transition to a high-margin formulations player is underappreciated; we
expect a strong 2011 (17%/13% sales/EPS growth) to drive earnings
upgrades and multiple expansion. We add Cipla (Sell; TP Rs253) to our
Conv List as we reiterate our view of lagging domestic growth vs. peers
and limited exposure to the product opportunities discussed in this report.
Strong revenue growth outlook to sustain outperformance in 2011
Indian pharma’s outperformance of last three years to be sustained
We expect Indian pharma to continue its outperformance for the fourth consecutive
year in 2011 as a result of accelerating revenue growth and expanding margins.
While the sector has seen multiple expansion in 2010, we prefer companies with ability
to surprise on the upside.
The key driver for this view is the product launch opportunities arising from the
impending patent cliff of global pharma.
In this report, we identify 50+ such potential opportunities, and forecast 18%/29%
sales/EPS CAGR (excluding Piramal) for the sector over FY2010-FY13E.
We maintain Buy on Lupin, upgrade Ranbaxy to Neutral, add Aurobindo to our
Conviction Buy list and Cipla to our Conviction Sell list.
US$3 bn potential US revenue for top 6 Indian cos over 2011-2014
Our detailed analysis of the pipeline of 450 ANDAs pending approval for the top-6
companies under our coverage, has identified 50+ potential drug launches, yielding
potential revenue stream of US$3bn from new generic launches in the US market
over 2011 to 2014.
We believe that there could also be upside risks to our estimates as there are a few
potential First-to-File opportunities whose details are not in the public domain
currently.
Hence, we forecast 18% revenue CAGR for the sector over FY10-FY13E and an earnings
CAGR of 29% over the same period.
Operating fundamentals to be sustained; CROCI generation of 20%
We believe that operating fundamentals for the sector are likely to be sustained and
forecast improving margins and cash returns over FY12E-FY13E.
Operating margins are likely to benefit from the multiple 6-month exclusive and limited
competition launches which historically have been associated with high profitability.
With these higher profitability opportunities, we forecast EBIT margins to improve by
150 bps.
We expect the sector to achieve earnings CAGR of 23% over FY11E-FY13E. We also
expect cash returns to be stable at around 20% levels (ex-Piramal), as a result of
improved revenue growth and profitability.
Upgrade Ranbaxy to Neutral; raise TP by 40% to Rs556 (11% potential upside):
We upgrade Ranbaxy to Neutral as we believe that the risk reward has improved with
potential resolution of FDA/DoJ issues and greater clarity on the potential to monetize
FTF (first-to-file ) opportunities.
Ranbaxy has the best ANDA pipeline in the sector with potential revenue of close to
US$1.5bn over the next 3 years.
Since we downgraded it to Sell on July 18, 2008, Ranbaxy is up 17.7% vs. the Sensex up at
33.5% and has underperformed its India pharma peers under our coverage by 83%.
Our new 12-month TP of Rs556 implies 11% potential upside. We are Neutral on the
stock as we believe that its current valuation, with base business at 41X on FY12E P/E
(sector trading at 15.7X), is a fair reflection of its growth prospects and leaves limited
room for upside.
DRL - next best pipeline; maintain Neutral on valuations; raise TP to Rs1,507:
We believe that Dr Reddy’s is also set to benefit significantly from the upcoming US
patent expiries as a result of several exclusive and limited competition product
launches over the next 2-3 years.
DRL’s known ANDA pipeline of over 20 products addresses a market size of US$42bn
with sales potential of about US$800mn over 2011-2014.
We raise our 12-month TP to Rs1,507 (from Rs1,363) but remain Neutral-rated on the
stock on valuation.
Add Aurobindo to C-Buy – business transformation undervalued
We add Aurobindo to Conviction Buy List with a revised 12-month target price of
Rs313, yielding potential upside of 33%.
We believe that Aurobindo is poised to transition from a low margin API player to a
formulations company with improving quality of revenues. We forecast revenue CAGR
of 19% over FY10-FY13E driven by industry leading growth in the key US generic
market and supply deals with pharma companies. Our revenue and earnings forecasts
for Aurobindo are 10%-15% above consensus forecasts.
We also expect margin expansion of 250 bps over the period as a result of increasing
utilization and vertical integration.
Despite a 700% share price rise over the last two years, Aurobindo is still trading at a
39% discount to its peers on FY12E P/E, which we believe is unwarranted.
Add Cipla to C-Sell – limited exposure to growth triggers; lower TP to Rs253
We add Cipla to the Conviction Sell List with a revised DC-based 12-month TP of Rs253
(from Rs276), implying potential downside of 19%.
While Cipla has outperformed the broader markets over the last 3 months, we believe
mainly due to media reports suggesting its potential stake sale (Economic Times, Jan
28, 2011), we expect the stock to underperform its peers going forward, as it has done
for each of the last ten years, owing to its lower growth prospects.
We believe Cipla’s revenue growth will lag its peers as its domestic leadership is
under threat due to increased competition and its export growth continues to be muted
due to product delays and lack of meaningful exposure to the US patent cliff.
Cipla currently trades at a FY12E P/E of 20.7X, a 32% premium to peers, which we
believe is not justified given its inferior growth profile.
77 potential product launches may yield US$3bn incremental sales
ANDA portfolio profile to decide winners among the generics
We expect the Indian pharma sector to grow at a revenue CAGR of 18% over FY10-FY13E
primarily driven by the grown in export revenues. Seven companies under our coverage
which have direct exposure to the US generic market should drive the revenue growth;
growing at average 21% revenue CAGR during FY10-FY13E, the top 6 (as discussed above)
taking the major share of the pie.
Among these companies, Ranbaxy (83) and Sun (64) have the most extensive product
portfolios in US, followed by Aurobindo (61). Sun also has the highest number of ANDAs
pending approvals (149) followed by Lupin (90). While the number of ANDAs is large, we
have also quantitatively assessed the value of as many ANDAs as possible, and come to
the conclusion that Ranbaxy and DRL have the best pipeline in terms of value among these
companies.
Ranbaxy and DRL look set to capture the largest slice of the US$3bn pie
Among the top six generic companies with US exposure (Ranbaxy, DRL, Lupin, Sun, Cadila
and Glenmark) Ranbaxy and Dr Reddy’s have the best profile of product approvals with
First-to-file / Para IV / exclusivity / settlements for the largest blockbuster drugs which are
facing patent expiry over the next three-four years.
Ranbaxy’s biggest opportunity remains its exclusivity on Lipitor (US$560mn) which is the
trump card for Ranbaxy in 2011, in our view. Other major blockbuster drugs to follow in
2012-14 are Actos (US$280mn), Nexium (US$206mn), Diovan (US$212mn) and Provigil
(US$95mn). A mere 8 approvals account for about US$1.5bn revenue potential for Ranbaxy
with LTM (last 12 months) sales at US$23bn in US, as per IMS.
Dr Reddy’s has the most comprehensive portfolio of big ticket launches in pipeline over the
next two years. It has 18 potential meaningful launches which may be worth US$750mn of
potential revenue. Among the major ones are Zyprexa (US$185mn), Geodon (US$108mn)
and Arixtra (US$64mn).
Lupin (US$434mn) and Sun (US$288mn) are the other two companies with material
revenue potential from the ANDA opportunity. Whereas Geodon (US$108mn) and
Cymbalta (US$90mn) may give the maximum share to Lupin, Sun would be looking to
capture share with the help of Taxotere (US$76mn).
Limited competition for Indian generics except from US generic cos
Indian generic companies, in our view, would be some of the prime beneficiaries of the
US$80bn opportunity arising from the patent expiry in the global drugs market over the
next three years. India is the leading filer of drug approvals in the developed markets of US
and Europe thereby giving them the highest exposure to the opportunity. Indian
companies received the highest number of ANDA approvals in 2009 after USA. In terms of
filings in the European Union as well, India leads the way with 579 filings followed by USA
(391) and Germany (282).
For the top six Indian generic drug makers operating in US, the number of ANDA filings in
US has more than doubled over the last five years, from 397 in 2006 to 901 by 2010. This
material increase in ANDA filings has consequently resulted in a large number of approvals
coming in by 2010 with 452 applications already approved. Hence, we believe that Indian
companies are best positioned to tap the generic opportunity arising in the developed
markets and will lead the way in capturing the incremental share of revenue coming from
global generic drug sales over the next three years.
Exports revenues for India HC Inc. to rise to 75% from current 65%
Exports currently form 65% of the overall revenues for the sector. For the six generic
companies operating in the US markets, this share rises to 75%. We expect the average
domestic share for these companies to remain around 25% as a large part of the revenue
growth will be driven by US/EU markets in the next three years, in our view. We believe
that US will drive the next leg of growth for the Indian generic companies on the back of
the US$3bn revenue opportunity arising from the patent expiry of blockbuster drugs.
Revenues from US have materially increased in the last few years from 25% in FY2008 to
about 31% by end of FY2010. Combined revenues from US for the top six companies are
expected to more than double to Rs150 bn in FY11E vs. Rs62 bn in FY08. The growth is the
result of a large number of ANDA approvals in the US market; however, there is still a large
basket of pending ANDA approvals (449 out of 901 filed till date) which may provide further
upside risk to our revenue growth forecasts beyond the US$3 bn potential discussed in this
report.
Global generics to grow to 11.5% of global drug sales of US$800bn
Global generic drug sales account for US$85 bn, which is 10.5% of the total global drug
sales of US$800 bn as of 2009. As per IMS Health, this share is expected to increase to
11.4% by the end of 2013, primarily on the back of patent expiry of multiple blockbuster
drugs over the next 3-4 years. Hence, global generic drug sales are expected to grow at
about 7% over the next three years. Among the developed countries, generic penetration is
still very low, which will drive revenue growth over FY11E-FY13E, in our view.
About US$83 bn of global drug sales are facing patent expiry over the next three years
(2010E-12E) vs. US$98bn in 2005-09, and will become exposed to the generic drug makers
as their addressable market. The US market will have the largest share of the ‘patent cliff’
with sales of close to 68% of the overall drugs facing patent expiry. This makes US the
single largest addressable opportunity for generic companies across the world.
EBIT margins to rise further by 150 bps; CROCI sustained at 20%
We reaffirm our view of sustained operational fundamentals for the sector largely driven
by ANDA opportunities as discussed above. We expect the pharma sector to post a healthy
topline growth of 17% over FY10-FY13E, primarily driven by sustained opportunities in
both export and domestic markets. After a modest 10% revenue growth in FY10, we expect
growth to pick up in FY11E and peak in FY12E on the back of US revenue outlook. We
believe Ranbaxy will be the biggest beneficiary of the one-off product launches in FY11EFY12E,
thereby inflating the revenue growth for the sector (further details in the Ranbaxy
section). Excluding the impact of one-offs from Ranbaxy, we expect stable revenue growth
(17%) for the sector. Operationally, we expect EBIT margins to remain stable at around 20%
for the sector (excluding Ranbaxy).
Stable CROCI of 20% should help sustain multiples
Despite three consecutive years of outperformance for the sector versus the broader Indian
market, the Indian pharma sector is currently trading at 17X on FY12E P/E, which is in line
with its historical average, thereby mirroring the strong growth outlook reflected in the
fundamentals.
We expect cash returns for the sector to be sustained at 20% levels (ex-Piramal) over the
forecast years, which falls in line with its historical average, after two years of lower CROCI,
in our view.
We expect the sector to grow at 18% revenue CAGR and 29% earnings CAGR over FY10-
FY13E (excluding Piramal). Our target prices imply an average FY12E P/E of 15.7X, in line
with its 7-year historical average.
We continue to use sector Director’s Cut Valuation Ratio (VAR) of 1.44X
We continue to use Director’s Cut as our valuation methodology and continue to use
sector multiple of 1.44X to set our TPs.
Hence, we raise 12-month target prices for eight stocks under our coverage by up to
40%. We lower target prices for Jubilant (by 39%) on demerger of its agri business and
earnings revision, and for Biocon (by 19%) and Cipla (by 8%) on account of earning
revisions. We add Aurobindo to the Conviction Buy list and Cipla to Conviction Sell list.
We upgrade Ranbaxy to Neutral from Sell.
20% discount to Aurobindo vs peers: We apply a 20% discount to implied EV for
Aurobindo vs. its peers. While Aurobindo has historically traded at a 30% discount, we
believe this discount to peers should narrow, considering the material transformation
in its revenue composition, from a primarily low-margin API producer to a high-margin
formulations producer.
30% discount to Jubilant vs. peers: We apply a 30% discount to implied EV for
Jubilant vs. its peers, in line with its historical average discount. We do not expect this
discount to narrow in the near-term as the company’s CROCI, though improving, still
remains in the 4th quartile. Additionally, we believe this discount is merited owing to a
much higher leverage vs. peers (gearing of around 120% in FY10).
Our target price calculation methodology for Piramal is based on SOTP – we take the
NPV of the cash from the sale of its domestic formulations business and ascribe a P/E
of 12X to the earnings from its residual business.
For Ranbaxy, we value the core business on Director’s Cut framework adjusting for the
cash returns from the one-off opportunities (Rs486) and add NPV of Rs70 from the oneoff
opportunity from Aricept, Lipitor and Nexium exclusivities.
For Glenmark, we value the core business on Director’s Cut framework (Rs301) and
add NPV of Rs19 for the risk-adjusted value of the product pipeline.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Healthcare: Pharmaceuticals
Equity Research
Deep dive into patent cliff - US$3bn opportunity for Top 6 cos
Indian pharma sector’s outperformance to continue in 2011
We expect Indian pharma to continue its outperformance for the fourth
consecutive year in 2011 owing to accelerating revenue growth and
expanding margins. While the sector has seen multiples expand in 2010,
we prefer companies with ability to surprise on the upside. The key driver
for this view is the 50+ potential product launch opportunities arising from
the impending patent cliff of global pharma (US$ 88bn of sales in
blockbuster drugs going off-patent over 2011-14). In this report, we analyze
these opportunities in detail, and forecast 18%/29% sales/EPS CAGR for the
sector over FY2010-FY13E. We reiterate Buy on Lupin, upgrade Ranbaxy to
Neutral, add Aurobindo to C-Buy and Cipla to C-Sell.
50+ product launches; US$ 3bn of revenues for top 6 Indian cos
Our deep dive into the 450 ANDAs pending approval for the top 6 firms
in our coverage has identified 50+ potential generic launches, yielding a
potential revenue of US$3bn in US over 2011E-14E. With these higher
profitability opportunities, we forecast EBIT margins to improve by 150 bps
and CROCI to stay stable at 19%-20% over the next two years. We revise
EPS estimates across our coverage by +39% to -41% over FY2011E-13E.
RBX (upgrade to Neutral) & DRL have best pipeline; Buy on Lupin
We conclude Ranbaxy (US$1.42bn), DRL (US$0.79bn) and Lupin
(US$0.44bn) have the best product pipelines. Hence we upgrade Ranbaxy
from Sell to Neutral and reiterate our Buy on Lupin. Despite its strong outlook,
we remain Neutral on DRL owing to valuations. Since we added Ranbaxy to
the Sell list on July 18, 2008, Ranbaxy is up 17.7% vs. the Sensex up 33.5%,
and has underperformed its Indian pharma peers under our coverage by 83%.
Add Aurobindo to Conviction Buy; Cipla to Conviction Sell
We add Aurobindo (Buy, TP Rs313) to our Conv List as we believe its
transition to a high-margin formulations player is underappreciated; we
expect a strong 2011 (17%/13% sales/EPS growth) to drive earnings
upgrades and multiple expansion. We add Cipla (Sell; TP Rs253) to our
Conv List as we reiterate our view of lagging domestic growth vs. peers
and limited exposure to the product opportunities discussed in this report.
Strong revenue growth outlook to sustain outperformance in 2011
Indian pharma’s outperformance of last three years to be sustained
We expect Indian pharma to continue its outperformance for the fourth consecutive
year in 2011 as a result of accelerating revenue growth and expanding margins.
While the sector has seen multiple expansion in 2010, we prefer companies with ability
to surprise on the upside.
The key driver for this view is the product launch opportunities arising from the
impending patent cliff of global pharma.
In this report, we identify 50+ such potential opportunities, and forecast 18%/29%
sales/EPS CAGR (excluding Piramal) for the sector over FY2010-FY13E.
We maintain Buy on Lupin, upgrade Ranbaxy to Neutral, add Aurobindo to our
Conviction Buy list and Cipla to our Conviction Sell list.
US$3 bn potential US revenue for top 6 Indian cos over 2011-2014
Our detailed analysis of the pipeline of 450 ANDAs pending approval for the top-6
companies under our coverage, has identified 50+ potential drug launches, yielding
potential revenue stream of US$3bn from new generic launches in the US market
over 2011 to 2014.
We believe that there could also be upside risks to our estimates as there are a few
potential First-to-File opportunities whose details are not in the public domain
currently.
Hence, we forecast 18% revenue CAGR for the sector over FY10-FY13E and an earnings
CAGR of 29% over the same period.
Operating fundamentals to be sustained; CROCI generation of 20%
We believe that operating fundamentals for the sector are likely to be sustained and
forecast improving margins and cash returns over FY12E-FY13E.
Operating margins are likely to benefit from the multiple 6-month exclusive and limited
competition launches which historically have been associated with high profitability.
With these higher profitability opportunities, we forecast EBIT margins to improve by
150 bps.
We expect the sector to achieve earnings CAGR of 23% over FY11E-FY13E. We also
expect cash returns to be stable at around 20% levels (ex-Piramal), as a result of
improved revenue growth and profitability.
Upgrade Ranbaxy to Neutral; raise TP by 40% to Rs556 (11% potential upside):
We upgrade Ranbaxy to Neutral as we believe that the risk reward has improved with
potential resolution of FDA/DoJ issues and greater clarity on the potential to monetize
FTF (first-to-file ) opportunities.
Ranbaxy has the best ANDA pipeline in the sector with potential revenue of close to
US$1.5bn over the next 3 years.
Since we downgraded it to Sell on July 18, 2008, Ranbaxy is up 17.7% vs. the Sensex up at
33.5% and has underperformed its India pharma peers under our coverage by 83%.
Our new 12-month TP of Rs556 implies 11% potential upside. We are Neutral on the
stock as we believe that its current valuation, with base business at 41X on FY12E P/E
(sector trading at 15.7X), is a fair reflection of its growth prospects and leaves limited
room for upside.
DRL - next best pipeline; maintain Neutral on valuations; raise TP to Rs1,507:
We believe that Dr Reddy’s is also set to benefit significantly from the upcoming US
patent expiries as a result of several exclusive and limited competition product
launches over the next 2-3 years.
DRL’s known ANDA pipeline of over 20 products addresses a market size of US$42bn
with sales potential of about US$800mn over 2011-2014.
We raise our 12-month TP to Rs1,507 (from Rs1,363) but remain Neutral-rated on the
stock on valuation.
Add Aurobindo to C-Buy – business transformation undervalued
We add Aurobindo to Conviction Buy List with a revised 12-month target price of
Rs313, yielding potential upside of 33%.
We believe that Aurobindo is poised to transition from a low margin API player to a
formulations company with improving quality of revenues. We forecast revenue CAGR
of 19% over FY10-FY13E driven by industry leading growth in the key US generic
market and supply deals with pharma companies. Our revenue and earnings forecasts
for Aurobindo are 10%-15% above consensus forecasts.
We also expect margin expansion of 250 bps over the period as a result of increasing
utilization and vertical integration.
Despite a 700% share price rise over the last two years, Aurobindo is still trading at a
39% discount to its peers on FY12E P/E, which we believe is unwarranted.
Add Cipla to C-Sell – limited exposure to growth triggers; lower TP to Rs253
We add Cipla to the Conviction Sell List with a revised DC-based 12-month TP of Rs253
(from Rs276), implying potential downside of 19%.
While Cipla has outperformed the broader markets over the last 3 months, we believe
mainly due to media reports suggesting its potential stake sale (Economic Times, Jan
28, 2011), we expect the stock to underperform its peers going forward, as it has done
for each of the last ten years, owing to its lower growth prospects.
We believe Cipla’s revenue growth will lag its peers as its domestic leadership is
under threat due to increased competition and its export growth continues to be muted
due to product delays and lack of meaningful exposure to the US patent cliff.
Cipla currently trades at a FY12E P/E of 20.7X, a 32% premium to peers, which we
believe is not justified given its inferior growth profile.
77 potential product launches may yield US$3bn incremental sales
ANDA portfolio profile to decide winners among the generics
We expect the Indian pharma sector to grow at a revenue CAGR of 18% over FY10-FY13E
primarily driven by the grown in export revenues. Seven companies under our coverage
which have direct exposure to the US generic market should drive the revenue growth;
growing at average 21% revenue CAGR during FY10-FY13E, the top 6 (as discussed above)
taking the major share of the pie.
Among these companies, Ranbaxy (83) and Sun (64) have the most extensive product
portfolios in US, followed by Aurobindo (61). Sun also has the highest number of ANDAs
pending approvals (149) followed by Lupin (90). While the number of ANDAs is large, we
have also quantitatively assessed the value of as many ANDAs as possible, and come to
the conclusion that Ranbaxy and DRL have the best pipeline in terms of value among these
companies.
Ranbaxy and DRL look set to capture the largest slice of the US$3bn pie
Among the top six generic companies with US exposure (Ranbaxy, DRL, Lupin, Sun, Cadila
and Glenmark) Ranbaxy and Dr Reddy’s have the best profile of product approvals with
First-to-file / Para IV / exclusivity / settlements for the largest blockbuster drugs which are
facing patent expiry over the next three-four years.
Ranbaxy’s biggest opportunity remains its exclusivity on Lipitor (US$560mn) which is the
trump card for Ranbaxy in 2011, in our view. Other major blockbuster drugs to follow in
2012-14 are Actos (US$280mn), Nexium (US$206mn), Diovan (US$212mn) and Provigil
(US$95mn). A mere 8 approvals account for about US$1.5bn revenue potential for Ranbaxy
with LTM (last 12 months) sales at US$23bn in US, as per IMS.
Dr Reddy’s has the most comprehensive portfolio of big ticket launches in pipeline over the
next two years. It has 18 potential meaningful launches which may be worth US$750mn of
potential revenue. Among the major ones are Zyprexa (US$185mn), Geodon (US$108mn)
and Arixtra (US$64mn).
Lupin (US$434mn) and Sun (US$288mn) are the other two companies with material
revenue potential from the ANDA opportunity. Whereas Geodon (US$108mn) and
Cymbalta (US$90mn) may give the maximum share to Lupin, Sun would be looking to
capture share with the help of Taxotere (US$76mn).
Limited competition for Indian generics except from US generic cos
Indian generic companies, in our view, would be some of the prime beneficiaries of the
US$80bn opportunity arising from the patent expiry in the global drugs market over the
next three years. India is the leading filer of drug approvals in the developed markets of US
and Europe thereby giving them the highest exposure to the opportunity. Indian
companies received the highest number of ANDA approvals in 2009 after USA. In terms of
filings in the European Union as well, India leads the way with 579 filings followed by USA
(391) and Germany (282).
For the top six Indian generic drug makers operating in US, the number of ANDA filings in
US has more than doubled over the last five years, from 397 in 2006 to 901 by 2010. This
material increase in ANDA filings has consequently resulted in a large number of approvals
coming in by 2010 with 452 applications already approved. Hence, we believe that Indian
companies are best positioned to tap the generic opportunity arising in the developed
markets and will lead the way in capturing the incremental share of revenue coming from
global generic drug sales over the next three years.
Exports revenues for India HC Inc. to rise to 75% from current 65%
Exports currently form 65% of the overall revenues for the sector. For the six generic
companies operating in the US markets, this share rises to 75%. We expect the average
domestic share for these companies to remain around 25% as a large part of the revenue
growth will be driven by US/EU markets in the next three years, in our view. We believe
that US will drive the next leg of growth for the Indian generic companies on the back of
the US$3bn revenue opportunity arising from the patent expiry of blockbuster drugs.
Revenues from US have materially increased in the last few years from 25% in FY2008 to
about 31% by end of FY2010. Combined revenues from US for the top six companies are
expected to more than double to Rs150 bn in FY11E vs. Rs62 bn in FY08. The growth is the
result of a large number of ANDA approvals in the US market; however, there is still a large
basket of pending ANDA approvals (449 out of 901 filed till date) which may provide further
upside risk to our revenue growth forecasts beyond the US$3 bn potential discussed in this
report.
Global generics to grow to 11.5% of global drug sales of US$800bn
Global generic drug sales account for US$85 bn, which is 10.5% of the total global drug
sales of US$800 bn as of 2009. As per IMS Health, this share is expected to increase to
11.4% by the end of 2013, primarily on the back of patent expiry of multiple blockbuster
drugs over the next 3-4 years. Hence, global generic drug sales are expected to grow at
about 7% over the next three years. Among the developed countries, generic penetration is
still very low, which will drive revenue growth over FY11E-FY13E, in our view.
About US$83 bn of global drug sales are facing patent expiry over the next three years
(2010E-12E) vs. US$98bn in 2005-09, and will become exposed to the generic drug makers
as their addressable market. The US market will have the largest share of the ‘patent cliff’
with sales of close to 68% of the overall drugs facing patent expiry. This makes US the
single largest addressable opportunity for generic companies across the world.
EBIT margins to rise further by 150 bps; CROCI sustained at 20%
We reaffirm our view of sustained operational fundamentals for the sector largely driven
by ANDA opportunities as discussed above. We expect the pharma sector to post a healthy
topline growth of 17% over FY10-FY13E, primarily driven by sustained opportunities in
both export and domestic markets. After a modest 10% revenue growth in FY10, we expect
growth to pick up in FY11E and peak in FY12E on the back of US revenue outlook. We
believe Ranbaxy will be the biggest beneficiary of the one-off product launches in FY11EFY12E,
thereby inflating the revenue growth for the sector (further details in the Ranbaxy
section). Excluding the impact of one-offs from Ranbaxy, we expect stable revenue growth
(17%) for the sector. Operationally, we expect EBIT margins to remain stable at around 20%
for the sector (excluding Ranbaxy).
Stable CROCI of 20% should help sustain multiples
Despite three consecutive years of outperformance for the sector versus the broader Indian
market, the Indian pharma sector is currently trading at 17X on FY12E P/E, which is in line
with its historical average, thereby mirroring the strong growth outlook reflected in the
fundamentals.
We expect cash returns for the sector to be sustained at 20% levels (ex-Piramal) over the
forecast years, which falls in line with its historical average, after two years of lower CROCI,
in our view.
We expect the sector to grow at 18% revenue CAGR and 29% earnings CAGR over FY10-
FY13E (excluding Piramal). Our target prices imply an average FY12E P/E of 15.7X, in line
with its 7-year historical average.
We continue to use sector Director’s Cut Valuation Ratio (VAR) of 1.44X
We continue to use Director’s Cut as our valuation methodology and continue to use
sector multiple of 1.44X to set our TPs.
Hence, we raise 12-month target prices for eight stocks under our coverage by up to
40%. We lower target prices for Jubilant (by 39%) on demerger of its agri business and
earnings revision, and for Biocon (by 19%) and Cipla (by 8%) on account of earning
revisions. We add Aurobindo to the Conviction Buy list and Cipla to Conviction Sell list.
We upgrade Ranbaxy to Neutral from Sell.
20% discount to Aurobindo vs peers: We apply a 20% discount to implied EV for
Aurobindo vs. its peers. While Aurobindo has historically traded at a 30% discount, we
believe this discount to peers should narrow, considering the material transformation
in its revenue composition, from a primarily low-margin API producer to a high-margin
formulations producer.
30% discount to Jubilant vs. peers: We apply a 30% discount to implied EV for
Jubilant vs. its peers, in line with its historical average discount. We do not expect this
discount to narrow in the near-term as the company’s CROCI, though improving, still
remains in the 4th quartile. Additionally, we believe this discount is merited owing to a
much higher leverage vs. peers (gearing of around 120% in FY10).
Our target price calculation methodology for Piramal is based on SOTP – we take the
NPV of the cash from the sale of its domestic formulations business and ascribe a P/E
of 12X to the earnings from its residual business.
For Ranbaxy, we value the core business on Director’s Cut framework adjusting for the
cash returns from the one-off opportunities (Rs486) and add NPV of Rs70 from the oneoff
opportunity from Aricept, Lipitor and Nexium exclusivities.
For Glenmark, we value the core business on Director’s Cut framework (Rs301) and
add NPV of Rs19 for the risk-adjusted value of the product pipeline.
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