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Indian pharmaceuticals look poised for growth given their exposure to the US (drugs going
off-patent) and India (stable growth). However, the US opportunity seems overhyped and
margin pressure could be a concern. We favour Cipla, LPC and GNP, raise Sun to Hold, and
keep our Sell on DRRD and RBXY.
Drugs going off-patent in the US and domestic formulations business augur well…
We believe the Indian pharmaceutical companies we cover are structurally well positioned for
growth given their exposure (40-83% of revenues) to the twin growth markets of the US (high
growth, but volatile) and India (relatively lower but consistent growth). Their robust ANDA
(Abbreviated New Drug Application) pipelines in US should enable them to capitalise when
drugs with cumulative revenues of US$72bn go off-patent in the US over CY11-15F (Chart
2). We expect India’s domestic formulation business to grow consistently in the mid-teens
(about 15% yoy growth seen in last three years by domestic formulation players), driven by
the positive economic outlook for the country and underpenetrated rural markets.
... but US opportunity appears overhyped; margin pressure could be another concern
We believe upside opportunities from the US patent expiries could disappoint due to:
1) aggressive strategies adopted by innovator companies such as settlements, authorised
generics, product extensions and prescription switches; 2) regulatory action by US FDA
affecting monetisation of opportunities as quality issues are increasing; and 3) relatively
fewer sole exclusivity opportunities for Indian pharmaceuticals (Table 4). Teva, with the
largest ANDA/first-to-file (FTF) pipeline and track record of capturing leadership in new launches,
could also provide stiff competition to Indian generics. Margin pressure (Table 8) as seen in
3QFY11 could be another concern due to rising input and employee costs, higher marketing
spend and increasing costs related to resolving US FDA issues coupled with an increasing tax
rate (factored into our estimates).
We therefore prefer cherry picking: Cipla, Lupin and Glenmark are our top picks
We therefore prefer cherry-picking companies that have a robust business model – a strong core
presence in the US and India, a robust ANDA pipeline, a focus on niche segments and no
regulatory overhangs. Our top picks are: 1) Cipla, in our view the best defensive pharmaceutical
stock, 2) Lupin, which looks well positioned for growth in key markets, and 3) Glenmark, for what
we see as its attractive valuations. We upgrade Sun to Hold for what we see as the most
favourable business mix. We reiterate our Sell rating on Dr Reddy’s, which we believe has a
weak business mix and is expensive despite its strong US pipeline, and Ranbaxy, due to its
persistent US FDA woes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian pharmaceuticals look poised for growth given their exposure to the US (drugs going
off-patent) and India (stable growth). However, the US opportunity seems overhyped and
margin pressure could be a concern. We favour Cipla, LPC and GNP, raise Sun to Hold, and
keep our Sell on DRRD and RBXY.
Drugs going off-patent in the US and domestic formulations business augur well…
We believe the Indian pharmaceutical companies we cover are structurally well positioned for
growth given their exposure (40-83% of revenues) to the twin growth markets of the US (high
growth, but volatile) and India (relatively lower but consistent growth). Their robust ANDA
(Abbreviated New Drug Application) pipelines in US should enable them to capitalise when
drugs with cumulative revenues of US$72bn go off-patent in the US over CY11-15F (Chart
2). We expect India’s domestic formulation business to grow consistently in the mid-teens
(about 15% yoy growth seen in last three years by domestic formulation players), driven by
the positive economic outlook for the country and underpenetrated rural markets.
... but US opportunity appears overhyped; margin pressure could be another concern
We believe upside opportunities from the US patent expiries could disappoint due to:
1) aggressive strategies adopted by innovator companies such as settlements, authorised
generics, product extensions and prescription switches; 2) regulatory action by US FDA
affecting monetisation of opportunities as quality issues are increasing; and 3) relatively
fewer sole exclusivity opportunities for Indian pharmaceuticals (Table 4). Teva, with the
largest ANDA/first-to-file (FTF) pipeline and track record of capturing leadership in new launches,
could also provide stiff competition to Indian generics. Margin pressure (Table 8) as seen in
3QFY11 could be another concern due to rising input and employee costs, higher marketing
spend and increasing costs related to resolving US FDA issues coupled with an increasing tax
rate (factored into our estimates).
We therefore prefer cherry picking: Cipla, Lupin and Glenmark are our top picks
We therefore prefer cherry-picking companies that have a robust business model – a strong core
presence in the US and India, a robust ANDA pipeline, a focus on niche segments and no
regulatory overhangs. Our top picks are: 1) Cipla, in our view the best defensive pharmaceutical
stock, 2) Lupin, which looks well positioned for growth in key markets, and 3) Glenmark, for what
we see as its attractive valuations. We upgrade Sun to Hold for what we see as the most
favourable business mix. We reiterate our Sell rating on Dr Reddy’s, which we believe has a
weak business mix and is expensive despite its strong US pipeline, and Ranbaxy, due to its
persistent US FDA woes.
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