Pharma Sector Domestic – Challenges Ahead ::Emkay

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Pharma Sector

Domestic – Challenges Ahead

Last year, Indian Pharma industry grew by 16%, one of the highest growth rates in the world Pharma market. In the first two quarters Indian Pharma market growth has slowed down to 13% from 16% in 2010. Domestic Indian companies are the ones which are impacted most by this slowdown in growth.

In our report, "Domestic Pharma market", we have diagnose the challenges faced by the Indian Pharma market, which was valued at USD 12 billion in 2010 and tried to answer the following questions.

n       What are the reasons for decline in the growth rate of Indian Pharma industry in the first half of 2011?

n       What is the impact of these factors on different pharma companies?

n       Find out which company will outperform the industry growth rate?

Our analysis shows that there is a high degree of correlation between macro factors, economic growth and Indian pharma industry growth. When the pace of economic reforms and economic growth slows down it impacts the pharma industry growth. Other reason was, every company has increased the strength of MRs in last two years and as a result there was a spurt of growth last year which is tapering down this year. Impact of slowdown in growth is more pronounced in mid and small cap companies and the companies which have more exposure in GP therapies, which is more susceptible to competition. Competition is increasing from low cost players like Mankind & Alkem labs in the mass product therapies like anti-infective. MNCs which were focused more on acute categories till now are increasingly launching products in chronic space & that too at competitive prices.

To analyse the impact of these challenges on pharma companies’ domestic portfolio, we have devised the “4 Step Stress Test “ to find out how various companies will get impacted. Even though domestic business is only 20%-50% of the overall revenues, its contribution to the base business earnings is higher at 50%- 70%. ROCE of domestic business is much higher at 40%-60% compared to other businesses which have less than 20% and as a result multiples are mainly driven by domestic business. Our analysis suggests that any change in the domestic revenue has an amplified impact on the earnings and multiples of the companies.

Pharma Companies which are mainly focused on domestic business will be the one which will get impacted the most like - Cipla, Torrent, IPCA and Unichem. Other pharma companies which have sizeable opportunities in form of Para IVs and FTF in US will able to cushion the impact  like Ranbaxy and Dr. Reddy. Sun and Lupin have superior portfolio in domestic business with more focus on Chronic category and good opportunities in form of Para IV and FTFs.

We have cut down the domestic growth estimates for Cadila, Cipla, Dr. Reddy, IPCA, Torrent and Unichem for FY12 and FY13 by 3% to 7% and earnings growth estimates by 2% to 9% & retained the growth and earnings estimates for Lupin, Ranbaxy, Sun, GSK and Pfizer.

n       Buy - Glenmark and IPCA

n       Accumulate – Lupin and Sun Pharma

n       Hold - Cadila, Cipla, Dr. Reddy,  Ranbaxy, Torrent and Unichem