Monthly: May 2013 – Domestic formulations IPM grows at 9.5% in May 2013:: Nomura

Summary
In this report, we provide detailed sales trends (AIOCD data) for the top 10
companies and the top 10 therapy areas in the India pharmaceuticals
market (IPM). We also include data for Dr Reddy’s and Glenmark, which
are not in the top 10 list, but are part of our coverage universe. Companies
that maintained growth above the IPM in May 2013 were Sun Pharma
(+20.3%), Cipla (+13.9%), Ranbaxy (20.3%), Zydus (24%), Lupin (13.7%),
Glenmark (14.1%) and Dr. Reddy’s (12.1%). Glaxo continued reflecting
decline in net sales at -5.7% for the month of May 2013, on supply
constraints, in our view.
Chronic therapies continue on a higher growth trajectory vs IPM. Cardiac,
anti-diabetic and Neuro CNS segments’ net sales for the month of May
2013 grew at 12.4%, 12.1% and 12.8%, respectively, vs. IPM growth of
9.5% y-y. Segments experiencing subdued growth are vitamins and
gynaecology, which grew at 6.5% and 6.1% y-y in May 2013 in terms of
net sales.

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Primary sales growth under pressure; destocking at distributor level
On a high base, secondary growth for the IPM remained subdued at 9.5%
during the month. The primary sales growth is likely to come under
pressure for the following two reasons:
 Implementation of the new pricing policy: The implementation of the
new pricing policy has commenced with the government notifying the
ceiling prices of the first batch of 200 products. In our interactions,
companies have acknowledged slower off-take, as trade is reducing
inventory levels. Companies would have 45 days to implement the price
restrictions.
 Agitation by trade channel: In the state of Maharashtra, the ongoing
agitation by the trade channel against the local regulator could
potentially impact primary sales for the month of June. Our interactions
with companies suggest that no primary sales have been recorded since
end-May. We expect a resolution in the near term. However, in case the
situation persists until end-June, 1QFY14 primary sales will be adversely
impacted. Maharashtra accounts for 13% of India sales. For companies
in our coverage universe, Maharashtra sales are 11-19% of India sales,
according to AIOCD AWACS (Fig 2).
The above has led to lower inventory levels in the trade channel. As per
AIOCD, stock levels have declined from 38.8 days on 10 April 2013 to 30.7
days on 10 June 2013

NPPA notifies ceiling prices
Last week, the National Pharmaceutical Pricing Authority (NPPA) issued the ceiling
prices of almost 200 drugs that shall come under the new pricing policy. The notification
of the remaining drugs under NLEM (National List of Essential Medicines) is expected in
the near future. The companies will have 45 days from the date of pricing notification to
comply with the new pricing policy.
Drugs listed under the NLEM, will come under the new pricing policy. The NLEM
comprise 348 bulk drugs and 650 formulations. The market research agencies IMS and
AIOCD AWACS estimate that ~18% of the pharmaceutical market willl be under pricing
control. The overall impact on the market due to the new pricing policy is estimated at
~2% of the market, as per AIOCD AWACS. The company level impact as computed by
AIOCD AWACS is presented in Fig 1.
Fig. 1: Company level impact of DPCO 2013 (INR m)
Company Loss at PTR level
Glaxo 1,877
Cipla 838
Ranbaxy 651
Zydus Cadila 517
Sun Pharma 277
Dr. Reddy’s 245
Lupin 142
Glenmark 5
Source: AIOCD data, Nomura research
We believe companies will be able to mitigate the impact to an extent from 1) raising
prices of drugs that come out of the ambit of price control. We estimate that ~6% of the
Pharmaceutical market will come out of price control; 2) volume share gains on falls in
prices: We expect limited volume share gains for strong brands as prices come down.
We don’t expect substantial gains due to intense competition at the market place. We
highlight that the assessment in Fig 1 above is limited only to the standard NLEM
strengths and formulation. There could be some adverse impact on pricing of non NLEM
strengths and formulations for the NLEM bulk drugs, which we believe account for 7% of
the pharmaceutical market. For most of the companies except for Glaxo, we expect very
limited impact on the financials. We have already incorporated the impact of new pricing
policy on Glaxo in our estimates (please refer to our note titled, Downgrading to Reduce
on recent rally, dated 7 June 2013). We have considered an impact of INR750mn,
INR1.5bn and INR1.2bn in CY13, CY14 and CY15, respectively.
Issues in Maharashtra
There are media reports (Times of India, 20 Jun 2013) that highlight the ongoing
agitation by the chemists and wholesalers against the Maharashtra FDA. As per the
media article, there are several contentious issues which include a crackdown by the
FDA on chemists for operating without a qualified pharmacist, the FDA asking
companies to supply medicines to small distributors, thereby bypassing the established
channel etc. The distributors stopped procuring medicines since early June 2013. Some
of the companies that we have interacted with suggest that supplies have been disrupted
since end-May 2013. This has resulted in chemist shops running out of stock in the state.
Given the critical nature of the situation, we do expect a resolution in the near term.
However, in case the situation persists until end of this month, primary sales for the
companies will be adversely impacted during 1QFY14. Overall, Maharashtra accounts
for ~13% of the India Pharmaceutical market, as per AIOCD AWACS. In Fig 2 below, we
highlight Maharashtra sales as a percentage of overall India sales for some companies.