Pharma Update: Centrum

Domestic market slows down



We expect the domestic pharma industry to grow at 8-10% in FY14
compared to 12% in FY13 due to the negative impact of National
Pharmaceutical Pricing Policy (NPPP) and trade related issues. We
expect improvement in market share of leader brands due to substantial
pick up in volumes following price reduction. The 10 pharma companies
under our coverage which have exposure to the domestic market
generated ~31% of total revenues. The domestic industry is likely to
normalize to 12-14% growth in FY15. The global pharma market is
expected to grow at 2% in 2013 due to 1% decline in the US market and
flat growth in Europe.



$ Domestic revenues drop: We expect 8-12% revenue growth for the
domestic pharma industry for FY14 due to negative impact of NPPP and
trade related issues. As per AIOCD AWCS-October’13 MAT data, the
domestic market grew at 5.2%. The 10 companies under our coverage
generated 31% of the total revenues. Five of these companies grew
faster than the market. These were: Sun Pharma (SPIL) 16.6%, Cipla
7.2%, Lupin 6.2%, Dr. Reddy’s Labs (DRL) 8.1% and Merck 6.1%.



$ EBITDA margin declines: We expect EBITDA margin for most pharma
companies to get impacted by 100-200bps in FY14. This is due to the
rise in imported material cost with sharp depreciation of rupee
against the dollar, impact of price cuts under NPPP and trade related
issues. We expect a rise in price of APIs due to their exemption from
price control. However, if rupee starts appreciating margins could
improve.



$ Prices revised upward: Most pharma companies have raised prices in
the range of 3-10% for products currently outside price control to
nullify the effect of NPPP. As the percentage of price controlled
products is much lower than products outside it we expect overall
revenues to improve.  We expect good volume growth for the products
that have gone under price control. Moreover, for controlled products,
companies will be eligible to increase prices based on the Wholesale
Price Index (WPI) in April’14.



$ Sun Pharma and Lupin remain preferred picks in the space: SPIL and
Lupin continue to be our best picks in the sector on account of SPIL’s
acquisition of Dusa and URL’s generic business in the US and strong
sale of generic Doxil in the US. Lupin’s strong presence in the US and
Japan will generate good revenue growth. Both companies have reported
excellent results for Q2FY14 and are expected to give over 25% returns
over CMP.



Thanks & Regards,

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