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India domestic formulation business has recently seen increasing headwinds (muted growth,
NPPA overhang, M&A premium diminishing), but still seems better placed than the US
business, in our view. We see sector price correction of 3-20% in last 1m as buying
opportunity with Cipla and Glenmark as top picks.
India domestic formulations business appears to be losing its sheen...
Growth moderating: Most pharma companies have been increasing their focus (by ramping
up sales force, product launches, and entry into new therapy areas) on the domestic
formulations market over the last 12 months due to the high revenue growth (c15%+) seen in
the last 3 years. However, 1QFY12 results reflected muted revenue growth (see the table in
the attached note) in domestic formulation business for quite a few players due to: (a)
restructuring in sales force and inventory; (b) some therapeutic segments facing slowdown
(anti-infectives, pain etc); and (c) not being able to cope with the increasing competition
NPPA /DPCO overhang: Measures by the National Pharmaceutical Pricing Authority (NPPA) /
Drug Price Control Order (DPCO) to expand the coverage list for pricing control in India and to
recover arrears (see the table in the attached note for details) on the grounds of overcharging
also remains an overhang. Even as the NPPA makes attempts to recover arrears (on the grounds
of overcharging), the outstanding arrears by pharmaceutical companies continues to increase
steadily. According to the latest list published by the NPPA, the agency sent out demand notices
to the companies in 812 cases for a total recovery of Rs.23.5bn till July 31, 2011. While the total
amount recovered by NPPA since inception is a paltry Rs.2.1bn, it has now started making
concerted measures to recover its dues. NPPA has now started referring overcharging cases to
district collectors of concerned states for revenue recovery.
M&A premium diminishing: Also, given the strong growth momentum seen in the last 3 years in
domestic formulations market, MNC Pharma companies are slowly and steadily increasing their
reach/ control on the market either through M&A, partnerships, or launching products from their
parent's product portfolio. This has led to Government raising concerns on potential drug price
increases and is therefore not encouraging acquisitions of domestic pharma by MNC pharma.
This would lead to M&A premium enjoyed by the domestic pharma (as seen from Abbott's
acquisition of Piramal's domestic business at 7.7x Price/ Sales) companies to diminish.
... but is still better placed than US generics market, in our view..
While the domestic formulation business appears to be losing its shine, we believe that it is still
relatively best placed and we expect at least a stable 10-12% growth due to: a) positive macros -
increasing population with rising healthcare needs, increasing per capita income; b) increasing
healthcare facilities and insurance penetration; c) rising prevalence of life-style-related disease;
and d) coverage widening from the current Tier-1/2 cities to Tier 3 cities and rural markets.
...as one-off upsides from US patent cliff hyped up, in our view
While we acknowledge that the generic companies having US exposure to gain from the
cumulative revenues of US$72bn going off-patent in the US over CY11-15F, we also believe that
the upside potential from the US patent cliff might be lower than market expectations due to: a)
Aggressive strategies adopted by innovator companies (Product lifecycle management (shifting
Rx as seen by Sanofi for Allegra D-24 to OTC, multiple settlements (Nexium, Eloxatin),
authorised generics (AG) as seen in generic Aricept, Accolate, fondaparinux, etc); b) Regulatory
action by US FDA over quality issues (Form 483s, warning letter, seizure, AIP, product recalls);
and c) Presence of Teva, the largest generics company with the largest ANDA/first-to-file (FTF),
leading to fierce competition.
US generics market continues to face high pricing erosion. We also believe that growth is likely to
taper off after patent expiries peak-out in 2012.
However, we believe the recent deal between USFDA and generic companies to underwrite
government inspections of manufacturing plants abroad, reducing the risk of tainted drugs and
speeding approval of their products for an annual payment of US$299m, as a positive step.
Cipla and Glenmark remain our top picks
The price correction of 3-20% in the last 1M for quite a few Indian pharma companies reflects
concerns on the challenges faced by Indian pharma - competition intensifying in the domestic
pharma market, actual upside from the US markets lower than our expectations, margin pressure
seen in 1QFY12 results due to higher costs (staff, SG&A, etc), in our view.
We recommend cherry picking stocks that have a strong business model. Cipla and Glenmark
remain our top picks. Cipla (we expect margin expansion to continue as operating leverage kicksin,
60% of the domestic product portfolio in the chronic segment) and Glenmark (R&D pipeline
gaining traction, improvement in the base business, attractive valuations) are our top picks.
We see limited upside potential on Lupin on current valuations as it nears our TP of Rs465. We
also like Sun Pharma (due to its focus on the chronic segment in the domestic formulations) but
have a Hold rating on valuations.
Maintain Sell on Dr Reddy’s (over dependence on its strong US business as other business
continues to face headwinds) and Ranbaxy (weak base business).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India domestic formulation business has recently seen increasing headwinds (muted growth,
NPPA overhang, M&A premium diminishing), but still seems better placed than the US
business, in our view. We see sector price correction of 3-20% in last 1m as buying
opportunity with Cipla and Glenmark as top picks.
India domestic formulations business appears to be losing its sheen...
Growth moderating: Most pharma companies have been increasing their focus (by ramping
up sales force, product launches, and entry into new therapy areas) on the domestic
formulations market over the last 12 months due to the high revenue growth (c15%+) seen in
the last 3 years. However, 1QFY12 results reflected muted revenue growth (see the table in
the attached note) in domestic formulation business for quite a few players due to: (a)
restructuring in sales force and inventory; (b) some therapeutic segments facing slowdown
(anti-infectives, pain etc); and (c) not being able to cope with the increasing competition
NPPA /DPCO overhang: Measures by the National Pharmaceutical Pricing Authority (NPPA) /
Drug Price Control Order (DPCO) to expand the coverage list for pricing control in India and to
recover arrears (see the table in the attached note for details) on the grounds of overcharging
also remains an overhang. Even as the NPPA makes attempts to recover arrears (on the grounds
of overcharging), the outstanding arrears by pharmaceutical companies continues to increase
steadily. According to the latest list published by the NPPA, the agency sent out demand notices
to the companies in 812 cases for a total recovery of Rs.23.5bn till July 31, 2011. While the total
amount recovered by NPPA since inception is a paltry Rs.2.1bn, it has now started making
concerted measures to recover its dues. NPPA has now started referring overcharging cases to
district collectors of concerned states for revenue recovery.
M&A premium diminishing: Also, given the strong growth momentum seen in the last 3 years in
domestic formulations market, MNC Pharma companies are slowly and steadily increasing their
reach/ control on the market either through M&A, partnerships, or launching products from their
parent's product portfolio. This has led to Government raising concerns on potential drug price
increases and is therefore not encouraging acquisitions of domestic pharma by MNC pharma.
This would lead to M&A premium enjoyed by the domestic pharma (as seen from Abbott's
acquisition of Piramal's domestic business at 7.7x Price/ Sales) companies to diminish.
... but is still better placed than US generics market, in our view..
While the domestic formulation business appears to be losing its shine, we believe that it is still
relatively best placed and we expect at least a stable 10-12% growth due to: a) positive macros -
increasing population with rising healthcare needs, increasing per capita income; b) increasing
healthcare facilities and insurance penetration; c) rising prevalence of life-style-related disease;
and d) coverage widening from the current Tier-1/2 cities to Tier 3 cities and rural markets.
...as one-off upsides from US patent cliff hyped up, in our view
While we acknowledge that the generic companies having US exposure to gain from the
cumulative revenues of US$72bn going off-patent in the US over CY11-15F, we also believe that
the upside potential from the US patent cliff might be lower than market expectations due to: a)
Aggressive strategies adopted by innovator companies (Product lifecycle management (shifting
Rx as seen by Sanofi for Allegra D-24 to OTC, multiple settlements (Nexium, Eloxatin),
authorised generics (AG) as seen in generic Aricept, Accolate, fondaparinux, etc); b) Regulatory
action by US FDA over quality issues (Form 483s, warning letter, seizure, AIP, product recalls);
and c) Presence of Teva, the largest generics company with the largest ANDA/first-to-file (FTF),
leading to fierce competition.
US generics market continues to face high pricing erosion. We also believe that growth is likely to
taper off after patent expiries peak-out in 2012.
However, we believe the recent deal between USFDA and generic companies to underwrite
government inspections of manufacturing plants abroad, reducing the risk of tainted drugs and
speeding approval of their products for an annual payment of US$299m, as a positive step.
Cipla and Glenmark remain our top picks
The price correction of 3-20% in the last 1M for quite a few Indian pharma companies reflects
concerns on the challenges faced by Indian pharma - competition intensifying in the domestic
pharma market, actual upside from the US markets lower than our expectations, margin pressure
seen in 1QFY12 results due to higher costs (staff, SG&A, etc), in our view.
We recommend cherry picking stocks that have a strong business model. Cipla and Glenmark
remain our top picks. Cipla (we expect margin expansion to continue as operating leverage kicksin,
60% of the domestic product portfolio in the chronic segment) and Glenmark (R&D pipeline
gaining traction, improvement in the base business, attractive valuations) are our top picks.
We see limited upside potential on Lupin on current valuations as it nears our TP of Rs465. We
also like Sun Pharma (due to its focus on the chronic segment in the domestic formulations) but
have a Hold rating on valuations.
Maintain Sell on Dr Reddy’s (over dependence on its strong US business as other business
continues to face headwinds) and Ranbaxy (weak base business).
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