The Indian pharmaceutical industry is 3rd largest in the world in terms of volume and the 14th largest in terms of value and is expected to grow to U.S. $55 billion by FY 2020 from U.S. $24 billion in FY 2015. Exports constitute ~50% of the total industry size **.
* * McKinsey Report – India Pharma 2015 – Unlocking the Potential of the Indian Pharmaceutical Market
Financial performance of Pharma stocks is largely driven by:
- Regulatory environment (in India and in other importing countries);
- Geographical exposure;
- New launches and innovation;
- Patents (particularly in the US market);
- Currency fluctuations.
Performance of Large Cap Pharma Stocks
(Top 10 Pharma stocks in India by current market capitalization; arranged based on % change)
|Company Name||Current Market Cap (Rs. Cr.)||Price on 31 July 2014||
Price on 31 July 2015
|Dr Reddys Labs||72,415||
Quarterly performance – large cap Pharma stocks (consolidated financials)
The table below highlights financial performance for the above companies over the past 1 year period. As will be evident, while stock prices have run away by an average 55%; earnings have deteriorated by 2.4% resulting in super expensive valuations.
In large cap pharma space, Aurobindo Pharma topped the list rising 112.77 % from Rs 356 on 31 July 2014 to Rs 759 on 31 July 2015 followed by Torrent Pharma.
1 YEAR PERFORMANCE – UNIFORM SECTOR BASED INVESTMENT OF RS. 10,000
 Defensive theme: Pharma stocks have traditionally remained (somewhat) unaffected to economic slowdowns.
 Expanding Footprint: Indian Pharma companies are expanding their presence worldwide through new launches, getting faster drug approvals and strong product pipeline. The share prices are factoring in strong earnings growth in coming quarters.
FACT: More than 40 % of over-the-counter and generic prescription drugs and 10 % of finished dosages sold in the United States are imported from India.
 U.S. Recovery: United States economy is showing sign of revival leading to this optimism.
 Patent Expiry: During 2014-2016, ~ U.S. $ 92 billion worth of patented drugs are expected to go off-patent in the U.S. Expiry of drug patents in the U.S. is great news for Indian pharmaceutical industry.
 Export Income & Strong Dollar: Indian pharmaceutical industry earns majority revenue in US $. Weak rupee helps these companies.
Exports – % of Revenue
|Dr Reddys Labs||83%|
LARGE CAP PHARMA STOCKS REVENUE BREAKUP – GEOGRAPHICAL EXPOSURE
 Low Cost Advantage
Enjoys low manufacturing and employee costs at its primary manufacturing base in India, and a vertically integrated API division which generates cheap raw materials. The Ranbaxy acquisition will further help Sun Pharma in generating higher margins.
 Strong Product Presence
Manufactures a few complex products which contribute significantly to both the company’s top and bottom lines. Strategically identifying and entering limited competition segments offers great opportunities for growth. For example: Sun Pharma is one of the few approved manufacturers of Doxil, an injection for ovarian cancer. Until more and more players enter in this segment, Doxil will continue to be a highly profitable drug for Sun Pharma.
|Price/Earnings Ratio (7 Sept)||46.86|
|Interest Coverage Ratio||13.92|
 U.S. generics hold key to revenue performance
U.S. generics are key growth contributors for Lupin where the company makes 25-30 new product launches annually. Healthy pace of new launches and entry in newer therapies (derma, ophthal) would also help sustain out-performance in domestic business.
 Niche launches to strengthen its position
Lupin will extend its product offerings in gastro intestinal products along with existing product pipeline of ophthal, oral contraceptives, complex injectable and respiratory. With a strong pipeline of 164 products, U.S. business sales are expected to reach ~U.S. $ 1.6 billion by FY 2018 (management projection). The new launches are expected to increase U.S. generics segmental share to 48% of sales (from the current share of 45% in FY 2015).
|Price/Earnings Ratio (7 Sept)||35.75|
|Interest Coverage Ratio||368.96|
 Large emerging-market presence
Dr. Reddy has a strong brand presence in many emerging markets particularly Russia and India where rising disposable incomes and fragmented customer base offer attractive growth opportunities.
 Market share gains in the U.S. markets
In the U.S., Dr. Reddy has grown quickly in over-the-counter generics, which is an attractive segment of the market with high barriers to entry. The company is also able to launch difficult-to-manufacture drugs with limited competition, such as Arixtra and Allegra.
|Price/Earnings Ratio (7 Sept)||29.75|
|Interest Coverage Ratio||32.29|
 Not Considering Inorganic Growth
The company has increased its reach into Europe through acquisition of Betapharm, a German generic manufacturer, for $570 million. Betapharm’s performance was not as expected and its losses have forced Dr. Reddy to take significant write-offs on its assets.
The company is not considering any future potential international acquisitions.
 Export segment to be the growth driver
Cipla exports to more than 180 countries, exports contributed 61% to the total turnover in FY2015, with Africa, US and Latin America constituting more than ~60% of total exports. In the U.S., Cipla has a strong product pipeline of 147 Abbreviated New Drug Application (ANDA)***, out of which, 79 are approved.
*** ANDA is submitted to the Food & Drug Administration (FDA) in the United States for seeking approval of a generic drug product.
 Increasing penetration in the domestic market
Cipla is one of the largest players in the domestic formulation market, with a market share of around 5.3%. Domestic formulations contributed 43% to the company’s total turnover in FY2015. The company is the market leader in key therapeutic areas such as respiratory care, anti-viral and urological.
 Launch of CFC-free inhalers
Another potential long term growth driver for the company is the CFC-free inhalers in the regulated markets. CFC-free inhalers in Europe and U.S. address a potential market size of more than U.S. $3 billion.
|Price/Earnings Ratio (7 Sept)||34.33|
|Interest Coverage Ratio||12.84|
 Strong U.S. Product Pipeline
Aurobindo Pharma has been an aggressive filer in the US market with 379 ANDAs filed until Q1 FY2016. Amongst peers, the company has emerged as one of the top ANDA filers.
With U.S. $92 billion going off-patent in the U.S. by the end of year 2016, Aurobindo Pharma is well placed to tap this opportunity with it being one of the largest U.S. generic suppliers.
 Inorganic Strategy
The company adopts a strategy of strong acquisitions to augment growth and improve sales mix. Recently, it signed 2 big deals (acquisition) with – Actavis (Europe) and Natrol (U.S.).
|Price/Earnings Ratio (4 Sept)||26.10|
|Interest Coverage Ratio||17.81|
Challenges facing Pharmaceutical Companies
 Intense Competition
Competes with various pharmaceutical companies that have similar products in the same market but manufactured at facilities which have been approved by the highest regulatory authorities in the United States and Europe.
 Regulatory Environment
Risk due to adverse developments in regulatory environment and statutory provisions. National Pharmaceutical Pricing Authority (NPPA) controls and regulates the prices of pharmaceutical drugs in India. Price controls imposed by the authority are unpredictable and have a negative impact on company’s profitability margins.
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