Dolat Capital's report on Indian pharma sectorThe Indian pharma players have been one of the biggest beneficiaries of the patent cliff over the last five years. Over time, some of these players have built up sizeable base in the US markets through their systemic approach to tap into the opportunities going off patent, while some have opted to take the direct route through acquisitions. How long can this go on? And how prepared are the Indian players and which ones, to tackle this opportunity as it tapers off next few years? And can there be there other geographies that can present as growth avenues for the companies? We attempt to take a macro view on these issues in this note.
GLOBAL GENERICS
The global generics market is estimated to grow to USD 430bn in 2016 from USD 242bn in 2011, implying a CAGR of 12 percent. This compared to the 8 percent CAGR over 2006-2011 is a marked acceleration. The near-term outlook for US generics remains intact with USD 100bn worth of drugs slated to go off patent over the next five years.
While the upcoming patent cliff may throw up selective opportunities for Indian generic companies, we do believe that low lying fruits that created opportunity to reap significant rewards are done. Hence it would require a more selective approach on part of the Indian drug makers to scale up on capabilities towards complex molecules, as well as focus on new areas. We believe Indian generic companies are gearing up for this opportunity through a) Shifting focus towards differentiated platform technologies, b) Niche/complex filings, focusing more on profitability than market share, c) Aggressive Para IV filings, d) Building branded portfolio to tap specialty therapies, e) Orphan/Shortage drugs: future potential for Indian generics, f) M&A activity: tap the complex/ niche opportunity and g) Tie-up/In-licensing deals with innovators.
However, challenges such as a) Growing ANDA approval backlog and increasing ANDA approval timelines, b) USFDA's increased focus on cGMP compliance, c) unfair use of restricted drug distribution program by innovators have impacted sentiment.
Aurobindo Pharma
With new filings in Penems and high value injectables, we believe the company's pending approvals of 90 ANDAs auger well for quality of revenues from US generics and margin. While cost optimisation would boost margin, we are concerned on slow ramp-up in utilisation, strong outflow on capex and addition of new loan due to two new acquisitions. At CMP, the stock trades at 9.3x FY14E & 7.1x FY15E earnings. We initiate coverage on Aurobindo with 'BUY' recommendation and a target price of Rs 258 (10x FY15E EPS).
Biocon
Revenue scale up in domestic branded business, Fidaxomicin bulk and Orlistat supplies, shall aid near-term revenue growth. Higher R&D costs (as the product pipeline advances) restricts margin expansion. At CMP, the stock trades at 17.5x FY14E and 14.5x FY15E earnings. We initiate with 'Accumulate' recommendation with a target price of Rs 399 (17x FY15E EPS). We have also included Biocon in our preferred picks list.
Cadila Healthcare
We believe that FY14 will be a year of recovery for CDH. We estimate a strong 19 percent EPS CAGR for FY13 -15E with RoCE and RoE in the range of 19-20 percent and 24-25 percent in FY14E/15E respectively. The stock trades at 18.0x FY14E and 14.1x FY15E consolidated EPS. We remain positive on the long term prospects of the company and initiate coverage with 'Accumulate' with a target price of Rs 727 (16x FY15E EPS).
Cipla
We believe Cipla has one of the strongest generic pipelines among Indian companies. After a long delay, we believe Cipla's CFC-free inhaler pipeline is likely to be gradually commercialized in Europe and upsides from highmargin opportunities like Seretide can potentially come through over the next two years. We estimate EPS CAGR at 17 percent over FY13-15 with potential upsides from MNC supplies and CFC-free inhalers. The growth will be led by 13 percent CAGR for the international business, tempered by reducing technology licensing income. At CMP, the stock trades at 19.4x FY14E & 17.0x FY15E earnings. We initiate coverage on Cipla with 'Accumulate' recommendation and a target price of Rs 480 (20x FY15E EPS).
Divis Laboratories
We expect 19 percent revenue growth over FY13-15E mainly led by increased order flows and ramp up in its new facility at Vizag SEZ (translates into higher operating leverage). Debt free balance sheet and controlled capex enables Divis to generate healthy cash flows which in turn reflects in its high return ratios. At CMP, the stock trades at 17.0x FY14E and 14.2x FY15E earnings. We initiate coverage on Divi's Laboratories with a 'Accumulate' recommendation and a target price of Rs 1141 (17x FY15E EPS).
Dr Reddys Laboratories
DRL leverages on its chemistry skills to identify and capitalize on niche opportunities with limited competition. The company has built significant API capabilities that support its fast growing generic formulations business. Notably, dependence on Betapharm has reduced significantly (14 percent of sales), and is unlikely to be a further drag on overall financials. At CMP, the stock trades at 21.7x FY14E & 18.6x FY15E earnings. We initiate coverage on Dr. Reddy's with 'Accumulate' recommendation and a target price of Rs 2382 (20x to FY15E EPS).
GlaxoSmithKline Pharmaceuticals
GSK revenues have been impacted due to supply constraints and inventory rationalisation. In addition, the new DPCO 2013 is expected to have 5 percent impact on revenues in CY13E. Given the premium valuations (26.1x CY14E) and declining trend in margins, we recommend 'Sell' with a target price of Rs 1900 (22x CY14E earnings).
Glenmark Pharma
We expect Glenmark to post revenue CAGR of 18 percent and PAT CAGR of 19.8 percent over FY13-15E on the back of: a) strong pipeline of 53 ANDA's pending approval in US b) 18 percent CAGR in domestic formulation biz and 20 percent CAGR in semi-regulated markets and c) higher contribution from FTF and high margin products. At CMP, the stock trades at 19.3x FY14E & 15.6x FY15E earnings. We initiate coverage on Glenmark with 'Accumulate' recommendation and a target price of Rs 561 (17x to FY15E EPS).
Ipca Laboratories
We expect acceleration in export formulation revenues mainly led by a) uptick in US revenues-commercialization of Indore SEZ in Q4FY14E, b) sustained growth in its institutional business and c) gradual recovery in domestic formulations hereon shall add to growth momentum. We estimate adjusted earnings to record 22 percent CAGR over FY13-15E. At CMP, the stock trades at 17.8x FY14E and 14.8x FY15E earnings. We recommend 'Accumulate' on the stock with a target price of Rs 743 (17x FY15E EPS).
Lupin
We expect Lupin to register earnings CAGR of 14 percent over FY13-15E, led by limited competition generic launches in US (Niaspan, Renagel, Trizivir, Lunesta, Zymar, TriLipix and Asacol). Its business model enables healthy cash flow generation and augments requisite growth funding. The company continues to seek high-potential, low-risk acquisitions in key markets which shall further complement its organic growth momentum. At CMP, the stock trades at 24.2x FY14E and 20.9x FY15E earnings. We recommend 'Accumulate' on the stock with a target price of Rs 965 (24x FY15E earnings). We continue to have Lupin in our preferred picks list.
Sun Pharmaceutical Industries
We expect SUNP to post revenue CAGR of 19.5 percent and PAT CAGR of 18.5 percent over FY13-15E on the back of: 1) Superior revenue mix; 2) Domestic market growth rate to be higher than the market at 18 percent; 3) Higher R&D expenditure productivity 4) Competition in Taro products leading to price normalization; 5) Increased visibility in US on account of upsides from URL and DUSA acquisitions. At CMP, the stock trades at 23.7x FY14E & 21.2x FY15E earnings. We initiate coverage on SUNP with 'Accumulate' recommendation and a target price of Rs 603 (25x FY15E EPS).
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