>India Pharmaceuticals: Domestic-focused businesses

EXECUTIVE SUMMARY
■ We maintain our Positive rating for the sector.
■ We maintain our positive view on domestic formulations sales, but believe the US-market patent cliff may shrink PERs.
■ Contract research and manufacturing services (CRAMS) is a sustainable business model, in our view.
■ We prefer PER-based valuations for the companies in the sector.
– We initiate coverage of GlaxoSmithKline Pharmaceuticals (Glaxo), Lupin, and Torrent Pharmaceuticals (Torrent) with 1 (Buy) ratings, and of Biocon with a 4 (Underperform) rating
– We have 1 (Buy) ratings for Sun Pharmaceuticals (Sun), Cadila Healthcare (Cadila), Dishman Pharmaceuticals (Dishman), Divi’s Laboratories (Divi’s), Jubilant Organosys (Jubilant), and Piramal Healthcare (Piramal)
– We have 4 (Underperform) ratings for Cipla and Dr Reddy’s Laboratories (Dr Reddy’s)
– We have 5 (Sell) ratings for Glenmark and Ranbaxy Laboratories (Ranbaxy)


INVESTMENT SUMMARY
We maintain our positive bias toward companies focusing on the domestic business.
– US generics sales growth looks likely to be hindered by the large number of products due to go off-patent over the next two-to-three years
» The penetration rate for generic drugs in the US rose from 47% for 1999 to 72% for 2009
» Generics continue to gain market share, but increasing competition limits profitability
» Product patents worth in excess of US$28bn are set to expire over the next two years
– European markets are underpenetrated in terms of generics coverage, in our view
– We think the Japan generic market has potential, but is already very competitive
– We expect emerging-market sales to continue to expand at a faster rate than those in other markets
– We forecast domestic-formulation revenue to rise by 12-14% annually over the next three years, and expect the chronic-care segment to be key

To read the full report: INDIAN PHARMACEUTICALS