>PHARMACEUTICAL SECTOR: Increased sales from US generics to propel growth

■  Domestic formulations in a recovery phase
We expect the domestic pharma industry (DPI) growth to rebound to mid teens (14%-15%) during FY13, from low double digit growth during FY12. Over the medium term, we believe 14% growth to be sustainable. Our assumption is based on market share gains in life-style related products; increased pace of new product launches and higher penetration in tier III cities and rural markets.


We have observed sales force attrition levels to have come off their peaks while our channel checks indicate gradual absorption of underlying inventory (anti-infectives in particular). We expect Lupin and Sun Pharma to sustain market outperformance (>16-17% growth) while others, Torrent and IPCA in particular, to witness a stronger FY13E (albeit on low base) on the back of higher MR (marketing representative) productivity and increased focus on faster growing segments. The National Pharmaceutical Pricing Authority (NPPA) / Drug Price Control Order (DPCO) stance to expand the drug coverage list for pricing control and recovery of arrears remains an overhang.


■  Increased sales from US generics to propel growth
The key regulated markets - US and EU - are due to witness continuing mass generic penetration. The upcoming patent cliff coupled with pro-generic healthcare reforms places the US generic market in a sweet spot. On the contrary, stringent price control interventions and intense competition makes Europe less a profitable market. Our research highlights that CY12 will see the largest wave of US patent expirations (for drugs worth USD 33.6bn) and Indian players - Dr. Reddy’s, Sun Pharma and Lupin - are well-prepared to capitalize on a majority of these opportunities. Despite intense competition and other growth constraints, we expect these companies to be major beneficiaries (Refer Annexure - Generic Opportunities).


■  Favourable currency movement adding to conviction
The Rupee depreciation against the Dollar (14% in FY12) works in the favour of most of these drug makers on account of higher realization on their export receivables (eg. Sun Pharma, Dr. Reddy’s, Divi’s Labs, etc.). At the same time, select companies will see this benefit being offset by high MTM losses on their forex liabilities (eg. Ranbaxy, Cadila, Glenmark, etc.).


■  MNC Tie ups for EMs to aid topline growth FY13E onwards
Looming patent expiries (blockbuster products) and low R&D productivity (poor visibility on product pipeline) has led to MNC companies increasing their thrust on branded generics. The frequency of long-term supply deals with local generic manufacturers as a result has increased. We anticipate revenue contribution from some of the past deals entered into (Cadila – Abbott; Torrent- Astrazeneca) to aid topline growth in FY13E and scale up thereafter.


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