Thursday, December 1, 2011

>GLOBAL PHARMACEUTICALS: Who are the Key Players Affected by the $5.6B U.S. Lipitor LOE?

Conclusion: We assume 3 companies divide branded US Lipitor sales during the 180- day exclusivity period starting Nov 30th, incl. PFE, WPI’s authorized generic (AG) & Ranbaxy. We assume PFE retains 40%-50% of branded Lipitor share ($5.6B last 12 months) by continuing to pass along 40%+ discounts/rebates to mail order/PBM segment, with WPI & Ranbaxy dividing the remaining share at a 50-60% discount. At the end of the 180-day exclusivity period, we assume MYL/TEVA launch along with Dr. Reddy's, Aurobindo, & others, lowering pricing for generic Lipitor to pennies/day. Distributors are expected to benefit from the generic Lipitor mix shift contributing ~$0.03 in EPS for both ABC & CAH in C2011, & adding ~$0.06 to MCK. We expect full generic penetration following the exclusivity period, similar to the Zocor LOE (loss of
exclusivity) in 2006. Our US cholesterol U.S. market model assumes ~80% of ~350M TRx’s are generic by 2012E, making it challenging for remaining branded marketers (AZN’s Crestor & MRK’s Vytorin franchise) to raise price & gain share (see Figure 1).

What is the Impact on PFE & WPI Results? We maintain our PFE 4Q11E/‘12E Lipitor sales/EPS contribution at $930M/$640M & $0.07-$0.09 (14%-18% of 4Q EPS)/ ~$0.05
(2% of ’12 EPS). We estimate that every month delay to Ranbaxy’s launch could add <$0.01 to PFE’s ‘12E EPS (see Figure 2). We estimate WPI contribution to sales/EPS at ~$300M-$400M/~$0.48-$0.53 during the 180 days; if Ranbaxy is delayed by 1-2 months, the EPS benefit could double (see Figure 3). Each $100M in additional generic Lipitor sales (~25-35% GM) adds ~$0.13-$0.17 to WPI’s EPS (see Figure 4).

What is the Benefit to Ranbaxy if It Launches on Nov. 30? Our analyst in India expects generic Lipitor to add cRs30/share to the company's earnings during the 180- day period. This assumes c60% price erosion (higher than what we expected earlier) & 30% share. Post the exclusivity period, we expect higher price erosion (c95%) and lower market share (c20%), translating to full year recurring EPS upside of cRs2/share.

What is the Opportunity for Daiichi Sankyo (DS)? Ranbaxy's issues with FDA/DOJ had been regarded as a major negative factor in the DS’s stock price. Our Japanese analyst expects resolutions with several hundred million dollars in fines. Once resolved, investors will take a look at DS’s fundamentals rather than simply avoiding the company due to its uncertainty. Generic Lipitor upside is no longer recognized as a huge earnings opportunity given low contribution to Eisai in the generic Aricept case.

What is the Benefit to Drug Wholesalers? We expect the introduction of generic Lipitor to be an incremental positive for the drug wholesalers, with the mix shift contributing ~$0.03 in EPS for both ABC and CAH in C2011, and adding $0.06 to MCK. Generic Lipitor should then add $0.13, $0.08 and $0.17 in C2012 for ABC, CAH and MCK respectively, as the wholesalers generate larger profits during the exclusivity period. This will create tougher Lipitor EPS comparisons in C2013, where we estimate generic Lipitor will contribute $0.05 to ABC, $0.03 to CAH, and $0.07 to MCK.

To read the full report: GLOBAL PHARMACEUTICALS

>INDIA STRATEGY: Governance and governments: Key theme for CY2012 in Indian Stock Market

Governance: The missing link. The performance of the Indian stock market in CY 2012 will laregely depend on the ability of Indian and eurozone governments to manage their challenges. We expect 15-20% upside to the Indian market if (1) governance improves in India and (2) Eurozone sovereign-debt issues get resolved favorably. In the absence of the former, India may have to contend with low GDP growth, high fiscal and BOP deficits and limited investment opportunities.

Governance and governments: Key theme for CY2012

Macro-economy to get only marginal relief from respite in inflation and oil prices

Portfolio strategy: Still hedgingour bets but taking a more positive view

Earnings outlook: Some resilience given composition of earnings

To read the full report: INDIA STRATEGY



Half-Yearly Performance
The agricultural sector has been a rather stable performer in FY12 so far. According to the first advance estimates, foodgrain production has registered a growth of more than 8.0% during the kharif season. Foodgrain Production of 124 lakh tonnes during this has been close to the target of 126 lakh tonnes. The target for the rabi season is set at about 119 lakh tonnes of foodgrains, which definitely appears achievable.

Interest rate sensitive sectors such as mining, manufacturing and construction have taken a beating in the first half this year, consequent on lower production and investments in the backdrop of rising interest rate regime.

The financing services segment has however, not been unduly harmed by the same. Banking activities may maintain performance even in the following months.

Growth in electricity, gas and water supply has been robust at 8.9% in H1 FY12, as supported by strong contribution of electricity in IIP for the period April-September FY12. Increased financial and burden and operational inefficiencies in power discoms, combined with lower domestic coal production and higher cost of imports could impact this sector in the coming months.

Expectations for H2 FY12

We expect an increase in GDP growth in H2 FY12 to 7.8% from the current 7.3% in H1 FY12. The underlying assumption for this expectation is a revival of growth in the manufacturing sector in busy season with stable performance from agriculture and sustained contribution of financial services.

The government may take a look at the social, community and personal services segment. With a widening fiscal deficit, limited tax revenue and thinning receipts from the disinvestment process this financial year, the government may consider contraction in public expenditure. Additionally, one has to factor in a base effect of non-tax revenue receipts from 3G/BWA auctions that had supported government finances last year, but will be largely absent this year.

Expectations for entire FY12
Industrial production this year has been hit adversely. However, with status quo in rates and a gradual reversal in the current regime, an improvement in industrial production may be expected in the remaining months of FY12.

Based on this assumption, we expect GDP growth to settle at 7.3% for FY12.

Sectoral growth rates are pegged at 3.5%, 6.2% and 8.8% for agriculture, industry and services sectors respectively. In particular, the performance of manufacturing and construction might recover, with growth projected at 6.8% for the year in the manufacturing sector.

Industrial production, in particular the manufacturing sector continues to remain a major risk factor for GDP growth in FY12.

To read full report: 1H FY12