Edge for large players

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SummaryNo immediate risk to high multiples as earnings stay in high-teens.

In our recent Indian pharma trip, we met all large Indian pharma companies, the regulator, industry participants including doctors, sales representatives, distributors, pharma consultants and private equity investors.

India: positives outweigh negatives: Indian firms sounded positive on increasing sector volume growth aided by: (i) the new initiative of Medical Council of India to approve the new course of Bachelor of Science in Community Healthcare which should open up the rural market; (ii) the recent sharp increase in MBBS seats; and (iii) increasing health insurance in India.

We see a trend emerging in India where the market is shifting more in favour of large players as: (i) the regulator becomes more stringent on implementation of new marketing code ethics, the larger companies with a stronger brand recall should benefit; (ii) the opportunity to introduce new products is reducing (regulator is more stringent in approving new combinations) but the larger companies still have the opportunity to in-license products and (iii) with the new pricing policy, products from the larger companies are now more affordable. We therefore expect market share gains for the larger companies to accelerate.

Most of the industry participants expressed concerns that free/subsidised medicine programme of the government could convert the Indian market from branded generic to generic-generic but the timeline depends on how far and fast is the government able to address the shortage of healthcare infrastructure. We believe that unless the government is successful in creating the required infrastructure and has the required resources to address quality concerns across the manufacturers (high shortage of drug inspectors in India), the Indian market is far from being shifted to the generic-generic market.

US growth supported by the expected increase in approval rates: Indian firms guided towards high-teen growth in the US despite patent-cliff due to: (i) the expected increase in approvals post-generic user fees and (ii) multiple opportunities in the already genericised market given Indian firms’ low scale.

Stay positive on Indian pharma: Indian pharma companies trade at a premium valuation to the global average given: (i) higher growth, (ii) higher RoCEs (return on capital employed) (iii) stronger balance sheets, and (iv) presence in the lower-risk Indian market.

Our meetings with all major Indian pharma companies and the industry participants including the regulator increase our confidence that there is no immediate risk to high multiples for the sector as the earnings growth is expected to remain strong in high teens. Pricing policy was an overhang,

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