Pharma Sector - Edel

8/7/2019 Pharma Sector - Edel

1/142


2/142

Edel Pulse: Pharmaceuticals

Edelweiss Securities Limited 1

Executive Summary

The domestic branded generics market, a critical cog in the growth wheel for most Indiancompanies, is currently in spate. Unlike the apprehension of market participants about thesustainability of growth, our survey findings indicate that growth is not only sustainable butwill move into the next orbit of 18-20% viz-a-viz current growth of 14-15%. Higher growthin domestic market will not only improve growth prospects of pharma companies (c30-50%to revenue), but will also improve overall profitability (margins are relatively higher).

Further, as is the norm, when all companies are in expansion mode, only a handful willpotentially emerge as winners. Hence, to understand these changing dynamics, wecommissioned an extensive and unique study across 27 cities in 11 states (all four zonesNorth, South, East, and West), covering more than 100 distributors, representing notably 45-50% of the total pharma market. These distributors, with more than 10-15 years of presencein the market, ideally connect suppliers on one hand and consumers on the other.

We covered all tiers of geographies in each zone including metros, tier-I to IV cities. Wetravelled across the length and breadth o f the country to gain incisive insig hts intothe future of the domestic pharma market, performance of various Indiancompanies, strategies adopted and ground level challenges impacting growth. Wehave tied our observations to industry data from AIOCD to overcome individual distributorsbias over companies. We further highlight that views of distributors are restricted to theircoverage companies, which differ, but collectively represent 80% of the total market.

Key questions addressed from the survey include:

What is the potential growth in domestic market and key drivers of this growth?

How sustainable is the current market growth over next three-four years?

Which therapeutic areas are growing faster?

What are the key strategies adopted by various companies?

What are the key changes in the activity level of MNCs?

We conclude that, Sun Pharma and Lupin are ranked by 94% and 74% of coveragedistributors, respectively, as preferred players in the largecap space, while IPCA and TorrentPharma are ranked by 86% and 70% of coverage distributors, respectively, as leadingplayers in the mid-cap space. Interestingly, Sanofi-Aventis, among MNCs, is ahead of peersand is aggressively making its mark in tier III and IV cities. We also identified emerging newplayers such as Mankind, Eris, and Macleods, which are gaining strong traction in variousmarkets.

Combining the takeaways from our distributors survey and the prospects of Indian companiesin emerging markets and US, we expect Lupin, Dr. Reddys, Cadila and Torrent Pharma to dowell over the next 12-18 months. We are positive on Sun Pharma, however, currentvaluations do not leave much upside for investors.

Overall, through this report, we have attempted to identify trends, drivers, and challengesfaced in the ever-changing market scenario and effectiveness of current strategies adoptedby various companies.


3/142

2 Edelweiss Securities Limited


Contents

At a Glance ................................................................................................................ 3

Ear to the ground: Verdict is Out ......................... .......................... ......................... ....... 4

Domestic Formulations: On a high ................................................................................. 7

Chronic Leads; Cosmetology New Avenue ...................................................................... 9

Metro, tier-I key markets; Semi urban and rural areas are new growth pockets ................ 13

Aggressive MNC expansion Poses High Risk .................................................................. 17

Differentiating Class from Mass ................................................................................ 20

Future Growth Drivers ............................................................................................... 29

Valuations: Rich, But Not Stretched ............................................................................. 31

Key Risks ................................................................................................................. 34

Appendix I Growth drivers: Pull and Push factors ..................................................... 37

Appendix II Survey Methodology ........................................................................... 43

Distributor Survey - Questionnaire ........................................................................ 45

Companies

Cadila Healthcare ...................... ......................... ........................ ........................ . 53

Cipla .................................................................................................................. 71

Dr. Reddys Laboratories ...................................................................................... 79

Lupin ................................................................................................................. 89

Ranbaxy Laboratories .......................................................................................... 99

Sun Pharmaceuticals ......................................................................................... 119

Torrent Pharmaceuticals .................................................................................... 129


4/142


5/142



Ear to the Ground: Verdict is Out

India is projected to be the third-largest pharma market (after the US and China) in terms of incremental growth. It is also evident that the sub-continent, with the highest population androbust economic growth, offers attractive return to pharma companies due to its cost-effective manufacturing capabilities and branded generics nature of the market. Historically,the non-regulated structure of market has enabled Indian companies to build strong marketshare, however, with changing market dynamics, companies have to adopt new strategicapproach to grow and compete. Therefore, to gain a deeper understanding of thistransformation, we set out to survey various markets, encompassing all zones and tiers. Weselected a sample of 27 cities, ideally representing a mix of all geographies within India, andafter meeting more than 100 distributors across cities, we gained the following insights:

Growth momentum to sustain and move into next orbitIndian pharma market is likely to sustain current growth momentum (14-15% versushistorical run-rate of 10-12% over FY00-10) and a large number of distributorsanticipate growth trajectory to move to the next level of 18-20%. This could potentially

add USD 3 bn of incremental sales over the next four to five years. This strong growth isinclusive of metros, tier I and II cities and smaller or tier III and IV towns. However,one-third of this incremental growth will come from tier III-IV towns and rural markets,which constitute 20% of the total market, and are currently growing at 25-30%, higherthan metros and tier-I cities. This is largely led by increase in income levels, higherpenetration of healthcare, and increase in health awareness among masses. Cipla, with astrong portfolio in the acute and respiratory segment, is depicting strong growth in tierII-IV markets, while Cadila, Lupin, Sanofi-Aventis and IPCA are also aggressivelyexpanding in these regions.

Chronic therapies leading growth; cosmetology new growth avenueChronic therapies including cardiac, diabetics and neuro-psychiatry, constitute 28% of the total market and are growing at 18-19% versus the current industry growth of 15%

(MAT March 2011). Most distributors have observed that anti-diabetics is emerging as ahigh-growth segment, followed by cardiac and CNS. Further, rising discretionaryspending and focus on personal care is driving growth in the cosmetology segment. Thissegments growth potential is large, given lower penetration, and it entails highermargins due to better pricing of products. Other super specialties such as oncology,pediatrics and nephrology are also picking up in selective markets.

The competition in chronic therapies is increasing rapidly, leading to higher investmentsby players to retain market share. Consequently, specialty focused promotion isemerging as a strong and effective approach to build brand loyalty. As per our survey,most companies have carved new divisions for key specialties, while others have createddedicated field force or special tasks force (STFs) to promote high-value brands withinsegments. Most distributors view this as highly effective strategy to enhance marketshare and also results in higher field force productivity. Sun Pharma has pioneered thespecialty focus model, resulting in higher market share in the chronic segment.

Expansion by MNCs could intensify competition for Indian counterpartsMultinational pharma companies have become aggressive and have initiated meaningfulinvestments in the domestic market. These investments, although at nascent stage, willeventually set the base for the next leg of growth. Most leading players have set boldaspirations for their Indian businesses and are adopting a more localised business model,including pan-India penetration, branded generics launches, and well-spread outdistribution network. While recent branded generics launches are priced economically,our survey indicates that sales have not ramped up in most markets for these products.


6/142



Moreover, in-licensing of off-patented/patented molecules could incrementally drivehigher revenues in the medium term. We believe that with aggressive expansion plansand deep pockets, MNCs could potentially emerge as strong competitors, compellingIndian companies to hike investments, while price wars could potentially hurt theirprofitability in the long term.

Higher attrition in field force poses risk to current growthThe cost of hiring competent field force is soaring and retention is posing a keychallenge. Most markets are seeing more than 30% field force attrition. We haveidentified four key reasons behind high attrition: (a) increase in demand for medicalrepresentatives to increase doctor focus, coverage and number of divisions; (b) limitedsupply of talent pool with companies competing for high quality people; (c) setting upchallenging field force targets with a mandate to aggressively capture market share; and(d) shift to other sectors like IT and financial services which offer higher incentives andgrowth. We perceive higher attrition as a potential risk for companies following the oldincentive structure and inefficient policies to retain field force, which could dent theirgrowth and profitability in the near term. Cadila, Cipla, IPCA and GSK are few playersfacing higher attrition, while Sun Pharma, Lupin and Torrent have been ranked by mostdistributors as companies possessing highly effective and stable field force.

Decline in success rate of new product introductionsMost large and mid-size companies, to actively expand coverage across molecules ortherapies, are aggressively launching new products. New product introductionscontribute 4-5% of overall market growth. However, as per our survey, 70-80% of theseproducts are failures. Most of these failures are in established segments, where morethan 10-15 players currently exist. Also, there is a growing resistance among retailersand distributors to provide shelf space for new products before prescription generation.Hence, we observe companies that are more proactive and launch products ahead of themarket are more successful in building brands, which potentially contributes to higherbusiness growth. Most distributors suggest that new launches by Sun Pharma, Sanofi-Aventis and Lupin have pent-up demand in the first week of launch. Also, companies

with differentiated R&D pipeline like Sun Pharma and Dr. Reddys clearly have an edgeover others.

Differentiating class from mass: End driver of surveyThrough our distributor survey we tried to differentiate highly effective companies fromothers (class from mass) on the basis of parameters such as: (a) portfolio concentration(chronic versus acute); (b) growth relative to the market; (c) field force stability andproductivity; (d) field force penetration; (e) success of new product launches; and (f)ability to build brands. The survey questionnaire was designed to gauge top 30companies (as per market share) on the basis of these key parameters.

We conclude that, Sun Pharma and Lupin are ranked by 94% and 74% of coveragedistributors, respectively, as preferred players in the largecap space, while IPCA and

Torrent are ranked by 86% and 70% of coverage distributors, respectively, as leadingplayers in the mid-cap space. MNCs are adopting a more localised approach to buildmarket presence and are building infrastructure for the next leg of growth. InterestinglySanofi-Aventis, among MNC pharma, is ahead of peers and is aggressively coming up intier IIIIV cities. Moreover, we also identified some key emerging small-mid size players,such as Macleods, Aristo, Eris and Mankind, who are scaling up and capturingincrementally higher market share.


7/142



Fig. 1: Competitive sco recard

Source: Edelweiss research

Table 1: Top picks - Lupin and Torrent Pharma offer highest upside (INR )


Note: * PE multiple for Dr Reddys, Sun Pharma. and Ranbaxy is based on CMP adjusted for NPV of one-off exclusivity sales

Company NameDomestic growthCAGR(5yr)

Portfolioconcentration

Brandbuilding ability

Success of new productlaunches

Field forcestability

Field forceproductivity

Reach(Medical reps)

Large Cap

Sun Pharma

Dr Reddy's

Cipla

Lupin

Cadila

Mid-cap

Torrent Pharma

IPCA

Glenmark

MN C

Ranbaxy

Sanofi-Aventis

GSK India

Pfizer India

Scale: Best Least5 1

CMP TP NPV of Reco Upsideone-offs (%) FY11E FY12E FY13E

Cadila 844 960 BUY 14 26.7 20.8 16.7 Cipla 321 350 HOLD 9 25.9 21.1 17.3

Dr. Reddy's 1,656 1,950 94 BUY 18 25.0 20.5 17.7 Lupin 412 500 BUY 21 21.6 19.1 15.6

Ranbaxy 468 432 94 HOLD (8) 44.0 27.5 22.2 Sun pharma 446 477 10 HOLD 7 33.7 24.3 20.5 Torrent Pharma 591 760 BUY 29 16.8 13.9 10.9

P/E (x)Company


8/142



Domestic Formulations: On A High

The Indian pharmaceutical market (IPM) has historically posted 10% CAGR over FY01-09.However, in the past two years market growth has been on a high trajectory at 15-16%indicating significant expansion in overall market base. To understand the trends and driversof this growth, we commissioned an extensive survey of 100 distributors covering 27 cities in11 states (all four zonesNorth, West, South, and East), representing notably 45-50% of thetotal pharma market.

Chart 1: IP M grow th has been robust over past tw o years

Source: CRISIL, Edelweiss research

Growth not only sustainable, but likely to move in higher orbit

Most distributors (95%) believe that the growth is not only strong, but will sustain over the

medium term. Over 60% respondents are of the view that growth is likely to sustain at anaverage 13-15%, while a relatively good number of distributors (27%) believe that it can behigher than the current average.

Chart 2: Majority of distributors believe grow th is sustainable


10.0

8.0

5.0

7.0

4.5

14.9 14.215.0

10.4

17.8

15.0

0.0

4.0

8.0

12.0

16.0

20.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011(MAT

March)

( % )

15%27%

Average sus tainable growth

Notsustainable

5%

Sustainable95%

Sustainability of growth

Sustainability of growth isnot an issue


9/142



We believe, apart from strong macro economic growth and changing socio economic profile,aggressive strategies adopted by pharma companies are also adding momentum. We, thus,broadly classify growth drivers as pull factors and push factors (Chart 3 shows the majordrivers of growth as per distributors). Among pull factors, increase in health awareness andhigher prevalence of lifestyle-related disease is resulting in higher demand forpharmaceuticals. Further, among push factors, field force expansion to cover larger masses,

focus on building brands, aggressive product introductions, and specialty-focused promotionhave been identified as major growth drivers. We have analysed each of these factors indetail (Appendix A) and our study indicates that these macro factors will continue to drivehigher growth over the next decade.

Chart 3: Factors driving grow th in the market


Healthcareinfrastructu

re / Govtexpenditure

11%

Changinglifestyle

30%

Healthawareness

30%

Higherincomelevel /

Affordability4%

Healthinsurance

9%

Populationand aeging

16%

Pull factors Push factors

Newproduct

launches23%

Field forceexpansion

32%Brand

building13%

Specialtypromotion

17%

Priceincreases

9%

Newdivisions

6%


10/142



Chronic Leads; Cosmetology New Avenue

The chronic segment (also termed as life-style-related ailments), comprising three specialtyareascardiovascular, anti-diabetics and neuro-psychiatryaccount for ~28% of the totalmarket and is growing at a faster clip of 18-19%, well above the average industry growth of 16% (Table 2). Among these specialties, cardiovascular is the largest therapy constituting15% of total pharma market, while anti-diabetics, though relatively smaller in size (6%contribution), is emerging as the fastest growing segment (chart 4). This is furthersubstantiated by our survey which shows that among various therapies, highest growth isviewed in anti-diabetics, followed by cardiac and neuro-psychiatry segments.

Table 2: Chronic segment has out performed overall market growt h (% )

Source: AIOCD, Edelweiss research

Chart 4: Anti-diabetics is fastest grow ing segment Chart 5: Therapies depicting higher grow th (survey)

Source: AIOCD, Edelweiss research Source: Edelweiss research

While rising urbanisation and sedentary lifestyles are driving higher growth in lifestylediseases (Chart 6), the overall base of the market is also expanding. Increase in healthawareness and proliferation of various single specialty and multispecialty hospitals has led toearly diagnosis of chronic disease among people. As shown in chart 7, growth in the chronic

segment is led by higher prescription growth, rather than pricing, which implies higherpenetration of the market. Hence, companies focused on chronic segment are likely to posthigher and sustainable growth than overall market, in the long term.

FY09 FY10 Mar-11 % of total

Chronic 19.1 19.2 17.4 27.9 Acute 14.9 14.9 14.1 72.1 Overall market growth 16.1 16.2 15.0 100.0

0.0

6.0

12.0

18.0

24.0

30.0

A n t

i -

D i a b e t i c s

C a r

d i o

v a s c u l a r

N e u r o -

P s y c

h i a t r y

O n c o l o g y

G r o w

t h -

( % )

MAT Mar-10 MAT Mar-11

6% 7%15%% of totalmarket

1%

Base of chronic segmentis expanding

0.0

20.0

40.0

60.0

80.0

100.0

A n t

i -

I n f e c t

i v e s

R e s p i r a

t o r y

C a r

d i a c

C N S

A n t

i - D i a b e t e s

C o s m e t o l o g y

O n c o l o g y

( % o

f d i s t r i b u t o r s )


11/142



Chart 6: Population with lifestyle disease will double Chart 7: Growth driven by higher prescriptions

Source: McKinsey, Edelweiss research Source: AIOCD, Edelweiss research

Cosmetology, oncology and nephrology: New grow th avenues within chronic

As per our survey, the super specialty segment could be the next growth driver withinchronic, given lower penetration, soaring affordability and insurance penetration. The rise indiscretionary spending and focus on personal care is driving growth of the cosmetologysegment and players like Dr. Reddys, Ranbaxy, and Glenmark are gaining from this trend.Super specialty therapies such as oncology, urology, vaccines, and nephrology are alsodepicting higher prevalence, specifically in metros and tier-I cities. These therapies, althoughhave niche presence, are growing double the industry growth rate due to higher number of standalone specialty centers for early diagnosis and treatments. Moreover, newerintroductions in these therapeutic areas will also expand the market as was the case with DPPIV categories in diabetes where despite premium pricing of Januvia (Sitagliptin; 4-5x to thecurrent treatment), the product has been a huge success.

More active competition in chronic segments is resu lting in higher investments

Strong growth in chronic therapies has led to higher competition with most companiesexpanding portfolios to enter the lucrative market. For instance, Ranbaxy, Cipla and IPCA,which are traditionally focused on the acute segment, are now actively building their chronicportfolio, by aggressively launching new products to fill therapeutic gaps. Moreover, while themarket is becoming more competitive, its overall scope has expanded with higher number of doctors. Most of the existing and new players have enhanced investments in terms of fieldforce expansion and new divisions to: (a) increase focus on specialists and super specialists;(b) expand reach to the uncovered doctor population; and (c) ramp-up sales of newproducts. We mention two cases of companies, with higher focus on chronic segment(Torrent and Sun Pharma), to understand their strategic approach to gain market share in ahighly competitive market.

0.0

1.2

2.4

3.6

4.8

6.0

C o r o n a r y

h e a r

t

d i s e a s e

D i a b e t e s

A s t

h m a

O b e s i

t y

C a n c e r

( % o

f p o p u

l a t i o n )

2005 2015E

0%

20%

40%

60%

80%

100%

Anti -diabetics

CVS CNS IPM

Volume Price New products


12/142



Chart 8: Case 1 Torrent Pharma has doubl ed field force and added sub-divisions and further subdivided existingdivisions to increase focus on each specialty

Source: Company, Edelweiss research

As shown in Case 1, focus on brand building is becoming vital for existing players, hence,specialty promotion is emerging as the new and widely adopted strategy across marketswherein companies, like Torrent, are adopting micro-focused approach to build brand loyaltywith doctors. Most companies are carving new divisions with dedicated field force to focus onindividual specialties like anti-diabetics, CVS, CNS, dermatology, etc. and even individualproducts or brands in a few cases (e.g., Sanofi Aventis). This helps field force to focus on fewproducts, leading to better promotion among doctors and higher market share. Sun Pharma(case 2) has been successful in building strong brand franchise through therapy-focusedmarketing. The company has mapped three to four divisions within each of the key therapiesto focus on multiple product segments with dedicated field force (refer Fig. 2). This strategyoffers more depth in marketing, with multiple medical representatives covering a single

specialist, leading to higher prescription share and mind share. Sun Pharmas multi-focusedmarketing has rendered it the highest field force productivity among peers (INR 8.9 mnversus industry average of INR 3.7 mn). Almost all distributors believe that specialty focusimproves brand positioning and creates high impact on growth.

530

935

254

285386

577

0

400

800

1,200

1,600

2,000

FY09 FY11

( N

o o

f r e p s

. )

Cardiovascular Anti-diabetics CNS

1,170

1,797

49%

76%

12%

Specialty focusedmarketing is gainingground

Divisions

FY09 FY10 FY11

CVS / Anti-diabetics

Psycan,Delta andAzuca

Psycan,

Delta,PsycanCND andAzuca

CVS

Psycan,Delta,PsycanCND

Anti-Diabetics

Azuca

CNSAxon, Mind& Neuron

Therapies

CNSAxon,Mind & Neuron

Axon,Mind & Neuron

Therapies

Divisions


13/142



Fig. 2: Case 2 - Sun Pharma has build strong franchise by creating higher specialty focus

Source: Company, Edelweiss research

Cardiovascular

Cardiology,Diabetology

InterventionalCardiology

ARIAN AZURA AVIORLife sciences

AZURACriticare

CNS(Psychiatry,Neurology) SYNERGY SYMBIOSIS SIRIUS

Gynecology

Fertility, Uro logy

GastroenterologyOrthopedics

SPECTRA INCALife Sciences

INCALife Sciences

SUN SOLARES

Therapy Divisions / Sub divisions

Opthalmology AVESTA MILMET

Oncology

Rheumatology,Dermatology

SUN Oncology

ORTUS

RADIANT


14/142



Metro, tier-I key markets; Semi urban and ruralareas are new growth pockets

We believe metros and tier-I markets will remain key drivers of industry growth, while the

base of semi-urban and rural markets will expand driven by higher affordability and improvedaccess to better healthcare. We have tried to analyse through our survey the changingdynamics of various tiers or classes of geographies within the industry. We can divide, basedon the population parameter, the IPM into two major categories: (a) metros and tierI cities(population ranging from 500,000 to 1 mn and above); and (b) semi urban and rural markets(population ranging from 5000 to < 500,000). Metros and tier-I cities account for 60% of thetotal market, while semi-urban (tier II-IV) and rural markets account for the balance 40%.The table, below, highlights cities covered through the survey and growth in various tiers of the market, as perceived by distributors.

Table 3: Tier-I, III and IV cities are registering higher gr owth abo ve industry average


We highlight that metros are growing at an average rate of 13-15%, in line with the industry.Acute therapy still constitute ~60-65% of volumes, while the share of chronic therapies isincreasing, which is driving higher number of specialty set ups. As a result, companies areexpanding field force in these markets to target larger doctor population. Most distributorsguide that growth in metros will sustain for the foreseeable future led by four key factors: (i)urbanisation (due to migration of people from lower tiers) resulting in higher population; (ii)rapid changes in lifestyle, leading to faulty eating habits, key driver of chronic disease; (iii)higher growth of middle income levels group driving affordability; and (iv) increase indiagnosis and treatment levels.

Increase in health awareness is also resulting in higher self medication, which is driving mostcompanies to switch leading brands from prescription to OTC (e.g., Pfizer is expanding itsbrand franchise by promoting Gelusil syrup as an OTC product). This strategy enablescompanies to get higher growth and return from established brands with lower investments.Moreover, companies like IPCA and Cadila are entering into nutraceuticals segment driven byhigher demand for additional supplements to cope with rising stress levels. IPCA hasintroduced Nutralite to venture into the nutraceutical segment.

City TierOverall share

of market (%)Population Cities covered through survey

No of retailchemists

AverageGrowth (%)

Metro 30% >1 mn Hyderabad, Chennai, Mumbai,Ahmedabad, Delhi, Kolkata

4,000 to 20,000 13-15%

Tier-I 30% 500,000 to 15%

Tier-II Gurgaon, Bhubaneshwar,Baroda,Cuttak, Howrah

1,000 to 3,000

Tier III Karimnagar, Warangal,Nashik, Noida

1,000 to 2,000

Tier IV

Rural/MicroTowns

20%300,000 to500,000

>15%

20% up to 300,000Vapi, Satara, Sangli, Abhore,Kolhapur, Miraj, Behrampur, Sikar,Chomu etc.

250 to 700 25-30%


15/142



Growth in tier-I cities higher than metros

We view, on the basis of our survey, higher growth in tier-I markets (at 15-20%) thanmetros, largely due to increasing base of chronic disease (diabetes and CNS) growing at afaster rate compared to metros and increasing penetration of better healthcare facilities suchas higher secondary care and single specialty care hospitals.

Semi-urban and rural markets: New grow th pockets

Semi-urban markets, comprising various tier II-IV cities, are potentially high growth markets,growing in the range of 15-30%, higher than average industry growth. Affordability is thebiggest growth driver, led by higher disposable incomes, which has led to significant increasein pharmaceutical spending. Further, these markets are highly underpenetrated (70-75% of population comprising 40% of total market by value) which will enable it to sustain highdouble digit growth over the next four-five years. We believe this strong growth has positiveimplications for top tier pharma companies, majority of which have embryonic presence inthese markets. However, the dynamics are different form metros (Table 4) entailingcompanies to tailor their marketing strategies to individual markets.

Table 4: Dynamics of semi-urban and rural markets vary from m etros and tier-I markets


We detail out three key strategies adopted by companies to penetrate tier III and IVmarkets. First , most companies are appointing local staff or setting up a local headquarter tocater to these markets, which was earlier addressed by field force from tier I and II towns inclose proximity. As per distributors, local field force is essential to promote productseffectively to local GPs and CPs which leads to higher volume growth. Second , existing

Semi-urban & Ruralmarkets Metros & Tier -I towns Comments

Therapeutic mix

Acute therapies account for 80-90% of totalconsumption in semi urban areas

Anit-infectives, gastro-intestinal and respiratoryare high growth therapies, while chornictherapies are catching up with higher growth intowns with more urbanization

Doctor population

Nature of doctor population is largely GPs andCPs (90-95% of total), while specialistspresence is limited to fewer class-II/III townswhich are seeing higher urbanization and

expansion of therapies like respiratory, neuro-psychiatry and diabetics

Local competition Very high Not much impact

Poliferation of local players giving stiff competition to Top tier pharma companies

Local playes have better relations with doctors,low pricing strategy and incentivise retailerswith better schemes

Distribution set-up

Hub and spoke(Hub is the Tier-III/IV town

which catrers to near bymicro towns)

Multi-layeredWide spread and organized

Lack of distribution set-up leading to higher costof distribution. (Sanofi Aventis does taxis toursusing own vehicles into micro interiors)

Field force Lack of quality in field forceMore skillful with betterproduct knowledge and

understanding of the market

Penetration and local presence is lower in tier-III/IV cities

Chronic(10-20%)

Chronic(35-40%)

GPs (MBBS), RMPs(90-95%)

Specialists (5-10 %) GPs and CPs(50%)

Specialists (50%)

Local field force presenceis critical to gain marketshare in semi-urban andrural markets


16/142



players are expanding their coverage (field force is doubled in most regions) to addresslarger pool of doctors and micro interiors, which were earlier not covered. For instance, toincrease penetration, Sanofi Aventis is doing taxi tours in micro interiors which have notransport. Last , companies are organising more CMEs (medical education programmes byinviting senior physicians for local doctors) as well as healthcare awareness camps which arehelping them reach targeted customers more effectively. Hence, by improving accessibility in

under-penetrated markets, companies are creating higher demand for pharmaceuticals. Webelieve companies like Cipla, Cadila, IPCA, Ranbaxy, and Sanofi Aventis, which are adoptinga more localized approach, are well positioned to take advantage of growing demand.

Table 4, above, further depicts that the disease profile of tier III-IV cities is highlyconcentrated on the acute segment. We believe companies in order to penetrate and buildbase in tier IIIIV markets, will have to initially tailor their product portfolios to the acutesegment, while selectively positioning in the chronic segment. As per our analysis, chronicsegments like respiratory (anti-asthma), cardiac, and diabetes are also picking up in selectivemarkets which gives opportunities for growth to companies like Sun pharma, Torrent, andUSV, who have selectively focused on neuropsychiatry, cardiac and anti-diabetic segments,respectively, in these markets.

Chart 9: Players becoming more active or ex panding coverage in tier II I-IV areas


As per our survey, larger players such as Cipla, Cadila, and Ranbaxy, with strongconcentration in the acute segment, are doing well in semi-urban and rural areas, whileplayers such as Lupin and IPCA are also expanding coverage and seeing positive tractionfrom these regions (Chart 10). Moreover, MNCs (GSK, Pfizer and Sanofi Aventis) are alsoexpanding field force, strengthening distribution networks, and launching economically pricedbranded generics products (such as Rabeprazole by Pfizer). We highlight that these products

have initially not posted higher traction and will take longer gestation periods before buildingmarket share.

0.0

15.0

30.0

45.0

60.0

75.0

C i p l a

C a d

i l a I P C A

R a n

b a x y

D r

R e d

d y ' s

L u p i n

S a n o f i

A v e n t

i s G S K

P f i z e r

G l e n m a r k

T o r r e n t

( % o


Companies primarily focuson acute segment in tierIII-IV and rural markets


17/142



Chart 10: Relative performance in semi-urban and rural markets (Survey)


Interestingly, Mankind and Macleods are prominently gaining market share, giving stiff competition to other players in these markets. While most companies have been traditionallyfocused on metros and tier-I towns, companies like Mankind and Macleods have expandedpenetration in smaller markets, thereby establishing strong hold in terms of prescriptionshare of doctors. However, the positioning is different than other peers and hence do notdirectly compete with similar doctor population. To illustrate our point further, Mankindstrategy differentiates on two points: (a) lower prices; and (b) deeper penetration in doctorswith a larger coverage list. Moreover, they have relatively better promotional strategies forretailers wherein the company offers schemes with higher incentives than other players.Finally, Mankinds field force largely comprises people with non-science backgrounds andattrition is low due to higher incentive structure. We believe higher stability or lower attritionis critical to build market share in these markets.

Chart 11: Field force stability of players in rural market ( Survey)


0.0

20.0

40.0

60.0

80.0

100.0

C i p l a

C a d

i l a

L u p i n

M a n

k i n d

I P C A

D r

R e d

d y ' s

P f i z e r

R a n

b a x y

M a c

l e o d s

G l e n m a r

k

S a n o f

i

A v e n t

i s

T o r r e n

t

G S K

( % )

Gaining market share Losing market share

0% 20% 40% 60% 80% 100%

IPCA

Cipla

Cadila

Ranbaxy

Lupin

Mankind

Pfizer

(% distributors)

Better field force Poor field force

Mankind, Macleods havestrong foothold in semi-urban and rural markets


18/142



Aggressive MNC Expansion Poses High Risk

MNC pharma companies are aggressively expanding with meaningful investments in thedomestic market. These investments, although at a nascent stage, will set up base for thenext leg of growth. Most leading MNC companies have set bold aspirations for their Indianbusinesses and are adopting a more localised business model including pan-Indiapenetration, well spread out competent field force, strong distribution network and brandedgeneric presence. 65% of total distributors believe that MNCs are becoming aggressive interms of launching new products, therapies, and competitive pricing of products. MNCs suchas Aventis, MSD, and Abbott are transforming existing policies and aggressively buildingchannel relations with distributors. For instance, Sanofi Aventis has directly interacted with alldistributors across India (video conference call) to elucidate their business and futurestrategies. Moreover, senior management and area heads from MNCs are directly meetingkey distributors to strengthen coverage.

Chart 12: Strategies adopted by MNCs


Chart 13: Most distributors perceive aggressive expansion by M NCs


0.0

20.0

40.0

60.0

80.0

100.0

New productlaunches (incl

branded generics)

Field forceexpasnion

Brand promotion Building channelrelations

( % o


Not muchchange in

activity35%

Higher activitylevel65%


19/142


20/142



Chart 14: Field force expansion by key MNC players


Sanofi-Aventis is preferred play in MNC space

Sanofi Aventis is emerging as the most aggressive player, among MNCs, with an all inclusivestrategy for growth. The company has positioned itself into the high growth chronic segment(50% of its total portfolio) with strong market share in anti-diabetics. Among the top 10brands, six are in the chronic segment. Further, Aventis has active coverage across marketsand is increasing reach into various tier II-IV markets. The company has adopted dualstrategies for each class of market. For instance, its focus in metros and tier-I markets is toaggressively build brands and has employed a specialty task force (STF) for each of itsbrands. Lantus, Cardace and Allegra are few of the strong brands build by Sanofi despite stiff competition. For tier II to IV markets, the company is building upon its acute franchise byexpanding reach and access through project Prayas (which underlines its strategy to reachmicro interiors) and by launching line extensions of established brands such as combiflam

cream.

Chart 15: Relative performance of MNCs (Survey)


0

700

1,400

2,100

2,800

3,500

GSK Pfizer Aventis

( N o . o f r e p s .

)

2008 2010

43%

64%

188%

0%

20%

40%

60%

80%

100%

S a n o f

i

A v e n t

i s

A b b o t

t

P i r a m a l

P f i z e r

G S K

R a n

b a x y

Growing above market Growing below market In line

Sanofi-Aventis is leadingthe MNC pack

MNCs have doubled field

force to expandgeographical reach


21/142



Differentiating Class from Mass

A strong and growing domestic market has opened floodgates of opportunities for Indian aswell as MNC players, who are targeting these with multi-pronged approach. While somecompanies have been frontrunners in identifying future opportunities, others have lostmomentum. To differentiate the former from the latter, we have contemplated variousparameters which could be critical for growth. Further, we believe that historical execution isa realistic measure to differentiate players, but it may not be indicative of future growth andperformance. Hence, these five key parameters (or critical success factors) could gauge thestrength of a companys domestic business and act as an effective tool to differentiate goodfrom the bad (or winners from losers). These include:

a) Portfolio concentration or business mix (acute versus chronic)

b) Ability to build brands

c) Success of new product launches

d) Field force penetration or coverage

e) Field force stability and productivity

On the basis of above mentioned parameters and through our analysis from the survey, wehave identified few highly effective companies which have strong execution and are growingahead of market.

Sun and Lupin emerge as favored plays in large cap; Torrent/ IP CA score in mid cap

Sun pharma and Lupin were ranked by most distributors as outperformers among large caps,while Torrent and IPCA scored in mid caps. Among MNCs, Aventis scored over other playerssuch as GSK and Pfizer. Players such as Cipla, Ranbaxy and Cadila are facing some pressuresin terms of growth and stability but are likely to turnaround, in our view.

Sun pharma has emerged as the undisputed choice among distributors primarily because of its ability to identify therapeutic gap areas and launch products ahead of competition,resulting in better mind share and market share. Second, the company has focus on medicalcolleges and has innovatively built its doctors franchise by engaging them at an early stage.

Lupin scores over peers due to its focus on key opinion leaders (KOLs). The company hasactively build a wider portfolio by entering into newer therapeutic areas and is growing aheadof peers in chronic segments such as CVS, CNS, and respiratory. Moreover, its aggressiveand highly effective field force helps it sustain growth in a highly competitive market.

Cipla , despite deep penetration and high field force productivity, has seen slow growth indomestic market. This is largely due to instability in the field force which has furtherimpacted its ability to build big brands. However, we believe that Cipla can surprise themarket positively due to its higher focus on tier II and IV markets, where the company hasstarted witnessing high growth traction, and addressing of structural issues with reference toits mature and generic-generic portfolio in domestic market.

Other companies like Cadila, Dr. Reddys, and Ranbaxy are also gearing up which isevident from the fact that they have ramped up their field force by 22%, 94%, and 72%,respectively, over the past two years.

In the mid-cap space, Torrent is ahead of comparable peers on account of higher focus onthe chronic segment, better field force stability, and ability to build brands. However, it lagsin terms of launching new products. Moreover, IPCA is also gaining strong momentum in all

We judge strength of domestic business of eachplayer on the basis of fivekey parameters


22/142



markets and has increased divisions (12 from earlier seven) to expand into newer therapiesand tier II to IV towns. We highlight that Torrent and IPCA have expanded field forceaggressively (by 64% and 58%, respectively) which has impacted their field forceproductivity (Fig. 3).

In the MNC space, Sanofi-Aventis has a clear advantage over other MNCs because of high

focus on the chronic segment, strong brand building abilities, competent sales force, andaggressive approach in metros as well as tier II to IV towns.

Fig. 3: Competi tive scor e card


The competitive score card, above, measures each company on the basis of its strength ineach of the parameters, which is key end driver of our survey. We now illustrate our findingsthrough discussion of each of these key parameters and substantiate our preferred plays overothers.

Company NameDomesticgrowth CAGR(5yr)

Portfolioconcentration

Brandbuildingability

Success of new productlaunches

Field forcestability

Field forceproductivity

Reach(Medical reps)

Large Cap

Sun Pharma

Dr Reddy's

Cipla

Lupin

Cadila

Mid-cap

Torrent Pharma

IPCA

Glenmark

MN C

Ranbaxy

Sanofi-Aventis

GSK India

Pfizer India

Sca le: Bes t Least5 1


23/142



Portfolio concentration or business mixWe prefer Sun Pharma, Lupin, and Torrent as they have higher concentration in chronictherapies, which contribute 45-60% of their total sales (Chart 16). The presence in thechronic segment has historically offered these players higher growth than industry. Further,chronic therapies provide better realization than acute, thereby rendering higher grossmargins (80-90% versus 70% in acute segments).

Companies which are largely focused on the acute segment such as Ranbaxy, Dr. Reddys,Cipla, and IPCA, are posting higher growth in micro markets. The acute segment continues tohave larger share of IPM (~72% of total market) and has posted better growth in the pasttwo years due to increased penetration of companies in tier II-IV towns and rural areas.Among MNCs, portfolio concentration is more skewed towards acute except Sanofi-Aventiswhich has build strong presence in the chronic segment, where we see growth picking upover the past six months.

Chart 16: Players w ith strong focus on chronic segment to outperform market


We believe, within the chronic segment, companies with higher market share and ability tobuild successful brands will grow ahead of peers. As seen in charts 17-19, Sun Pharma hasleading market share in most specialty segments, while Lupin has posted higher growthamong peers. We highlight that the cardiovascular segment has become extremelycompetitive with older molecules facing pricing pressures. Cadila and Torrent have relativelyunderperformed in CVS due to pricing pressures in older molecules and lack of new productlaunches. As per our survey, Cadila is facing higher attrition among peers, leading to loss of market share in few divisions.

0.0 20.0 40.0 60.0 80.0 100.0

GlaxoPfizer

GlenmarkRanbaxy

IPCACadila

Dr Reddy'sCiplaLupin

Sanofi Sun Pharma

Torrent

(%)Chronic Acute

Sun, Lupin and Torrenthave high focus onchronic segment


24/142



Chart 17: Key players in anti-diabetics market

Chart 18: Key players in cardiovascular market

Chart 19: Key players in neuro-psychiatry market


29

16

29

20 22

36

17

0.0

2.4

4.8

7.2

9.6

12.0

0.0

8.0

16.0

24.0

32.0

40.0

U S V

S u n

P h a r m a

S a n o f

i -

A v e n t

i s

M S D

P i r a m a l

L u p i n

T o r r e n

t

( % )

( % )

Market share (RHS) Growth (LHS)

Industrygrowth

19

12

35

1916

14 14

0.0

1.3

2.6

3.9

5.2

6.5

0.0

8.0

16.0

24.0

32.0

40.0

S u n

P h a r m a

C a d i l a

L u p i n

R a n

b a x y

C i p l a

I n t a s

T o r r e n t

P h a r m a

( % )

( % )


Industrygrowth

1915

13

18

14

10

24

27

0.0

3.5

7.0

10.5

14.0

17.5

0.0

6.0

12.0

18.0

24.0

30.0

S u n

P h a r m a

I n t a s

P i r a m a l

T o r r e n

t

A b b o t

t

G S K

S a n o f

i -

A v e n t

i s

L u p i n

( % )

( % )


Indus trygrowth

We prefer players withhigher market share andgrowth within chronicsegment


25/142



Ability to build brands: A key differentiatorAs new product launches dwindle, building big brands has assumed much greater importanceand is rather necessary to improve profitability. To instill a culture and mindset of buildinglarge brands, companies need to focus on several aspects. First, for large brands, companysrequire active life cycle management, while for scaling up medium sized brands they need tobroaden coverage across doctors and geographies and finally for relatively new brands thefocus should be to create credibility and generate prescriptions among KOLs (key opinionleaders).

We recognize brand building as future growth driver and have identified companies withbetter track records in building brands. Our survey highlights that among domesticcompanies, Sun pharma leads the pack, followed by Lupin with 68% and 59% of distributors,respectively, gauging strong brand building capability. Among MNCs, respondents believeSanofi-Aventis has better brand building ability. Similarly, in mid caps, Torrent, IPCA andGlenmark have better brand building ability compared to peers.

Chart 20: 68% respondents believe Sun P harma has better brand building ability


The table 6, below, further shows that the incremental growth in top 10 brands of mostplayers is higher or in line with the overall growth of respective domestic business, except forDr Reddys where growth is largely driven by new products. Sun pharma has shown highestgrowth in top 10 brands which further supports our preference.

0

15

30

45

60

75

S u n

P h a r m a

L u p i n

A v e n t

i s

M a n

k i n d

C a d

i l a U S V

I P C A

G l e n m a r

k

I n t a s

T o r r e n

t

G S K

A b b o t

t

P

i r a m a l

D r

R e d

d y

C i p l a

P f i z e r

R a n

b a x y

( % c

o v e r a g e

d i s t r i i

b u t o r s )


26/142



Table 6: Top 10 brands are growin g in line or higher than overall domestic grow th


Success of new product launchesMost large and mid-size companies, to actively expand coverage across molecules ortherapies, are launching new products. However, as per our survey 70-80% of these productshave been failures; most of these failures have been in established segments, where morethan 10-15 players currently exist. Hence, we observe companies which are more proactiveand launch products ahead of the market are more successful in building brands, whichpotentially contribute to higher growth of the business.

The chart, below, indicates that companies like Sun Pharma and Lupin are equally successfulin building new products, as Top 10 brands contribution to growth is relatively lower than thepeers. However, companies like Ranbaxy and Glenmark still have high dependency on Top 10

brands. Ranbaxys Top 10 brands are driving ~50% of its incremental growth, primarily dueto slower pace of new launches over the past two three years. Similarly, MNCs dependencyon top 10 brands is relatively high due to fewer product launches compared to Indian peers.

Chart 21: Low er contribution from Top 10 brands indicates higher traction from new launches

Indian peers MNC peers


Top 10 brandsOverall

domesticRelative

performance

Glenmark 36.9 27.6 22.4 5

Ranbaxy 36.6 15.7 9.1 7Torrent 30.4 24.0 22.1 2

Cipla 27.9 25.0 20.6 4

Cadila 28.3 17.9 14.9 3

Sun Pharma 19.6 32.5 22.9 10

GSK 38.7 12.4 13.2 -1

Sanofi Aventis 55.1 20.0 21.2 -1

IPCA 34.7 22.0 24.4 -2

Lupin 21.0 21.6 24.3 -3

Pfizer 63.9 21.0 23.7 -3

Dr Reddy's 39.9 8.2 11.5 -3

Top - 10 brandsCont. to sales

(%)

Growth (MAT Mar 2011) (%)

Cipla

DrReddy's

Glenmark

IPCA

Lupin

SunPharma

TorrentCadila

10

18

26

34

42

50

10 20 30 40 50

( T o p

1 0 b r a n d

s c o n

t r i b u t

i o n

t o

g r o w

t h )

Top 10 brands contribution to total domesticsales (%)

Relative outperformance of Top 10 brands reflectshigher focus on brandbuilding by most players

SanofiAventis

Pfizer

GSK

Ranbaxy

30

37

44

51

58

65

10 30 50 70 90

( T o p

1 0 b r a n d s c o n

t r i b u t

i o n

t o

g r o w

t h )

Top 10 brands contribution to total domesticsales (%)


27/142



Chart 22: Companies most aggressive in launching new products


Most distributors view higher traction from new launches by Sun Pharma , Sanofi Aventis andLupin. Sun Pharmas ability to identify therapeutic gap area and launch products ahead of themarket are key differentiating factors behind its success. Also differentiated R&D pipeline of Sun Pharma and Dr Reddys clearly give them an edge over others. Dr. Reddys growthcontribution from new products (78%) is highest among peers and higher than industry(40%).

Higher field force penetration or coverageMany pharma companies, including MNCs, have enhanced their field force over the past twoyears to expand their reach and penetration in existing as well as tier-II to IV markets. Webelieve there is a huge scope for higher coverage as modern medicine till date reaches only35% of the population. India has approximately 8, 00,000 doctors, but most companies cover

only 1,50,000-2,00,000 as these are the leading prescription generators. However, successof few pharma companies such as Mankind and Macleods has challenged the traditionalmodel of top down approach and many companies (both Indian as well as MNCs) haveexpanded their reach to gain the incremental pie of growing opportunities.

Chart 23: Field force penetration has increased over past four years


0.0

13.0

26.0

39.0

52.0

65.0

S u n

P h a r m a

C i p l a

M a n

k i n d

P f i z e r

L u p i n

I n t a s

I P C A

T o r r e n

t

R a n

b a x y

G l e n m a r

k

( % o

f d i s t r i b u t o r s

)

0

1,100

2,200

3,300

4,400

5,500

C i p l a

I P C A

C a d

i l a

R a n

b a x y

D r .

R e d

d y ' s

T o r r e n

t

L u p i n

S u n

P h a r m a

G l e n m a r

k

( F i e l

d f o r c e )

FY08 FY11 (YTD)

13%19%

25%

20% 18% 19% 5%

23%

9%

CAGR (FY08-11)

Higher field forcepenetration to optimisereach to pharmacists,doctors and hospitals


28/142



As viewed in Chart 23, Cipla, IPCA, and Cadila have the largest field force, while Sun Pharmahas not expanded its field force due to its restricted focus on Metros and tier I towns.Ranbaxys field force expansion, through its Project Virat, from 2,500 reps to 4,200 reps,over the past six months, has been the largest. Further, Glenmark lags its peers in terms of penetration, but expects to expand field force by 15-20% per annum over the next twoyears.

Field force stability critical for sustainable growthField force stability is critical to maintain higher productivity and growth, while instabilityresults in disruption of sales. Although retention has always been a challenge for theindustry, off late, the attrition rate has zoomed owing to aggressive hiring. We believe,companies with strong and effective field force management have higher probability of sustaining market share and growth.

Historically, MNCs were associated with better field force stability because of higher payscale. However, as per the survey, Lupin, Sanofi-Aventis and Sun pharma have been rankedas companies possessing highly effective and stable field force compared to its large cap andMNC peers. Cipla has the highest attrition followed by Ranbaxy, while field force stability of Dr. Reddys and Cadila is above average. In the mid-cap space, Torrent and Glenmark havemore stability than IPCA, Unichem, and FDC. In the unlisted space, Mankind has a stable fieldforce because of its highly effective incentive policy.

Chart 24: Companies with highly stable and effective field force (Survey)


Field force productivity is of paramount importanceCompanies with higher field force stability and higher concentration in chronic segment hasbetter productivity. Although, aggressive field force expansion has impacted per man

productivity of many companies in the short term, we view these investments as positive asthey lend long-term growth visibility. Analysing the long-term trend, we observe that Sunpharma, Cipla, and Lupin have higher productivity. Among MNCs, the field forces of Aventisand GSK are highly productive because of strong brand equity and concentration in a fewtherapies and geographies. Among mid caps, productivity of Torrent and IPCA has beenimpacted due to aggressive expansion in field force over the past two years. We highlightthat it takes three to four years for new medical representatives to achieve company levelproductivity.

0%

20%

40%

60%

80%

100%

S a n o f

i A v e n t

i s

L u p i n

M a n

k i n d

S u n

P h a r m a

T o r r e n

t

G l e n m a r

k

P f i z e r

U S V

A b b o t

t P i r a m a l

G S K

D r

R e d

d y ' s

I P C A

C a d

i l a

R a n

b a x y

C i p l a

U n i c h e m F D

C

Satble field force Average Poor field force stability

Higher field forceproductivity yieldshigher margins


29/142



Chart 25: Recent expansion in field force has impacted pro ductivity


Historical execution in domestic marketHistorical revenue growth reflects the effectiveness of strategies and strong executioncapabilities of management. We highlight that companies which have scored well on allparameters, as discussed above, have also delivered strong revenue growth (over past fiveyears). Chart 26 indicates that Lupin and IPCA have posted 24% CAGR over FY05-10, whileSun Pharma and Torrent have also registered strong growth of 22% and 20%, respectively.

Chart 26: Companies with strong historical grow th scored w ell in our survey


IPCA

Cadila

Ranbaxy

DRRD

Torrent

Lupin

Sun

Glenmark

CiplaAventis

GSK

0.0

2.4

4.8

7.2

9.6

12.0

1,000 2,000 3,000 4,000 5,000 6,000

F i e l

d f o r c e p r o d u c

t i v i t y ( I N R m n )

Field force (no of reps)

24.1 23.721.9

20.1 19.918.4

14.511.6

10.0 9.37.2 6.8

0.0

6.0

12.0

18.0

24.0

30.0

L u p i n

I P C A

S u n

P h a r m a

T o r r e n

t

P h a r m a

G l e n m a r

k

D r

R e d

d y ' s

C i p l a

C a d

i l a

S a n o f

i

A v e n t

i s

G S K

P f i z e r

R a n

b a x y

G r o w

t h ( % )


30/142



Future Growth DriversAs the domestic pharma market grows in size and diversity, there are several opportunitiesthat will scale up to their full potential. Some of these include biologics and vaccines,consumer healthcare, patented products and hospital segment, which are at an early stage of

lifecycle, but are likely to scale up with upgradation of therapies, increased penetration of multi-specialty hospitals and changes in patients preference. According to industry sources,these opportunities will collectively grow to USD 25 bn by 2020 from the current USD 5 bn.

Rising acceptability of new therapies

As the domestic pharma market grows in size and diversity, we believe the acceptability of modern medicine (including biologics and vaccines) and new therapies will increase due toaggressive market creation by players and greater propensity of self medication. Investmentin enhancing patient awareness and education will impact diagnosis and treatment levels. Inaddition patients will show greater propensity to self medicate. The consumer healthcaresegment has the potential to grow at over 14% annually, provided players make large OTCbrands easily available to consumers, differentiate their products, and establish an emotionalconnection with patients. Finally, the acceptance of biologics and vaccines will rise. Thebiologics market is expected to reach USD 3 bn by 2020 from the current USD 300 mn.

Launch of patented products

Although patented products contribution to the domestic market is negligible (USD 200 mn;


31/142



Chart 27: Hospital market to post 22% CAGR

Source: Mckinsey, Edelweiss research

0

3

6

9

12

15

2009 2020E

( % )

Public Private

MarketShare (%)

13 26


32/142



Valuations: Rich, But Not Stretched Earning CAGR of 23% likely over FY10-13E

We expect our pharma universe to post 17% revenue CAGR over FY11-13E, driven by25% and 21% growth in Sun Pharma and Cadila, respectively. The drivers of this growth

are multiple, in our view, including strong traction in the domestic market, USD 135 bnworth opportunity from patent cliff in the US market, and double digit growth in variousemerging markets. We expect operating margins to expand by 220 bps to 21.8% overFY11-13E, led by outperformance from Ranbaxy (400 bps expansion) and Sun Pharma(300 bps margin expansion) during the same period. We expect strong revenue growthand operating margin expansion to drive 23% earning CAGR over FY11-13E.

Table 7: Earnings grow th momentum across coverage universe (IN R bn)


Note: * Financials (ex-ROCE) represent base business (Ex one-off from Para IV)

**Financials for Sun pharma includes Taro but excludes one-off from Para-IV

Pharma Indexs relative performance to broad market has moderatedThe BSE Healthcare Index has underperformed the broad market (Sensex) over the pastfour months, after a strong outperformance over the past three years. This is furtherevident from the fact that the relative premium to the broader market, which had

expanded towards the beginning of the year (43-45% relative to market), has correctedmore than 14-15% from its peak since January 2011. We believe this is largely because:(a) sector valuation multiples (one year forward) have expanded from their five yearhistorical average of 19x to 23x; and (b) the sector is fairly owned across institutionalinvestors who have been booking profits. However, post correction, over the past fourmonths, the sector is trading near to its five year average multiple (18-19x).

Company FY11 FY13E CAGR FY11 FY13E CAGR FY11 FY13E FY11 FY13E CAGR FY11 FY13E CAGR (%)(%) (%) (%)

Cadila 45.0 65.9 21.1 9.9 15.0 23.4 21.9 22.8 6.5 10.3 26.5 31.6 50.5 26.5 Cipla 62.5 82.8 15.1 13.6 19.3 19.3 21.7 23.3 10.0 14.9 22.1 12.4 18.5 22.1 Dr Reddy's* 72.7 97.5 15.8 15.3 21.2 17.7 21.0 21.7 10.5 14.9 19.0 62.4 88.4 19.0

Lupin 56.7 75.3 15.2 11.6 16.1 17.9 20.5 21.4 8.5 11.8 17.9 19.1 26.5 17.9 Ranbaxy* 72.3 90.3 11.8 6.1 11.3 36.0 8.5 12.5 3.6 7.1 40.8 8.5 16.9 40.8 Sun Pharma** 50.6 78.6 24.6 15.2 24.5 27.0 30.0 31.2 13.4 20.7 24.3 12.9 21.2 28.1 Torrent Pharma 22.6 32.1 19.3 4.4 6.7 23.0 19.5 20.8 3.0 4.6 24.6 35.1 54.5 24.6 Total 382.4 522.6 16.9 76.0 114.1 22.5 19.9 21.8 55.4 84.3 23.4 182.0 276.5 23.3

Revenue EBIDTA EBIDTA Margins (%) PAT EPS


33/142



Chart 28: Healthcare I ndex performance viz--viz Sensex


Valuations rich, but not stretched; prefer stock-specific approachAlthough valuations of the pharma sector have moved up, they are not in stretchedterritory. While we remain positive on the sector (as fundamentals remain strong), weprefer to be more stock specific. Moreover, variations in stock performance within thesector also highlight the importance of company-focused approach.

Chart 29: Relative performance w ithin sector (to Sensex)


Premium valuations to sustainOur universe currently trades at 22x FY12E and 18.5x FY13E EPS. Current sectorvaluations are closer to their five year average PE. Historically, the pharma universe hastraded at a 10-15% premium to the broader market on account of consistent earningsgrowth, healthy balance sheet, and defensive nature of the market. Currently, thePharma Index is trading at 24-25% premium to the Sensex (past one year averagepremium is 25-26%), slightly higher than the long-term average premium of 10-15%.We expect premium valuations to sustain with emergence of the innovator-genericpartnership model, strong earnings growth (23% earning CAGR), robust financial ratios(Universe RoCE of 28% and low leverage of 0.2 x) and higher positive free cash flow.

(9)

34

68

(32)

16 22

(5)

18

71

(51)

47 47

(70.0)

(35.0)

0.0

35.0

70.0

105.0

YTD CY10 CY09 CY08 CY07 CY06

( % )

BSE HC Sensex

(16)30

16

(8)

(1)13

42

5

2

(2)

12

(20) 0 20 40 60

Cipla

Dr Reddy's

Sun pharma

Ranbaxy

Glenmark

LupinCadila

IPCA

Torrent Pharma

GSK

Pfizer

(%)

1 yr R elative

Recentunderperformance ledby correction frompeak multiples

(4)42

28

411

2554

1814

1025

(20) 0 20 40 60

CiplaDr Reddy's

Sun pharmaRanbaxy

GlenmarkLupin

CadilaIPCA

Torrent PharmaGSK

Pfizer

(%)

1 yr Ablso lute


34/142



Chart 30: Pharma relative premium/ discount to Sensex


Lupin and Cadila likely to catch up peers multipleWe expect our large-cap universe to continue to trade at 19x one year forward PE (in-line with five-year average). However, Lupin and Cadila, which have historically traded atfive year mean multiple of 13-14 (mid-cap valuations), are seeing visible narrowingdown of the multiple gap with large peers as these companies have gradually moved intothe big league and we expect this gap (still trading at 10-15% discount to comparablepeers) to further narrow.

Top picks

We conclude, on the basis of our distributor survey, that Sun Pharma, Lupin, Cipla, andTorrent have a strong franchise in the domestic market and robust growth outlook.However, after considering incremental upsides from international markets, company-

specific issues and current valuations, we expect Lupin, Dr Reddys, Cadila, andTorrent to be outperformers over the next 12-18 months.

Table 8: Peer valuations matrix

Note: * PE multiple for Dr Reddys, Sun Pharma. and Ranbaxy is based on CMP adjusted for NPV of one-off exclusivity sales


0.0

0.4

0.7

1.1

1.4

1.8

0

80

160

240

320

400

A p r - 0

5

O c t - 0

5

A p r - 0

6

O c t - 0

6

A p r - 0

7

O c t - 0

7

A p r - 0

8

O c t - 0

8

A p r - 0

9

O c t - 0

9

A p r - 1

0

O c t - 1

0

A p r - 1

1

( R e l a t

i v e p r e m

i u m

t o s e n s e x

)

( I n d e x

)

Pharma Sensex Relative premium

Pharma index has tradedat 45% premium

CMP Reco

INR FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13ESun Pharma* 446 HOLD 12.9 17.9 21.2 28.1 33.7 24.4 20.5 8.4 7.8 6.3 28.7 20.2 16.7Cipla 321 HOLD 12.4 15.2 18.5 22.1 25.9 21.1 17.3 4.0 3.5 3.0 18.8 15.7 12.9Ranbaxy* 468 HOLD 8.5 13.6 16.9 40.8 44.0 27.5 22.2 2.3 2.0 1.7 27.5 19.9 14.0Cadila 844 BUY 31.6 40.6 50.5 26.5 26.7 20.8 16.7 4.0 3.2 2.6 18.2 14.3 11.4Dr. Reddy's* 1,656 BUY 62.4 76.4 88.4 19.0 25.0 20.5 17.7 3.7 2.8 2.4 17.3 14.1 11.4Lupin 412 BUY 19.1 21.6 26.5 17.9 21.6 19.1 15.6 3.2 2.7 2.3 15.4 12.3 10.5Large Caps 29.5 22.2 18.3 4.3 3.7 3.0 21.0 16.1 12.8

Glenmark 300 NC 15.2 18.6 22.9 22.9 19.8 16.2 13.1 3.2 2.8 2.3 11.8 10.7 8.8Torrent pharma 592 BUY 35.1 42.6 54.5 24.6 16.8 13.9 10.9 2.2 1.8 1.5 11.6 9.4 7.3IPCA 310 NC 17.2 22.0 29.0 29.9 18.1 14.1 10.7 2.2 1.8 1.5 11.1 8.9 7.3Aurobindo 195 BUY 19.7 22.5 27.8 18.7 9.9 8.7 7.0 1.8 1.5 1.2 7.5 6.8 5.5Unichem 191 NC 13.1 15.2 19.8 23.0 14.6 12.5 9.7 2.0 1.7 1.3 9.6 8.2 6.3Mid-cap 15.8 13.1 10.3 2.3 1.9 1.6 10.3 8.8 7.1

EV/EBITDA (x)EPS (INR) P/E (x)CAGR

(FY11-13)(%)

EV/Sales (x)


35/142



Key Risks

High field force attrition could dent growth and profitabilityA well spread out and competent field force (with good communication skills and productknowledge) is critical for establishing and sustaining market share in a fiercelycompetitive market like India. Players like Sun pharma, Lupin and most MNCs havepioneered various models to establish quality field force. This entails rigorous investmentin hiring, training, and retaining people, which creates upfront costs recovered over two-three years. For example, it takes one year for a company to recover upfront costs (orsunk costs) for each new medical representative and it takes another two-three years fora medical representative to reach company level productivity. Moreover, it takes six-eight months for a new sales representative to establish relations with physicians andpractitioners. Hence, loss of a trained field person not only results in loss of sales, butalso loss of initial investment. As per the survey, most companies are facing highattrition across tiers or geographies which could potentially risk growth in near term.Almost ~ 75-80% of distributors confirmed 15-30% (and above) field force attritionacross markets surveyed (see chart 31).

Chart 31: Higher attrition rates across the board


We have identified three key reasons behind higher attrition: (a) increase in demand formedical representatives and limited supply of talent pool with companies competing forhigh quality people; (b) setting up challenging field force targets with mandate toaggressively capture market share; and (c) shift to other sectors like IT and financialservices for better incentives and growth.

Sun pharma, Lupin, and Torrent have been ranked by distributors as companiespossessing highly effective and stable field force, while Cadila, IPCA, GSK, and Cipla arecompanies facing higher attrition.

30%


36/142


37/142



Chart 33: MNC grow th has improved over past few mo nths


Table 9: Emerging competition from new players


Decline in success rate of new product introductionsNew product introductions contribute 4-5% of overall market growth. Most large andmid-size companies, to actively expand coverage across molecules or therapies, are

aggressively launching new products. However, as per our survey, 70-80% of theseproducts are failures. Most of these failures are in established segments, where morethan 10-15 players currently exist. Also, there is a growing resistance among retailersand distributors to provide shelf space for new products before prescription generation.Hence, we observe companies that are more proactive and launch products ahead of themarket are more successful in building brands, which potentially contributes to higherbusiness growth. Most distributors suggest that new launches by Sun Pharma, Sanofi-Aventis and Lupin have pent-up demand in the first week of launch. Also, companieswith differentiated R&D pipeline like Sun Pharma and Dr. Reddys clearly have an edgeover others.

Potential expansion of controlled pricing list to impact profitabilityDomestic drug prices are lowest in the world, however, time and again the governmenthas deliberated expansion of the drugs list under pricing control. Currently, 74 drugs(15% of total market) are under controlled pricing and government is contemplating toexpand this list to include up to 356 drugs which could cover potentially 50-60% of thetotal market. Most of the existing products under price control are anti-infective, painkillers and vitamins, among others, which primarily belong to the acute therapysegment. However, the proposal, if implemented, will extend the list to include somebasic anti-diabetics and cardiovascular/other specialty class drugs, which are increasingprevalence and affecting the masses.

0.0

7.0

14.0

21.0

28.0

35.0

Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11

( % Y

- o - Y

)

Aventis Pfizer GSK

2010 2011 2010 2011 2010 2011Mankind 2.87 3.21 7 7 22.5 28.7 Alkem 2.82 2.96 8 9 16.3 21.0 Macleods 1.69 1.98 17 15 35.8 34.4 Eris Life Sciences 0.24 0.40 75 58 146.0 93.4

Market share (%) Growth Y-o-Y (%)Rank


38/142



Appendix- I

India w ill emerge third largest country in terms of incremental growth

Chart 1: USD 55 bn indus try by 2020

Source: McKinsey, Edelweiss research

Chart 2: India w ill emerge third largest in terms of incremental growth


12.6

35

55

70

0

10

20

30

40

50

60

70

80

2009 Pessimistic case(2020)

Base case(2020)

Aggressive case(2020)

CAGR ~17%

CAGR ~14.5%

CAGR~10%

India

Turkey

South Korea

Brazil

Mexico

Canada

China

Spain

UK

Italy

Germany

France

Japan

US

Turkey

SouthKorea

Mexico

Brazil

India

Canada

Spain

Italy

UK

China

Germany

France

Japan

US1

2

3

4

5

6

7

8

9

10

11

12

13

14

1

2

3

4

5

6

7

8

9

10

11

12

13

14

Germany

Brazil

Canada

UK

Japan

France

India

China

US 9%

11%

5%

2%

4%

13%

2%

8%

7%

Industry sources project Indian pharma market to be worth USD 55 bn by 2020 (14.5% CAGR). Interestingly, this makes

the domestic market the third largest, next to US and China, in terms of incremental growth.


39/142



Key driver of growth in pharma industry (P ULL factors)

Aging population and increased prevalence of chronic diseases:

Chart 3: Aging population Chart 4: Increased prevalence of chronic diseases

Source: Industry, Edelweiss research

Rising income level and increased awareness:

0

20

40

60

80

100

2000 2005 2010 2015 2020 2025 2030

( % )

0-14 15-59 60+ years 65+ years

46% of distributors believe that large and aging population coupled with increase in prevalence of chronic diseases iskey drivers of pharma growth.

Also, increased prevalence of chronic diseases will sustain higher growth in domestic market (currently growing at18-20% vs. 15% of industry) due to longevity of prescription generation.

India is also home to the largest pediatric and geriatric population, which is an attractive market in healthcaresegment (consumes 66% higher drugs).

Increased awareness and rising per capita income have emerged (34% of the respondents) as second key growthdrivers for pharma growth, as per our survey.

The per capita pharma spend in India significantly lags other emerging markets.

Healthcare spending has high beta on income. Rising income will drive 73 mn people into middle or upper incomesegment, leading to higher affordability and as income grows, percentage spend on healthcare r ises as well.

0

15

30

45

60

75

CHD Diabetes Asthma Obesity Cancer

2005 2010 2020

5.0 2.8 2.8

Prevalence of disea se area s (%)

3.8 0.2


40/142



Chart 5: India has low / capita inc. (USD) Affordability drives growth Health spend has high beta on income


Growing healthcare infrastructure, higher access and increase in government spending are other macro drivers

Chart 6: Grow ing health care infra. Rapid insura nce penetr ation High spending on healthcare by Govt.


690

613

346

148

50

Brazil

Russia

Thailand

China

India

0%

20%

40%

60%

80%

100%

FY06 FY10 FY20(P)

Deprived Consuming Elite

0

10

20

30

40

50

G o v t . h

o s p i

t a l

M i n i

h o s p

i t a l s

M e d . P

v t .

h o s p

i t a l s

L a r g e

P v t .

h

o s p i

t a l s

C o r p . c h a i n s

2009 2020

3 7 5 9 16

Growth rate (%)

20% of distributors believe that rapid penetration of insurance and growing healthcare infrastructure is another factordriving higher growth in pharma spending.

USD 200 bn projected investment for creating and upgrading the healthcare infrastructure which will add growthmomentum to the pharma industry. This spend will be largely through private sector.

Healthcare insurance posted 25% CAGR over CY05-10 and currently over 300mn people are covered by varioushealthcare policies. This is likely to go up to 655 mn people by 2020.

Higher government spending on healthcare e.g. Arogya Raksha Yojana (micro health insurance plan) has increasedhealth spend in Tier IV and other micro areas. Total government expenditure has increased by a healthy 18% CAGRover CY06-09.

0.0

6.0

12.0

18.0

24.0

30.0

1960 1970 1980 1990 2000 2010

( % )

Health Food

2010 2020

State insuranceRSBYESICPvt insuranceGovt. employee insurance

Growth

3

8

14

2

22

0.0

2.5

5.0

7.5

10.0

12.5

2006 2007 2008 2009

( U S D b n )

CAGR 18%


41/142


42/142



Penetration in rural markets

Chart 9: Rural markets have outperfo rmed average domestic grow th in the past


New product launches

Table 1: Value contribution from new products (>INR 100mn) has increased multi fold

Source: IMS, Edelweiss research

0

1,200

2,400

3,600

4,800

6,000

Urban market

( U S D b n )

2005 2007

CAGR 13%

2007 2008 2009 2010Domestic market (INR bn) 288 329 366 438 No. of new introduction (NI) 4,810 4,285 4,365 4,562 Value of NI (INR bn) 22 22 24 27 Value/ NI (INR mn) 6.0 7.7 8.4 9.6 Contribution to domestic market (%) 7.5 6.6 6.7 6.2 No. of NIs above INR 100 mn 10 10 15 20 Contribution of NIs above INR 100 mn to total NI value (%) 6.2 7.5 12.3 16.1 Value of largest NIs (INR mn) 233 309 521 814

25% of the respondents believe that new product introduction is another key strategy adopted by pharma companiesto step up the growth trajectory.

4-5% of the industry growth has been driven by new launches in the past. However, going forward, the pace of newlaunches will moderate and focus will be on building brands.

The average value per new launch has increased consistently despite lesser products being launched. This could bedue to brand building efforts by companies.

Metro and tier-I towns will continue to remain significant growth drivers because of growing urbanization, while ruraland tier II markets are gaining importance because of high income growth and penetration.

Rural markets have grown higher (25% CAGR) than the industry owing to better penetration and increase inaffordability.

We expect this growth momentum to sustain, taking its share from 20% of total market in 2010 to 25% in 2020.

0

300

600

900

1,200

1,500

Rural market

( U S D b n )

2005 2007

CAGR 25%


43/142



Focus on building brands

Focus on specialty promotion

Chart 8:

21% of our distributors believe that focus on brand building is a key strategy adopted by various pharma companies.

Understanding the need of building brands, companies have already started focusing on specialty promotions as well asmulti-brand marketing strategies.

Not only the number of new introductions above INR 100 mn has doubled over the past 4 years, but their valuecontribution has also increased multifold

Documents

Pharma Sector - Edel