Published on 15/09/2020 11:11:44 AM | Source: HDFC Securities Ltd

Pharma Sector Update - Chronic therapy: A portfolio prescription By HDFC Securities

Posted in Broking Firm Views - Sector Report| #Pharma Sector #HDFC Securities #Sector Report

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Chronic therapy: A portfolio prescription

Therapeutic re-order is underway

Domestic formulations business is the most sustainable and profitable part of Indian pharma companies. Its contribution to overall revenues has increased by 500bps to ~31% for our covered companies in the past seven years. Companies have shifted focus towards the high-growth chronic segment. Cardiac is in a race to lead the India Pharma Market (IPM), displacing anti-infectives from its dominant position. By 2030, cardiac and diabetes will become the top two therapies, accounting for ~27-30% of the market. In this report, we analyse the broad IPM trends, therapeutic shifts, incumbent’s progress in the chronic segment, and key determinants of success.


Chronic volume growth is twice the industry average

The chronic segment has grown at 14% CAGR and outperformed the industry by ~300bps over the past seven years. Importantly, the volume growth in this segment has been ~7%, which is double the industry average of 3-4%. Key chronic therapies such as cardiac and anti-diabetes have witnessed ~450 bps increase in market share, accounting for 22% of the IPM. Lifestyle changes have rapidly increased the risks of high blood pressure, high cholesterol, obesity, and diabetes thereby contributing to an increased disease burden.


Leading companies with big brands could emerge as winners

In the long run, we believe companies with strong therapeutic presence (high growth segments, leadership), ability to build brands (leverage brand equity with prescribers), ability to launch new/in-licensed products consistently and superior MR productivity will gain market shares and outperform the industry. Lupin, Glenmark, Mankind and Intas are making rapid strides in the chronic segment, which is reflecting in their rising market shares.


COVID disruption to further accelerate chronic share gains

While the IPM declined by 6% in the quarter, the chronic segment reported a growth of ~4% in the same period. After a subdued April and May, June witnessed a strong recovery in key chronic therapies. Cardiac, anti-diabetes and CNS grew by 14%, 9% and 8% respectively for the month. Our performance analysis of top brands in the June quarter suggests that the bigger brands are growing significantly ahead of their category average and hence are likely to gain further market share in the near term (Exhibit 20).


Play on consumerism, premium valuations to sustain

More than 90% of the Indian pharma market is branded generic in nature and has attributes similar to the consumer staples business. Notwithstanding the near- term disruption, we see significant structural benefits for the industry over the long term, viz., expansion of the formal market, the resilience of demand, consolidation of market share and cost efficiencies, which augur well for premium valuations. We assign the highest multiple to India business (one-year forward EV/EBITDA multiple of 14-17x) in our business-wise EV/EBITDA framework (Exhibit 23). Companies with a higher contribution of India revenues and a higher proportion of chronic within that deserve premium multiple over peers. The key potential risk is the expansion of NLEM list to drugs in the chronic segment.


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