Comparative analysis of India formulations business across players

12 Oct 2022 , 06:24 AM

Exposure to faster-growing chronic therapies & growth in the chronic portfolio, ability to create big brands as reflected through the number of brands ranking among the top 300 brands in India, and improvement in India sales rep productivity over the past 5-year period were other parameters considered for the purpose of this analysis.

IIFL Securities’ analysis indicates that Cipla, Sun Pharmaceuticals, JB Pharma and Torrent’s India business rank the best, on a consolidated score across the 14 various metrics (equal-weighted), while Sanofi, Alembic and Zydus’ India business rank the least. Analysts at IIFL Securities continue to reiterate JB Pharma and Torrent as their preferred picks among the India-focused formulation companies and also upgrade Sanofi from Sell to Add following its ~25% correction in stock price YTD.

IPM has consistently clocked 10-11% CAGR, though volume growth has considerably slowed to 2.5-3% over FY18-22

While the India Pharma Market (IPM) has been consistently growing at ~10-11% Cagr over FY11-22, the industry volume growth has slowed from 6.2% CAGR over FY11-18 to 2.9% CAGR over FY18-22. Increasing volumes have accounted for only ~27% of IPM’s growth over FY18-22 versus ~54% over FY11-18. Price increases have been a bigger component of domestic pharma market’s growth over the past 4-5 years, having been ~4-4.5% CAGR for IPM over FY18-22, thereby contributing to ~40% of industry’s growth during this period. Slowing volume growth for IPM can be attributed to declining rate of new product launches, as global pharma pipelines have shifted towards new-age therapies of autoimmune diseases/oncology – the market for which is limited in India (owing to affordability issues). Ramp-up of trade generics in India would have also partly impacted the volume growth for branded generics.

JB Pharma, Ipca and Alkem have significantly outperformed industry volume growth, led by expanding CVM presence

Most of the large Indian pharma players have struggled to outperform IPM volume growth with Glenmark, Zydus, Dr. Reddy’s, Torrent, Cipla, Alembic and Sanofi’s India volume growth being <2% CAGR over FY18-22. However, JB Pharma, Ipca and Alkem have significantly outperformed industry volume growth, with their volumes growing at ~13%, 7% and 6% CAGR respectively over FY18-22 versus IPM volume growth of ~3% CAGR. While most of the large peers in the industry have covered market (CVM) presence of ~66-68% of IPM, the CVM presence for JB Pharma, Ipca and Alkem is relatively lower at ~23%, 39% and 63%, respectively. Expansion of the CVM presence by ~750, 300, 20 basis points for JB Pharma, Ipca, Alkem respectively over FY18-22 along with ramp-up in chronic portfolio has led to volume outperformance for these players.
 
Strong volume growth has driven market share (MS) gains for JB Pharma, Ipca and Alkem

Thereby allowing them to significantly outperform IPM value growth. While IPM has clocked ~11% revenue CAGR over FY18-22, JB Pharma, Ipca and Alkem’s India formulations business has grown at 19%, 15% and 13% respectively based on primary sales. Volume-driven outperformance has led to ~30-40 basis points gains in MS for JB Pharma, Ipca and Alkem over FY17-22. Although analysts at IIFL Securities forecast Alkem’s India business to grow only at ~10% CAGR over FY22-25 owing to the high base of acute/Covidallied sales in FY22, they expect JB Pharma (ex-Sanzyme and Azmarda acquisitions) and Ipca’s India business to continue their ~14-15% CAGR over FY22-25 driven by strong focus on volume-led growth. With JB Pharma’s legacy acute brands of Rantac and Metrogyl having large prescription volumes, JB’s volume/value MS in IPM at ~1.9x (JB’s volume & value MS in IPM stands at ~1.5% & ~0.8% respectively) is significantly ahead of that of Cipla/Zydus at ~1.3x.

JB Pharma, Lupin and Cipla have been outperforming the growth of chronic therapies in India

While faster-growing chronic therapies account for ~36% of the IPM, few companies such as Eris, Lupin, Torrent, Cipla and Sanofi derive ~55-70% of their India formulation sales from chronic products. Although chronic therapies have grown at ~12.3% CAGR in the IPM over FY18-22, Sanofi, Torrent and Eris’ chronic portfolio in India has grown only at ~7-10% CAGR during this period, thereby underperforming chronic market growth. Comparatively, JB Pharma has significantly outperformed chronic market growth as well with its chronic portfolio growing at ~25% CAGR over FY18-22, driven by sustained >20% growth in its cardiac products and new launches in segments like diabetes, nephrology, respiratory, etc. Even Lupin and Cipla’s chronic business in India has grown handsomely at ~14% CAGR over the past 4-5 years.

Torrent, Sanofi and Sun rank the best in terms of productivity (PCPM) for the India sales rep team

Chronic-focused peers typically have higher PCPM for their India sales rep team as compared to acute-focused companies, owing to higher realizations for chronic products as well as lower number of reps in chronic business versus acute business (given acute companies need to cover GPs and hence, have a larger field force). Accordingly, with Torrent, Sanofi and Sun Pharma deriving ~50-60% of their India sales from chronic products, these companies have the highest PCPM in India at Rs9.5-10 lakh pm versus industry average of Rs5.5-6 lakh pm. Acute-heavy companies like Alkem, Alembic and Ipca have the lowest sales rep productivity at ~Rs4 lakh pm. In terms of productivity improvements over the past 5-year period, Sanofi, Torrent and JB Pharma have delivered highest India PCPM CAGR of ~9-12% over FY17-22.

Pharma MNCs have underperformed the IPM growth and consistently lost ranks; IIFL Securities upgrades Sanofi from Sell to Add

Although the IPM has clocked ~11% revenue CAGR over FY18-22, Abbott, Sanofi and GSK’s India business have grown only at ~7-9% CAGR during this period, respectively. Most of the pharma MNCs in India (Abbott, GSK, Pfizer, Sanofi) have failed to outperform domestic pharma market growth, given these MNCs are largely dependent on their global parent for new launches in India. Consequently, these MNCs have consistently lost ranks in the domestic market. Abbott/GSK/Pfizer/Sanofi are now ranked 2^nd/13^th/16^th/18^th in the IPM versus 1^st/4^th/9^th/10^th rankings in FY13. Analysts at IIFL Securities continue to prefer domestic pharma companies over MNCs, to play the India formulations growth story, considering domestic players have been outperforming the market growth and are trading at much reasonable valuations as against MNCs.

Sanofi’s India portfolio (9% primary sales CAGR over CY16-21) has grown only in-line or marginally below IPM growth rates, despite the company having almost ~54% revenue exposure to faster-growing cardiac and diabetes therapies. Analysts at IIFL Securities believe that Sanofi’s underperformance in the domestic market is unlikely to reverse in the near-term, given that its global parent’s product launches in the immunology/oncology segments will happen in India through unlisted group entities, rather than Sanofi India. Additionally, recent inclusion of Lantus (Insulin Glargine) under NLEM/price controls will restrict Sanofi’s ability to take price increases on this product (historical price hikes for Lantus have been ~8% CAGR), and thereby, limit company’s overall India business growth. Although analysts at IIFL Securities forecast only ~8% EPS CAGR for Sanofi India over CY21-24, they believe valuations are now reasonable at ~22x CY23 PER, following the ~25% correction in stock price YTD. They upgrade their rating on Sanofi India from Sell to Add with an unchanged TP of Rs6,320.

Cipla, Sun, JB Pharma and Torrent’s India business ranks the best on a consolidated score across 14 different parameters

Analysts at IIFL Securities have compared the India formulations business of pharma companies under their coverage universe across 14 different parameters, including MS gains in the domestic pharma market, contribution of volume growth to overall India business growth, exposure to faster-growing chronic therapies & growth in the chronic portfolio, ability to create big brands as reflected through the number of brands ranking among the top-300 brands in India, growth rate in top-10 brands, exposure to NLEM portfolio, improvement in India sales rep productivity over the past 5-year period, and growth potential in India business over FY22-25. Their analysis indicates that Cipla, Sun, JB Pharma and Torrent’s India business rank the best on a consolidated score across these 14 various metrics (equal-weighted), while Sanofi, Alembic and Zydus’ India business rank the least. They continue to reiterate JB Pharma and Torrent as their preferred picks among the India-focused formulation companies.