Ever since the coronavirus pandemic outbreak has spooked the world, two sectors have grabbed the undivided attention of investors—pharmaceuticals and technology. Both these industries are pivotal to the success of domestic manufacturing, consumption and exports.
India is soon going to become the pharmacy of the world—a hot topic on Dalal Street nowadays.
According to government records, India is the 3rd largest manufacturer of pharmaceuticals by volume and 14th largest by value. Moreover, it enjoys a 20% market share in the global generics market (by volume) and also accounts for 62% of the supplies of vaccines globally.
In the post pandemic world, governments across the world are expected to up their healthcare spends. This, coupled with the increased awareness amongst people regarding health and hygiene, is expected to brighten the prospects of Indian pharma companies having a global presence.
Rising manufacturing costs in China and India’s newly found thrust on going all-out on domestic manufacturing has the potential to open the floodgates of opportunities for Indian pharma companies. As a number of countries stride forward to cut their manufacturing reliance on China, the Indian pharma industry will enjoy strong tailwinds.
Various estimates suggest that manufacturing costs of drugs are 20%-30% cheaper in China as compared to that in India. However, with various government initiatives and committed investments by the industry, India might manage to narrow this gap substantially. The work of setting up two parks each for bulk drugs and medical devices has already begun.
What you just read is a 10,000-feet above ground, helicopter view which looks rosy. Unless you zero down on companies that may actually spearhead the competition, the bullish view for the industry would mean nothing to the success of your investment portfolio.
Therefore, first and foremost, stop getting carried away by any company suffixed-Pharma. You might end up betting on a damp-squib thinking that it will provide your portfolio an aerial route. But at the same time, you shouldn’t miss the forest for trees.
According to IQVIA estimates, the global pharmaceutical market is worth USD 1.2 trillion and the US makes up 40% of it. India, Japan, Russia and China are also catching up fast. Therefore, before betting on any company it’s imperative for you to check how much exposure it has to these markets.
Although the data above is crucial, it isn’t enough to pick any company for your portfolio.
With 7 new product launches, Ajanta Pharma’s US business jumped a massive 82% in FY20, whereas, Dr Reddy’s North America revenue grew just 8% despite 27 new product launches. On the other hand, Alembic Pharma reported an impressive rise of 53% in its US revenues. The company launched 22 new products in FY20.
Which company has better prospects?
Wait! Look before you leap…This data tells you nothing about the future prospects.
For that you may want to know the product pipeline of Indian pharma companies focused on the US (along with other geographies) and also the size of the market they cater to. Besides, the level of competition and complexities involved in the manufacturing of drugs also determines how attractive the new product launches could be for a company.
Competitive Generic Therapy (CGT) route awards exclusivity of 180 days to first-time generic product of a particular brand launched in the US. Exclusivity can boost the top line growth—no wonder stock markets celebrate such product launches. If new launches belong to a complex therapeutic area, it’s icing on the cake!
For example, on May 14, 2020, Laurus Labs got the USFDA’s approval to launch the First-Time Generic Drug—SYMFI-LO—a complete regimen for the treatment of Human Immunodeficiency Virus type 1 (HIV-1) infection. The share price of Laurus Labs has zoomed nearly 250% since then.
Between 2020 and 2024, pharmaceutical brands worth USD 139 billion are going off-patent, which might present high growth opportunities in the generics segment to Indian pharma companies. The share of specialty medicines in the overall spending on pharmacy in the developed markets is likely to grow from 44% in 2019 to 52% in 2024.
Data above suggests, if you want to capture the macro-theme of better healthcare at affordable costs, which is likely to play out in the US over the coming 3-4 years, you should identify the right companies.
The latest quantitative data may not give you the true picture in many cases, since there’s an overhang of the past. As you know, markets are forward looking. Depending on the product pipeline and management’s execution capabilities, markets factor in some future growth of pharma companies beforehand. In the initial stages, only a few savvy investors usually spot future growth trends.
For instance…
Lupin has a pipeline of 43 first-to-file products with an addressable market size of USD 43.6 billion. It’s noteworthy that 14 of these are exclusive opportunities. As on March 31, 2020 the company had more than 158 ANDAs (Abbreviated New Drug Applications) pending for approval which may potentially help it cater to the pharma market of USD 71.7 billion. The company is hopeful about the prospects of its inhalation and injectable business.
No wonder Lupin has been buzzing on Dalal Street despite its weak performance for the last several quarters!
In the past, many Indian companies including the frontliners, such as Sun, Lupin and Dr Reddy’s have faced regulatory hurdles. Consequently, they reported cancellation of new product launches and loss of export revenues. That reflects in their historical performance as well. However, some companies have learned from these experiences and have become more cautious (and perhaps uncompromising) to regulatory issues.
Such approach might help them to be on the right side of compliance going forward and make the most of potential opportunities.
A few Indian companies such as Ajanta Pharma and Caplin Point Labs have identified their niches. The former derives about 24% of its revenues from the African markets and another 26% from Asian countries excluding India. Caplin Point has been more focused on Latin American Markets so far. These companies have become prominent players in their targeted geographies.
That said, one has to be cautious about the currency movements in African and Latin American markets. At times, fluctuations in the respective domestic currencies can significantly affect margins. Caplin Point is very keen on growing its presence in the US markets going forward and has made some early progress too.
Capital expenditures incurred by pharmaceutical companies in recent years can give you some idea about their future plans.
Lupin has invested Rs 3,260 crore over the last 4 financial years for the advancement of existing capacities to facilitate future growth plans and attain efficiencies. Significant enhancement of capacities in areas such as Biosimilars and inhalation remain work in progress.
Last month, the company received the USFDA’s approval for launching Albuterol Sulfate Inhalation Aerosol, 90 mcg, in the US. This will help the company cater to the market of USD 1.3 billion. Lupin recently commissioned the Unit III-Indore facility—where the inhalation product will be manufactured.
Similarly, Alembic Pharma enhanced its capacities by incurring a capex of Rs 2,940 crore over the last 6 financial years. The company believes that the recent capacity additions will help it grow in the segments such as ophthalmology, general injectables, oncology injectables and oral solids.
Alkem, on the other hand, is coming out of a huge capex cycle through which it set up new manufacturing facilities, de-bottlenecked the existing ones and also established new R&D centres. The recently commissioned Indore plant is expected to manufacture tablets, capsules and dry syrups to serve the demand in the US and other key international markets.
Developing a rapport with doctors to increase the awareness about a company’s products has been a time-tested approach followed by pharmaceutical companies to increase the prescription sales. However, with changing times, such practices are becoming absolutely obsolete.
Digital technologies are making inroads in every process—right from manufacturing to distribution.
According to a Docplexus survey, 68% of doctors don’t want to meet Medical Representatives (MRs) more than once a month. And a majority of them think such meetings add no value to their clinical practices. Moreover, half the doctors surveyed by e-Pharma Physicians Annual Study stated that they were already aware of the drug information their MRs provided.
On this backdrop, the transformation of the entire ecosystem looks inevitable. A part of it is already underway. According to industry experts, digital platforms are likely to play a big role in increasing the engagement of healthcare professionals. Re-skilling, right-sizing, re-orientation of sales force are some interesting trends to watch out for.
In the overseas markets, many Indian companies largely rely on large distributors but there are a few exceptions. For instance, Alembic Pharma established the front-end in 2015. The company achieved USD 250 million of revenue through the front-end sales in the US in FY20.
Similarly, Caplin Point is also reducing its reliance on large distributors and reaching out to pharmacies directly in the Latin American markets. It intends to set up the front-end by FY22. The company believes such a move would be margin accretive.
Cut-throat competition and pricing pressure in the key markets such as the US and India have been persistent issues of the pharma industry. Nonetheless, growth opportunities are expected to be high in the post pandemic world.
Some companies are gearing up to achieve new-highs through intelligent selection of product portfolio, markets and marketing preferences. They are walking the tight-rope on cost management. At the same time, they are re-skilling their workforce, redefining supply chains, investing in backward integration to cut their reliance on Chinese APIs. Needless to say, research capabilities of pharma companies matter the most in developing complex drugs.
With just one or two companies in your portfolio, you may not be able to get adequate exposure to opportunities present in the pharma markets. You should eye a handful of companies with a good governance record that can give you exposure to key pharma markets and therapeutic areas having promising prospects.
If you take precaution at the time of stock selection, later you needn’t swallow a bitter pill for pain management.
Note: Our technical expert has assigned a BUY recommendation to Lupin on September 20, 2020. If you follow the technical advice, please stick to the stop losses and target prices. Watch the video below to see how Lupin looks on charts.
Watch The Video:
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
You may also like to read: Finding sane companies under insane market conditions…
Disclaimer
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
Consult your financial advisor before taking any investment decision.
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
For android only
Post your comment
You must be logged in to post a comment.