Executive Summary
The domestic branded generics market, a critical cog in the growth wheel for most Indian companies, is currently in spate. Unlike the apprehension of market participants about the sustainability of growth, our survey findings indicate that growth is not only sustainable but will move into the next orbit of 18-20% viz-a-viz current growth of 14-15%. Higher growth in 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 will potentially emerge as winners. Hence, to understand these changing dynamics, we commissioned an extensive and unique study across 27 cities in 11 states (all four zones— North, 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 presence in 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. We travelled across the length and breadth of the country to gain incisive insights into the future of the domestic pharma market, performance of various Indian companies, strategies adopted and ground level challenges impacting growth. We have tied our observations to industry data from AIOCD to overcome individual distributor’s bias over companies. We further highlight that views of distributors are restricted to their coverage 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 coverage distributors, respectively, as preferred players in the large–cap space, while IPCA and Torrent Pharma are ranked by 86% and 70% of coverage distributors, respectively, as leading players in the mid-cap space. Interestingly, Sanofi-Aventis, among MNCs, is ahead of peers and is aggressively making its mark in tier III and IV cities. We also identified emerging new players such as Mankind, Eris, and Macleods, which are gaining strong traction in various markets.
Combining the takeaways from our distributors survey and the prospects of Indian companies in emerging markets and US, we expect Lupin, Dr. Reddy’s, Cadila and Torrent Pharma to do well over the next 12-18 months. We are positive on Sun Pharma, however, current valuations do not leave much upside for investors.
Overall, through this report, we have attempted to identify trends, drivers, and challenges faced in the ever-changing market scenario and effectiveness of current strategies adopted by various companies.
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. Reddy’s Laboratories ... 79 Lupin ... 89 Ranbaxy Laboratories ... 99 Sun Pharmaceuticals ... 119 Torrent Pharmaceuticals ... 129 I S I E m e r g i n g M a r k e t s P D F i n - s d m c p l 0 1 f r o m 1 2 4 . 1 2 4 . 2 5 5 . 5 o n 2 0 1 1 - 1 1 - 0 9 0 1 : 1 9 : 4 5 E S T . D o w n l o a d P D F .
T A G L AN CE m p an y CMP (I N R )* * * CMP (Ex -NP V) (I N R ) Sh ar es O/ S (m n ) Mk t cap (I N R m n ) Ra ti n g R ev en u e E B IT D A N et p rof it EPS (INR ) R ev enue EB IT D A N et p ro fi t EPS EV / EB IT D A (x) P/E (x ) P/B ( x) RO CE (%) EB IT DA mar g ins (%) adi la H eal th ca re 8 4 4 844 2 0 4. 7 1 7 2, 7 6 7 B u y FY09 2 9 ,27 5 6 ,0 5 8 3,18 4 1 5 .6 26 .0 33 .0 2 0 .5 2 0 .5 3 0 .2 5 4 .3 9. 2 22 .9 20 .7 FY10 3 6 ,58 0 7 ,7 9 8 4,80 8 2 3 .5 25 .0 28 .7 5 1 .0 5 1 .0 2 3 .2 3 5 .9 6. 9 25 .9 21 .3 FY11 E 4 4,99 1 9 ,8 5 6 6,46 2 3 1 .6 23 .0 26 .4 3 4 .4 3 4 .4 1 8 .2 2 6 .7 7. 5 30 .7 21 .9 FY12 E 5 4,93 2 12 ,2 89 8,31 9 4 0 .6 22 .1 24 .7 2 8 .7 2 8 .7 1 4 .3 2 0 .8 5. 7 34 .3 22 .4 FY13 E 6 5,92 9 15 ,0 01 10 ,3 45 50 .5 20 .0 22 .1 2 4 .4 2 4 .4 1 1 .4 1 6 .7 4. 4 37 .8 22 .8 p la 3 2 1 321 8 0 2. 9 2 5 7, 7 3 1 H o ld FY09 5 2,34 3 12 ,4 11 9,70 5 1 2 .1 23 .7 45 .5 5 0 .4 5 0 .4 2 1 .5 2 6 .6 5. 7 22 .4 23 .7 FY10 5 6 ,05 7 13 ,7 95 10 ,0 50 12 .5 7.1 11 .2 3.6 3 .6 1 8 .6 2 5 .6 4. 4 21 .6 24 .6 FY11 E 6 2,46 5 13 ,5 69 9,96 7 1 2 .4 11 .4 (1 .6 ) (0.8) (0 .8 ) 1 8 .8 2 5 .9 3. 9 18 .0 21 .7 FY12 E 7 1,26 0 16 ,1 28 12 ,1 95 15 .2 14 .1 18 .9 2 2 .4 2 2 .4 1 5 .7 2 1 .1 3. 4 19 .1 22 .6 FY13 E 8 2,81 9 19 ,3 11 14 ,8 67 18 .5 16 .2 19 .7 2 1 .9 2 1 .9 1 2 .9 1 7 .3 3. 0 20 .4 23 .3 eddy's * 1 6 5 6 1 ,5 62 1 6 8. 9 2 7 9, 7 2 6 B u y FY09 6 1 ,64 2 9 ,7 1 8 4,30 0 2 5 .5 35 .0 44 .0 12 0.0 12 0. 0 28 .6 6 1 .2 7. 9 19 .3 15 .8 FY10 6 7 ,62 4 13 ,5 10 6,77 7 4 0 .1 9.7 39 .0 5 7 .6 5 7 .1 2 0 .1 3 8 .9 7. 4 20 .4 20 .0 FY11 E 7 2,72 4 15 ,2 97 10 ,5 39 62 .4 7.5 13 .2 5 5 .5 5 5 .5 1 7 .3 2 5 .0 6. 0 23 .4 21 .0 FY12 E 8 4,37 1 17 ,9 82 12 ,9 01 76 .4 16 .0 17 .6 2 2 .4 2 2 .4 1 4 .1 2 0 .5 4. 5 33 .5 21 .3 FY13 E 9 7,45 9 21 ,1 86 14 ,9 26 88 .4 15 .5 17 .8 1 5 .7 1 5 .7 1 1 .4 1 7 .7 3. 7 28 .4 21 .7 p in P h ar m a 41 2 412 4 4 4. 7 1 8 3, 2 1 6 B u y FY09 3 8 ,52 3 7 ,5 4 1 5,26 6 1 2 .7 40 .0 49 .0 1 8 .7 1 7 .6 2 3 .5 3 2 .4 1 2 .0 24 .9 19 .6 FY10 4 8 ,35 9 9 ,7 2 8 6,84 1 1 5 .4 25 .5 29 .0 2 9 .9 2 1 .0 1 9 .2 2 6 .8 7. 1 25 .7 20 .1 FY11 E 5 6,69 3 11 ,5 94 8,47 2 1 9 .1 17 .2 19 .2 2 3 .8 2 3 .8 1 5 .4 2 1 .6 5. 3 23 .8 20 .5 FY12 E 6 4,93 9 13 ,7 10 9,60 8 2 1 .6 14 .5 18 .3 1 3 .4 1 3 .4 1 2 .3 1 9 .1 4. 2 24 .5 21 .1 FY13 E 7 5,28 0 16 ,1 21 11 ,7 81 26 .5 15 .9 17 .6 2 2 .6 2 2 .6 1 0 .5 1 5 .6 3. 4 25 .2 21 .4 n b ax y* 46 8 374 4 2 1. 0 1 9 7, 0 4 7 H o ld C Y08 7 3,61 0 7 ,8 7 3 1,89 1 4. 5 8 .0 18 .0 1 6 .0 1 6 .0 2 2 .4 8 3 .3 4. 6 4 .0 1 0 .7 CY09 6 8 ,72 5 1 ,8 0 1 78 8 1 .9 (6.6) (7 7. 1) (5 8 .4 ) (5 8. 4) 10 0. 5 20 0.0 4. 5 6 .7 2.6 CY10 7 2 ,27 3 6 ,1 0 8 3,58 3 8. 5 5 .2 2 3 9 .1 35 4.9 35 4. 9 27 .5 4 4 .0 3. 5 22 .4 8.5 CY11 E 8 0,68 2 8 ,4 7 2 5,73 5 1 3 .6 11 .6 38 .7 6 0 .1 6 0 .1 1 9 .9 2 7 .5 3. 0 29 .1 10 .5 CY12 E 9 0,33 1 11 ,2 91 7,10 4 1 6 .9 12 .0 33 .3 2 3 .9 2 3 .9 1 4 .0 2 2 .2 2. 5 26 .2 12 .5 u n P h ar m a* * 44 6 436 1, 03 5. 6 4 6 1, 8 7 8 H o ld FY09 3 5,14 1 12 ,1 90 13 ,3 40 12 .9 31 .0 31 .0 30 .0 30 .0 3 5 .8 3 3 .8 6 .4 29 .6 34 .7 FY10 3 2 ,54 6 8, 54 5 9,08 4 8 .8 (7.4) (2 9. 9) (3 1 .9 ) (3 1. 9) 52 .3 4 9 .7 5 .8 16 .5 26 .3 FY11 E 5 0,62 3 15 ,1 86 13 ,3 77 12 .9 55 .5 77 .7 47 .3 47 .2 2 8 .7 3 3 .7 4 .9 27 .2 30 .0 FY12 E 6 8,65 6 20 ,9 41 17 ,5 76 17 .9 35 .6 37 .9 31 .4 38 .3 2 0 .2 2 4 .4 4 .3 31 .0 30 .5 FY13 E 7 8,64 2 24 ,5 04 20 ,6 58 21 .2 14 .5 17 .0 17 .5 18 .7 1 6 .7 2 0 .5 3 .7 34 .3 31 .2 orre n t P h ar m a 59 1 591 84 .6 50 ,0 0 9 Bu y FY09 1 6,30 7 2, 99 9 2,15 4 25 .5 20 .4 43 .5 63 .1 63 .1 1 7 .5 2 3 .2 7 .7 32 .6 18 .4 FY10 1 9 ,04 0 4, 08 7 2,68 7 31 .8 16 .8 36 .3 24 .8 24 .8 1 2 .6 1 8 .6 6 .0 42 .5 21 .5 FY11 E 2 2,58 6 4, 41 4 2,97 3 35 .1 18 .6 8 .0 1 0 .6 10 .6 1 1 .6 1 6 .8 4 .7 38 .5 19 .5 FY12 E 2 6,61 6 5, 32 3 3,60 8 42 .6 17 .8 20 .6 21 .3 21 .3 9. 4 1 3 .9 3 .7 38 .7 20 .0 FY13 E 3 2,14 2 6, 67 9 4,61 4 54 .5 20 .8 25 .5 27 .9 27 .9 7. 3 1 0 .8 2 .9 41 .4 20 .8 * * * C M P a s o n 21 st A p ri l 20 1 1 Fin a nc ia ls ( INR mn) G rowt h ( % ) V alua ti on s N ot e : * F in an ci a ls ( ex -RO C E ) r e pr e se n t ba se bu si n es s (E x on e-of f fr om pa ra I V ) ** Fi na nc ial s f or Su n p h ar m a in cl ud es T a ro b u t ex cl ud es o n e-of f fr om P a ra-IV
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 and robust 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 market share, however, with changing market dynamics, companies have to adopt new strategic approach to grow and compete. Therefore, to gain a deeper understanding of this transformation, we set out to survey various markets, encompassing all zones and tiers. We selected a sample of 27 cities, ideally representing a mix of all geographies within India, and after meeting more than 100 distributors across cities, we gained the following insights:
Growth momentum to sustain and move into next orbit
Indian pharma market is likely to sustain current growth momentum (14-15% versus historical run-rate of 10-12% over FY00-10) and a large number of distributors anticipate 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 is inclusive 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%, higher than metros and tier-I cities. This is largely led by increase in income levels, higher penetration of healthcare, and increase in health awareness among masses. Cipla, with a strong portfolio in the acute and respiratory segment, is depicting strong growth in tier II-IV markets, while Cadila, Lupin, Sanofi-Aventis and IPCA are also aggressively expanding in these regions.
Chronic therapies leading growth; cosmetology new growth avenue
Chronic 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 a high-growth segment, followed by cardiac and CNS. Further, rising discretionary spending and focus on personal care is driving growth in the cosmetology segment. This segment’s growth potential is large, given lower penetration, and it entails higher margins 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 investments by players to retain market share. Consequently, specialty focused promotion is emerging 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 created dedicated field force or special tasks force (STFs) to promote high-value brands within segments. Most distributors view this as highly effective strategy to enhance market share and also results in higher field force productivity. Sun Pharma has pioneered the specialty focus model, resulting in higher market share in the chronic segment.
Expansion by MNCs could intensify competition for Indian counterparts
Multinational pharma companies have become aggressive and have initiated meaningful investments in the domestic market. These investments, although at nascent stage, will eventually set the base for the next leg of growth. Most leading players have set bold aspirations for their Indian businesses and are adopting a more localised business model, including pan-India penetration, branded generics launches, and well-spread out distribution network. While recent branded generics launches are priced economically, our survey indicates that sales have not ramped up in most markets for these products.
Moreover, in-licensing of off-patented/patented molecules could incrementally drive higher revenues in the medium term. We believe that with aggressive expansion plans and deep pockets, MNCs could potentially emerge as strong competitors, compelling Indian companies to hike investments, while price wars could potentially hurt their profitability in the long term.
Higher attrition in field force poses risk to current growth
The cost of hiring competent field force is soaring and retention is posing a key challenge. Most markets are seeing more than 30% field force attrition. We have identified four key reasons behind high attrition: (a) increase in demand for medical representatives to increase doctor focus, coverage and number of divisions; (b) limited supply of talent pool with companies competing for high quality people; (c) setting up challenging 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 and growth. We perceive higher attrition as a potential risk for companies following the old incentive structure and inefficient policies to retain field force, which could dent their growth and profitability in the near term. Cadila, Cipla, IPCA and GSK are few players facing higher attrition, while Sun Pharma, Lupin and Torrent have been ranked by most distributors as companies possessing highly effective and stable field force.
Decline in success rate of new product introductions
Most large and mid-size companies, to actively expand coverage across molecules or therapies, are aggressively launching new products. New product introductions contribute 4-5% of overall market growth. However, as per our survey, 70-80% of these products are failures. Most of these failures are in established segments, where more than 10-15 players currently exist. Also, there is a growing resistance among retailers and distributors to provide shelf space for new products before prescription generation. Hence, we observe companies that are more proactive and launch products ahead of the market are more successful in building brands, which potentially contributes to higher business 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. Reddy’s clearly have an edge over others.
Differentiating ‘class from mass’: End driver of survey
Through our distributor survey we tried to differentiate highly effective companies from others (‘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 and productivity; (d) field force penetration; (e) success of new product launches; and (f) ability to build brands. The survey questionnaire was designed to gauge top 30 companies (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 coverage distributors, respectively, as preferred players in the large–cap space, while IPCA and Torrent are ranked by 86% and 70% of coverage distributors, respectively, as leading players in the mid-cap space. MNCs are adopting a more localised approach to build market presence and are building infrastructure for the next leg of growth. Interestingly Sanofi-Aventis, among MNC pharma, is ahead of peers and is aggressively coming up in tier III–IV cities. Moreover, we also identified some key emerging small-mid size players, such as Macleods, Aristo, Eris and Mankind, who are scaling up and capturing incrementally higher market share.
Fig. 1: Competitive scorecard
Source: Edelweiss research
Table 1: Top picks - Lupin and Torrent Pharma offer highest upside (INR)
Source: Edelweiss research Note: * PE multiple for Dr Reddy’s, Sun Pharma. and Ranbaxy is based on CMP adjusted for NPV of one-off exclusivity sales Company Name Domestic growth CAGR (5yr) Portfolio concentration Brand building ability Success of new product launches Field force stability Field force productivity Reach (Medical reps) Large Cap Sun Pharma Dr Reddy's Cipla Lupin Cadila Mid-cap Torrent Pharma IPCA Glenmark MNC Ranbaxy Sanofi-Aventis GSK India Pfizer India
Scale: Best ………Least 5 1
CMP TP NPV of Reco Upside
one-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
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 drivers of this growth, we commissioned an extensive survey of 100 distributors covering 27 cities in 11 states (all four zones—North, West, South, and East), representing notably 45-50% of the total pharma market.
Chart 1: IPM growth has been robust over past two 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 an average 13-15%, while a relatively good number of distributors (27%) believe that it can be higher than the current average.
Chart 2: Majority of distributors believe growth is sustainable
Source: Edelweiss research 10.0 8.0 5.0 7.0 4.5 14.9 14.2 15.0 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) (% ) <13% 8% 13-15% 65% >15% 27%
Average sustainable growth
Not sustainable 5% Sustainable 95% Sustainability of growth Sustainability of growth is not an issue
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 major drivers of growth as per distributors). Among pull factors, increase in health awareness and higher prevalence of lifestyle-related disease is resulting in higher demand for pharmaceuticals. Further, among push factors, field force expansion to cover larger masses, focus on building brands, aggressive product introductions, and specialty-focused promotion have been identified as major growth drivers. We have analysed each of these factors in detail (Appendix A) and our study indicates that these macro factors will continue to drive higher growth over the next decade.
Chart 3: Factors driving growth in the market
Source: Edelweiss research Healthcare infrastructu re / Govt expenditure 11% Changing lifestyle 30% Health awareness 30% Higher income level / Affordability 4% Health insurance 9% Population and aeging 16%
Pull factors Push factors
New product launches 23% Field force expansion 32% Brand building 13% Specialty promotion 17% Price increases 9% New divisions 6%
Chronic Leads; Cosmetology New Avenue
The chronic segment (also termed as life-style-related ailments), comprising three specialty areas—cardiovascular, anti-diabetics and neuro-psychiatry—account for ~28% of the total market 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 constituting 15% 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 further substantiated by our survey which shows that among various therapies, highest growth is viewed in anti-diabetics, followed by cardiac and neuro-psychiatry segments.
Table 2: Chronic segment has out performed overall market growth (%)
Source: AIOCD, Edelweiss research
Chart 4: Anti-diabetics is fastest growing segment Chart 5: Therapies depicting higher growth (survey)
Source: AIOCD, Edelweiss research Source: Edelweiss research
While rising urbanisation and sedentary lifestyles are driving higher growth in lifestyle diseases (Chart 6), the overall base of the market is also expanding. Increase in health awareness and proliferation of various single specialty and multispecialty hospitals has led to early 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 higher penetration of the market. Hence, companies focused on chronic segment are likely to post
higher 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 An ti -Di a b e ti cs Card io v a scu la r Ne u ro -Ps y ch iat ry On co lo g y Gr o w th -(% )
MAT Mar-10 MAT Mar-11
6% 15% 7%
% of total
market 1%
Base of chronic segment is expanding 0.0 20.0 40.0 60.0 80.0 100.0 An ti -In fe ct iv e s Re sp ir a to ry Ca rd ia c CN S An ti -D ia b e te s Cosm e tol og y On col o g y (% o f di st ri but o rs )
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 growth avenues within chronic
As per our survey, the super specialty segment could be the next growth driver within chronic, given lower penetration, soaring affordability and insurance penetration. The rise in discretionary spending and focus on personal care is driving growth of the cosmetology segment and players like Dr. Reddy’s, Ranbaxy, and Glenmark are gaining from this trend. Super specialty therapies such as oncology, urology, vaccines, and nephrology are also depicting higher prevalence, specifically in metros and tier-I cities. These therapies, although have niche presence, are growing double the industry growth rate due to higher number of standalone specialty centers for early diagnosis and treatments. Moreover, newer introductions in these therapeutic areas will also expand the market as was the case with DPP IV categories in diabetes where despite premium pricing of Januvia (Sitagliptin; 4-5x to the current treatment), the product has been a huge success.
More active competition in chronic segments is resulting in higher investments Strong growth in chronic therapies has led to higher competition with most companies expanding 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 chronic portfolio, by aggressively launching new products to fill therapeutic gaps. Moreover, while the market 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 field force 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 new products. 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 a highly competitive market.
0.0 1.2 2.4 3.6 4.8 6.0 Co ro n a ry he a rt di se a se Di a b e te s As th m a Ob e si ty Can ce r (% o f po pul a ti o n ) 2005 2015E 0% 20% 40% 60% 80% 100% Anti -diabetics CVS CNS IPM
Volume Price New products
Chart 8: Case 1 – Torrent Pharma has doubled field force and added sub-divisions and further subdivided existing divisions 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 markets wherein companies, like Torrent, are adopting micro-focused approach to build brand loyalty with doctors. Most companies are carving new divisions with dedicated field force to focus on individual specialties like anti-diabetics, CVS, CNS, dermatology, etc. and even individual products or brands in a few cases (e.g., Sanofi Aventis). This helps field force to focus on few products, leading to better promotion among doctors and higher market share. Sun Pharma (case 2) has been successful in building strong brand franchise through therapy-focused marketing. The company has mapped three to four divisions within each of the key therapies to focus on multiple product segments with dedicated field force (refer Fig. 2). This strategy offers more depth in marketing, with multiple medical representatives covering a single specialist, leading to higher prescription share and mind share. Sun Pharma’s multi-focused marketing has rendered it the highest field force productivity among peers (INR 8.9 mn versus industry average of INR 3.7 mn). Almost all distributors believe that specialty focus improves brand positioning and creates high impact on growth.
530 935 254 285 386 577 0 400 800 1,200 1,600 2,000 FY09 FY11 (N o of re p s. ) Cardiovascular Anti-diabetics CNS 1,170 1,797 49% 76% 12% Specialty focused marketing is gaining ground Divisions
FY09 FY10 FY11
CVS / Anti-diabetics Psycan, Delta and Azuca Psycan, Delta, Psycan CND and Azuca CVS Psycan, Delta, Psycan CND Anti-Diabetics Azuca CNS Axon, Mind & Neuron Therapies CNS Axon, Mind & Neuron Axon, Mind & Neuron Therapies Divisions
Fig. 2: Case 2 - Sun Pharma has build strong franchise by creating higher specialty focus
Source: Company, Edelweiss research Cardiovascular
Cardiology, Diabetology Interventional
Cardiology
ARIAN AZURA AVIOR Life sciences
AZURA Criticare CNS
(Psychiatry, Neurology) SYNERGY SYMBIOSIS SIRIUS
Gynecology Fertility, Urology Gastroenterology Orthopedics SPECTRA INCA Life Sciences INCA Life Sciences SUN SOLARES
Therapy Divisions / Sub divisions
Opthalmology AVESTA MILMET
Oncology Rheumatology, Dermatology SUN Oncology ORTUS RADIANT ISIEmergingMarketsPDF in-sdmcpl01 from 124.124.255.5 on 2011-11-09 01:19:45 EST. DownloadPDF.
Metro, tier-I key markets; Semi urban and rural
areas 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 improved access to better healthcare. We have tried to analyse through our survey the changing dynamics of various tiers or classes of geographies within the industry. We can divide, based on the population parameter, the IPM into two major categories: (a) metros and tier–I 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 the total 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 growth above industry average
Source: Edelweiss research 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 is increasing, which is driving higher number of specialty set ups. As a result, companies are expanding field force in these markets to target larger doctor population. Most distributors guide 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 in diagnosis and treatment levels.
Increase in health awareness is also resulting in higher self medication, which is driving most companies to switch leading brands from prescription to OTC (e.g., Pfizer is expanding its brand franchise by promoting Gelusil syrup as an OTC product). This strategy enables companies to get higher growth and return from established brands with lower investments. Moreover, companies like IPCA and Cadila are entering into nutraceuticals segment driven by higher demand for additional supplements to cope with rising stress levels. IPCA has introduced Nutralite to venture into the nutraceutical segment.
City Tier of market (%)Overall share Population Cities covered through survey No of retail chemists Growth (%)Average
Metro 30% >1 mn Hyderabad, Chennai, Mumbai,
Ahmedabad, Delhi, Kolkata
4,000 to 20,000 13-15%
Tier-I 30% 500,000 to <1
mn
Pune, Surat, Secunderabad 2,000 to 5,000 >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/Micro Towns 20% 300,000 to 500,000 >15% 20% up to 300,000
Vapi, Satara, Sangli, Abhore, Kolhapur, Miraj, Behrampur, Sikar,
Chomu etc. 250 to 700 25-30%
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%) than metros, largely due to increasing base of chronic disease (diabetes and CNS) growing at a faster rate compared to metros and increasing penetration of better healthcare facilities such as higher secondary care and single specialty care hospitals.
Semi-urban and rural markets: New growth 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 the biggest growth driver, led by higher disposable incomes, which has led to significant increase in 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 high double digit growth over the next four-five years. We believe this strong growth has positive implications for top tier pharma companies, majority of which have embryonic presence in these markets. However, the dynamics are different form metros (Table 4) entailing companies to tailor their marketing strategies to individual markets.
Table 4: Dynamics of semi-urban and rural markets vary from metros and tier-I markets
Source: Edelweiss research We detail out three key strategies adopted by companies to penetrate tier III and IV markets. First, most companies are appointing local staff or setting up a local headquarter to cater to these markets, which was earlier addressed by field force from tier I and II towns in close proximity. As per distributors, local field force is essential to promote products effectively to local GPs and CPs which leads to higher volume growth. Second, existing Semi-urban & Rural
markets Metros & Tier -I towns Comments
Therapeutic mix
Acute therapies account for 80-90% of total consumption in semi urban areas
Anit-infectives, gastro-intestinal and respiratory are high growth therapies, while chornic therapies are catching up with higher growth in towns with more urbanization
Doctor population
Nature of doctor population is largely GPs and CPs (90-95% of total), while specialists presence is limited to fewer class-II/III towns which 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 retailers with better schemes
Distribution set-up
Hub and spoke (Hub is the Tier-III/IV town
which catrers to near by micro towns)
Multi-layered Wide spread and organized
Lack of distribution set-up leading to higher cost of distribution. (Sanofi Aventis does taxis tours using own vehicles into micro interiors)
Field force Lack of quality in field force
More skillful with better product 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 presence is critical to gain market share in semi-urban and rural markets
players are expanding their coverage (field force is doubled in most regions) to address larger pool of doctors and micro interiors, which were earlier not covered. For instance, to increase penetration, Sanofi Aventis is doing taxi tours in micro interiors which have no transport. Last, companies are organising more CMEs (medical education programmes by inviting senior physicians for local doctors) as well as healthcare awareness camps which are helping them reach targeted customers more effectively. Hence, by improving accessibility in under-penetrated markets, companies are creating higher demand for pharmaceuticals. We believe companies like Cipla, Cadila, IPCA, Ranbaxy, and Sanofi Aventis, which are adopting a 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 highly concentrated on the acute segment. We believe companies in order to penetrate and build base in tier III–IV markets, will have to initially tailor their product portfolios to the acute segment, while selectively positioning in the chronic segment. As per our analysis, chronic segments like respiratory (anti-asthma), cardiac, and diabetes are also picking up in selective markets which gives opportunities for growth to companies like Sun pharma, Torrent, and USV, who have selectively focused on neuropsychiatry, cardiac and anti-diabetic segments, respectively, in these markets.
Chart 9: Players becoming more active or expanding coverage in tier III-IV areas
Source: Edelweiss research As per our survey, larger players such as Cipla, Cadila, and Ranbaxy, with strong concentration in the acute segment, are doing well in semi-urban and rural areas, while players such as Lupin and IPCA are also expanding coverage and seeing positive traction from these regions (Chart 10). Moreover, MNCs (GSK, Pfizer and Sanofi Aventis) are also expanding field force, strengthening distribution networks, and launching economically priced branded 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 building market share. 0.0 15.0 30.0 45.0 60.0 75.0 Ci p la Cad ila IP C A Ran b a x y Dr Re d d y 's Lu p in San o fi Aven ti s GSK Pfiz e r Gl en m a rk Tor re n t (% of d is tri b u to rs )
Companies primarily focus on acute segment in tier III-IV and rural markets
Chart 10: Relative performance in semi-urban and rural markets (Survey)
Source: Edelweiss research Interestingly, Mankind and Macleods are prominently gaining market share, giving stiff competition to other players in these markets. While most companies have been traditionally focused on metros and tier-I towns, companies like Mankind and Macleods have expanded penetration in smaller markets, thereby establishing strong hold in terms of prescription share of doctors. However, the positioning is different than other peers and hence do not directly compete with similar doctor population. To illustrate our point further, Mankind strategy differentiates on two points: (a) lower prices; and (b) deeper penetration in doctors with a larger coverage list. Moreover, they have relatively better promotional strategies for retailers wherein the company offers schemes with higher incentives than other players. Finally, Mankind’s field force largely comprises people with non-science backgrounds and attrition is low due to higher incentive structure. We believe higher stability or lower attrition is critical to build market share in these markets.
Chart 11: Field force stability of players in rural market (Survey)
Source: Edelweiss research 0.0 20.0 40.0 60.0 80.0 100.0 Ci p la Ca d ila Lu p in Ma n k in d IP C A Dr R e d d y 's Pf iz e r Ran b ax y Ma cl e o d s Gl en m a rk San o fi Aven ti s To rr e n t GSK (% )
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 have strong foothold in semi-urban and rural markets
Aggressive MNC Expansion Poses High Risk
MNC pharma companies are aggressively expanding with meaningful investments in the domestic market. These investments, although at a nascent stage, will set up base for the next leg of growth. Most leading MNC companies have set bold aspirations for their Indian businesses and are adopting a more localised business model including pan-India penetration, well spread out competent field force, strong distribution network and branded generic presence. 65% of total distributors believe that MNCs are becoming aggressive in terms of launching new products, therapies, and competitive pricing of products. MNCs such as Aventis, MSD, and Abbott are transforming existing policies and aggressively building channel relations with distributors. For instance, Sanofi Aventis has directly interacted with all distributors across India (video conference call) to elucidate their business and future strategies. Moreover, senior management and area heads from MNCs are directly meeting key distributors to strengthen coverage.
Chart 12: Strategies adopted by MNCs
Source: Edelweiss research Chart 13: Most distributors perceive aggressive expansion by MNCs
Source: Edelweiss research 0.0 20.0 40.0 60.0 80.0 100.0 New product launches (incl branded generics) Field force
expasnion Brand promotion Building channel relations
(% o f d is tr ib u to rs ) Not much change in activity 35% Higher activity level 65%
Distinct shift in strategy by launching branded generics products
MNCs are overhauling domestic portfolios by aggressively investing into branded generics, rebuilding the old/established brands through the OTC route and expanding into new therapies like CVS, CNS and Oncology. Table 5 shows, recent braded generic launches by some MNCs (GSK and Pfizer) and respective pricing of products versus Indian players. Table 5: MNCs are adopting aggressive pricing strategy in branded generics
Source: Edelweiss research This, table, depicts that MNCs have entered into the branded generics segment with extremely competitive prices versus Indian companies. However, sales from these brands have not picked up due to lack of strategic bandwidth in promoting branded generics. Most distributors believe that branded generics launches by MNCs will take longer to build traction as there are cultural barriers which companies face while marketing a non-parent product. Moreover, in licensing of off- patented/patented drugs from parent pipeline (over next two-three years) are sought as key business drivers. For example, MSD has strong pipeline of in licensed molecules which are gaining traction in the market.
Field force expansion to enhance penetration
MNCs are rapidly expanding field force as part of their strategy to expand geographical reach into tier I and II cities. For instance, Pfizer has increased its field force from 1,100 reps in CY09 to 2,300 by CY2010 and further plans to add field force in CY11-12. Similarly, GSK has increased its field force from 2,000 in CY08 to 2,800 in CY10 (growth of 40%). Sanofi Aventis has also expanded its field force to 1,800 reps from 1,100 in CY08. These investments will reap benefits over the next three to four years, in our view.
MNC Molecules Therapy Brand name Pricing
(INR) Company Brand name Pricing (INR)
Glaxo Atorvastatin CVS 43 (10 tablets) Ranbaxy Intas Dr Reddy's Cipla
Pfizer Rabeprazole
Gastro-intestinal Above 5 24 (7 tablets) Intas Cipla Dr Reddy's
Indian Competitive brands
180 (10 tablets) 125 (10 tablets) 110 (10 tablets) 157 (10 tablets) 55 (15 tablets) 64 (15 tablets) 70 (10 tablets)
Chart 14: Field force expansion by key MNC players
Source: Edelweiss research Sanofi-Aventis is preferred play in MNC space
Sanofi Aventis is emerging as the most aggressive player, among MNCs, with an all inclusive strategy 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 10 brands, six are in the chronic segment. Further, Aventis has active coverage across markets and is increasing reach into various tier II-IV markets. The company has adopted dual strategies for each class of market. For instance, its focus in metros and tier-I markets is to aggressively build brands and has employed a specialty task force (STF) for each of its brands. 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 by expanding reach and access through project Prayas (which underlines its strategy to reach micro interiors) and by launching line extensions of established brands such as combiflam cream.
Chart 15: Relative performance of MNCs (Survey)
Source: Edelweiss research 0 700 1,400 2,100 2,800 3,500 GSK Pfizer Aventis (N o. of rep s. ) 2008 2010 43% 64% 188% 0% 20% 40% 60% 80% 100% Sa n o fi Aven ti s Ab b o tt Pi ra m a l Pf iz e r GSK Ra n b ax y
Growing above market Growing below market In line
Sanofi-Aventis is leading the MNC pack
MNCs have doubled field force to expand
geographical reach
Differentiating ‘Class from Mass’
A strong and growing domestic market has opened floodgates of opportunities for Indian as well as MNC players, who are targeting these with multi-pronged approach. While some companies have been frontrunners in identifying future opportunities, others have lost momentum. To differentiate the former from the latter, we have contemplated various parameters which could be critical for growth. Further, we believe that historical execution is a realistic measure to differentiate players, but it may not be indicative of future growth and performance. Hence, these five key parameters (or critical success factors) could gauge the strength of a company’s domestic business and act as an effective tool to differentiate good from 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, we have identified few highly effective companies which have strong execution and are growing ahead of market.
Sun and Lupin emerge as favored plays in large cap; Torrent/IPCA 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 players such as GSK and Pfizer. Players such as Cipla, Ranbaxy and Cadila are facing some pressures in 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 medical colleges 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 has actively build a wider portfolio by entering into newer therapeutic areas and is growing ahead of peers in chronic segments such as CVS, CNS, and respiratory. Moreover, its aggressive and 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 in domestic market. This is largely due to instability in the field force which has further impacted its ability to build big brands. However, we believe that Cipla can surprise the market positively due to its higher focus on tier II and IV markets, where the company has started witnessing high growth traction, and addressing of structural issues with reference to its mature and generic-generic portfolio in domestic market.
Other companies like Cadila, Dr. Reddy’s, and Ranbaxy are also gearing up which is evident 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 on the chronic segment, better field force stability, and ability to build brands. However, it lags in terms of launching new products. Moreover, IPCA is also gaining strong momentum in all
We judge strength of domestic business of each player on the basis of five key parameters
markets and has increased divisions (12 from earlier seven) to expand into newer therapies and tier II to IV towns. We highlight that Torrent and IPCA have expanded field force aggressively (by 64% and 58%, respectively) which has impacted their field force productivity (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, and aggressive approach in metros as well as tier II to IV towns.
Fig. 3: Competitive score card
Source: Edelweiss research The competitive score card, above, measures each company on the basis of its strength in each of the parameters, which is key end driver of our survey. We now illustrate our findings through discussion of each of these key parameters and substantiate our preferred plays over others. Company Name Domestic growth CAGR (5yr) Portfolio concentration Brand building ability Success of new product launches Field force stability Field force productivity Reach (Medical reps) Large Cap Sun Pharma Dr Reddy's Cipla Lupin Cadila Mid-cap Torrent Pharma IPCA Glenmark MNC Ranbaxy Sanofi-Aventis GSK India Pfizer India
Scale: Best ………Least 5 1
Portfolio concentration or business mix
We prefer Sun Pharma, Lupin, and Torrent as they have higher concentration in chronic therapies, which contribute 45-60% of their total sales (Chart 16). The presence in the chronic segment has historically offered these players higher growth than industry. Further, chronic therapies provide better realization than acute, thereby rendering higher gross margins (80-90% versus 70% in acute segments).
Companies which are largely focused on the acute segment such as Ranbaxy, Dr. Reddy’s, Cipla, and IPCA, are posting higher growth in micro markets. The acute segment continues to have larger share of IPM (~72% of total market) and has posted better growth in the past two 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-Aventis which has build strong presence in the chronic segment, where we see growth picking up over the past six months.
Chart 16: Players with strong focus on chronic segment to outperform market
Source: Edelweiss research We believe, within the chronic segment, companies with higher market share and ability to build successful brands will grow ahead of peers. As seen in charts 17-19, Sun Pharma has leading market share in most specialty segments, while Lupin has posted higher growth among peers. We highlight that the cardiovascular segment has become extremely competitive with older molecules facing pricing pressures. Cadila and Torrent have relatively underperformed in CVS due to pricing pressures in older molecules and lack of new product launches. 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 Glaxo Pfizer Glenmark Ranbaxy IPCA Cadila Dr Reddy's Cipla Lupin Sanofi … Sun Pharma Torrent (%) Chronic Acute
Sun, Lupin and Torrent have high focus on chronic segment
Chart 17: Key players in anti-diabetics market
Chart 18: Key players in cardiovascular market
Chart 19: Key players in neuro-psychiatry market
Source: Edelweiss research
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 US V Su n Ph arm a Sa n o fi -Aven ti s MS D Pi ra m a l Lu p in To rr e n t (%) (%)Market share (RHS) Growth (LHS)
Industry growth 19 12 35 19 16 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 Su n Ph arm a Ca d ila Lu p in Ran b ax y Ci p la In ta s Tor re n t Ph arm a (% ) (% )
Market share (RHS) Growth (LHS)
Industry growth 19 15 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 Su n Ph arm a In ta s Pi ra m a l Tor re n t Ab b o tt GSK Sa n o fi -Aven ti s Lu p in (% ) (% )
Market share (RHS) Growth (LHS)
Industry growth We prefer players with
higher market share and growth within chronic segment
Ability to build brands: A key differentiator
As new product launches dwindle, building big brands has assumed much greater importance and is rather necessary to improve profitability. To instill a culture and mindset of building large brands, companies need to focus on several aspects. First, for large brands, company’s require active life cycle management, while for scaling up medium sized brands they need to broaden coverage across doctors and geographies and finally for relatively new brands the focus should be to create credibility and generate prescriptions among KOLs (key opinion leaders).
We recognize brand building as future growth driver and have identified companies with better track records in building brands. Our survey highlights that among domestic companies, Sun pharma leads the pack, followed by Lupin with 68% and 59% of distributors, respectively, gauging strong brand building capability. Among MNCs, respondents believe Sanofi-Aventis has better brand building ability. Similarly, in mid caps, Torrent, IPCA and Glenmark have better brand building ability compared to peers.
Chart 20: 68% respondents believe Sun Pharma has better brand building ability
Source: Edelweiss research
The table 6, below, further shows that the incremental growth in top 10 brands of most players is higher or in line with the overall growth of respective domestic business, except for Dr Reddy’s where growth is largely driven by new products. Sun pharma has shown highest growth in top 10 brands which further supports our preference.0 15 30 45 60 75 Su n Ph ar m a Lu p in Ave n ti s Ma n k in d Cad ila US V IP CA Gl en m ar k In ta s Torr e n t GSK A b b o tt Pi ra m a l Dr R e d d y Ci p la Pf iz e r Ran b a x y (% cov e ra ge d ist ri ib u to rs )
Table 6: Top 10 brands are growing in line or higher than overall domestic growth
Source: AIOCD, Edelweiss research
Success of new product launches
Most large and mid-size companies, to actively expand coverage across molecules or therapies, are launching new products. However, as per our survey 70-80% of these products have been failures; most of these failures have been in established segments, where more than 10-15 players currently exist. Hence, we observe companies which are more proactive and launch products ahead of the market are more successful in building brands, which potentially contribute to higher growth of the business.
The chart, below, indicates that companies like Sun Pharma and Lupin are equally successful in building new products, as Top 10 brands contribution to growth is relatively lower than the peers. However, companies like Ranbaxy and Glenmark still have high dependency on Top 10 brands. Ranbaxy’s Top 10 brands are driving ~50% of its incremental growth, primarily due to slower pace of new launches over the past two three years. Similarly, MNCs dependency on top 10 brands is relatively high due to fewer product launches compared to Indian peers. Chart 21: Lower contribution from Top 10 brands indicates higher traction from new launches
Indian peers MNC peers
Source: AIOCD, Edelweiss research Top 10 brands Overall domestic Relative performance Glenmark 36.9 27.6 22.4 5 Ranbaxy 36.6 15.7 9.1 7 Torrent 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 brands Cont. to sales (%)
Growth (MAT Mar 2011) (%)
Cipla Dr Reddy's Glenmark IPCA Lupin Sun Pharma Torrent Cadila 10 18 26 34 42 50 10 20 30 40 50 (T o p 1 0 br a n ds c o n tr ib u ti on t o gr o w th )
Top 10 brands contribution to total domestic sales (%)
Relative outperformance of Top 10 brands reflects higher focus on brand building by most players
Sanofi Aventis Pfizer GSK Ranbaxy 30 37 44 51 58 65 10 30 50 70 90 (T o p 1 0 br a n ds c o n tr ib ut io n t o gr o w th )
Top 10 brands contribution to total domestic sales (%)
Chart 22: Companies most aggressive in launching new products
Source: Edelweiss research Most distributors view higher traction from new launches by Sun Pharma , Sanofi Aventis and Lupin. Sun Pharma’s ability to identify therapeutic gap area and launch products ahead of the market are key differentiating factors behind its success. Also differentiated R&D pipeline of Sun Pharma and Dr Reddy’s clearly give them an edge over others. Dr. Reddy’s growth contribution from new products (78%) is highest among peers and higher than industry (40%).
Higher field force penetration or coverage
Many pharma companies, including MNCs, have enhanced their field force over the past two years to expand their reach and penetration in existing as well as tier-II to IV markets. We believe there is a huge scope for higher coverage as modern medicine till date reaches only 35% 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, success of few pharma companies such as Mankind and Macleods has challenged the traditional model of top down approach and many companies (both Indian as well as MNCs) have expanded their reach to gain the incremental pie of growing opportunities.
Chart 23: Field force penetration has increased over past four years
Source: Edelweiss research 0.0 13.0 26.0 39.0 52.0 65.0 Su n Ph arm a Ci p la Ma n k in d Pf iz e r Lu p in In ta s IP CA Tor re n t Ra n b ax y Gl en m ar k (% o f di st ri bu to rs ) 0 1,100 2,200 3,300 4,400 5,500 Ci p la IP CA Ca d ila Ra n b ax y Dr . R e ddy 's Tor re n t Lu p in Su n Ph ar ma Gl en m a rk (F ie ld f o rc e )
FY08 FY11 (YTD)
13% 19% 25% 20% 18% 19% 5% 23% 9% CAGR (FY08-11)
Higher field force penetration to optimise reach to pharmacists, doctors and hospitals
As viewed in Chart 23, Cipla, IPCA, and Cadila have the largest field force, while Sun Pharma has not expanded its field force due to its restricted focus on Metro’s and tier I towns. Ranbaxy’s 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 two years.
Field force stability critical for sustainable growth
Field force stability is critical to maintain higher productivity and growth, while instability results in disruption of sales. Although retention has always been a challenge for the industry, 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 pay scale. However, as per the survey, Lupin, Sanofi-Aventis and Sun pharma have been ranked as companies possessing highly effective and stable field force compared to its large cap and MNC peers. Cipla has the highest attrition followed by Ranbaxy, while field force stability of Dr. Reddy’s and Cadila is above average. In the mid-cap space, Torrent and Glenmark have more stability than IPCA, Unichem, and FDC. In the unlisted space, Mankind has a stable field force because of its highly effective incentive policy.
Chart 24: Companies with highly stable and effective field force (Survey)
Source: Edelweiss research
Field force productivity is of paramount importance
Companies with higher field force stability and higher concentration in chronic segment has better productivity. Although, aggressive field force expansion has impacted per man productivity of many companies in the short term, we view these investments as positive as they lend long-term growth visibility. Analysing the long-term trend, we observe that Sun pharma, Cipla, and Lupin have higher productivity. Among MNCs, the field forces of Aventis and GSK are highly productive because of strong brand equity and concentration in a few therapies and geographies. Among mid caps, productivity of Torrent and IPCA has been impacted due to aggressive expansion in field force over the past two years. We highlight that it takes three to four years for new medical representatives to achieve company level productivity. 0% 20% 40% 60% 80% 100% Sa n o fi Ave n ti s Lu p in Ma n k in d Su n P h a rm a Tor re n t Gl en m a rk Pf iz e r US V A b b o tt P ir a m al GS K Dr R e d d y' s IP C A Ca d ila Ra n b ax y Ci p la Uni che m FD C
Satble field force Average Poor field force stability
Higher field force productivity yields higher margins
Chart 25: Recent expansion in field force has impacted productivity
Source: Edelweiss research
Historical execution in domestic market
Historical revenue growth reflects the effectiveness of strategies and strong execution capabilities of management. We highlight that companies which have scored well on all parameters, as discussed above, have also delivered strong revenue growth (over past five years). Chart 26 indicates that Lupin and IPCA have posted 24% CAGR over FY05-10, while Sun Pharma and Torrent have also registered strong growth of 22% and 20%, respectively. Chart 26: Companies with strong historical growth scored well in our survey
Source: Edelweiss research IPCA Cadila Ranbaxy DRRD Torrent Lupin Sun Glenmark Cipla Aventis 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 Fi el d f o rc e p ro d uc ti vi ty ( IN R m n )
Field force (no of reps)
24.1 23.7 21.9 20.1 19.9 18.4 14.5 11.6 10.0 9.3 7.2 6.8 0.0 6.0 12.0 18.0 24.0 30.0 Lu p in IP C A Su n P h a rm a To rr e n t Ph ar m a Gl en m a rk Dr R e d d y' s Ci p la C a d ila Sa n o fi Ave n ti s GSK Pfize r Ran b a x y Gr o w th ( % )
Future Growth Drivers
As the domestic pharma market grows in size and diversity, there are several opportunities that 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 to aggressive market creation by players and greater propensity of self medication. Investment in enhancing patient awareness and education will impact diagnosis and treatment levels. In addition patients will show greater propensity to self medicate. The consumer healthcare segment has the potential to grow at over 14% annually, provided players make large OTC brands easily available to consumers, differentiate their products, and establish an emotional connection with patients. Finally, the acceptance of biologics and vaccines will rise. The biologics 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; <1% of total market) and there have been very few launches since 2005 in India, the recent successes of Januvia and Galvus indicates that patented products can drive tremendous growth in a few therapeutic areas, provided they are priced adequately. Rising affordability and increased healthcare insurance penetration will be the primary growth drivers for the patented products segment. The overall contribution of patented products is likely to remain below 5% (USD 1.7 bn by 2020), however, revenue will be concentrated to few brands and hence would be attractive for MNC players who proactively launch and build brands.
Hospital segment to gain importance
The hospital segment is one of the fast growing segments and has been a key growth driver for the domestic industry. While the retail segment is mainstay of the pharma market (contributes 85-90% of overall sales), the hospital segment is gaining importance driven by dramatic rise in infrastructure and advent of corporate hospitals. In the developed world, hospitals account for more than 25% of the pharmaceutical market, while in India they account for less than 10%, but are increasing at rapid pace. Over time, the proportion of pharmaceutical sales to hospitals is likely to increase with strong capacity addition (37% increase in FY10) in the healthcare segment. The hospital market contribution to domestic market to likely to grow from USD 1.7 bn to USD 14 bn by 2020 (22% CAGR; 26% market share). We highlight that our survey indicates strong focus by MNCs in hospital segment.
Acceptance of biologics and vaccines will increase
Chart 27: Hospital market to post 22% CAGR
Source: Mckinsey, Edelweiss research
0 3 6 9 12 15 2009 2020E (% ) Public Private Market Share (%) 13 26Valuations: 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 by 25% 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 bn worth opportunity from patent cliff in the US market, and double digit growth in various emerging markets. We expect operating margins to expand by 220 bps to 21.8% over FY11-13E, led by outperformance from Ranbaxy (400 bps expansion) and Sun Pharma (300 bps margin expansion) during the same period. We expect strong revenue growth and operating margin expansion to drive 23% earning CAGR over FY11-13E.
Table 7: Earnings growth momentum across coverage universe (INR bn)
Source: Edelweiss research 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 Index’s relative performance to broad market has moderated
The BSE Healthcare Index has underperformed the broad market (Sensex) over the past four months, after a strong outperformance over the past three years. This is further evident 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 corrected more 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 year historical average of 19x to 23x; and (b) the sector is fairly owned across institutional investors who have been booking profits. However, post correction, over the past four months, 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
