| WPI-linked price hike for NLEM drugs of ~6%; Net impact for manufacturers may be lower, in our view | ||
The list of essential medicines (NLEM) that witnessed price revisions under the DPCO 2013 in India will be allowed to hike retail prices from Apr-2014 based on the annual increase in WPI in CY13 (~6.32% as per government notice). Drugs outside of price control can raise prices up to 10% annually. While the DPCO price hike might be implemented in full, we expect muted low single digit price increases in non-DPCO drugs given the increasing competition in the domestic market. Even for DPCO drugs (~18% of India’s pharma market, as per the government), we believe that the net impact for manufacturers would be lower than 6.3% as the players are likely to transfer some of the pricing benefit to the trade channel to offset the trade margin reduction post DPCO 2013.
· Price hike in domestic market from Apr-14 for NLEM drugs. The DPCO 2013 for NLEM drugs (348 essential medicines) provides for an annual price hike based on the increase WPI. The government announced a price hike of up to 6.32% (based on change in WPI in CY13) in NLEM drugs and has directed manufacturers to inform the regulator of any hike within 15 days of the notice (link). Media reports (Business Standard) highlighted that the price increase announced is lower than expected by the industry and might not be enough to help companies offset cost pressures (related to raw material, packaging and freight). While drugs outside DPCO 2013 can increase prices up to 10%, we believe increasing competition (market share gains to offset pricing policy pressure) in the domestic market could led to muted pricing trends.
· Net impact on manufacturers likely to be lower. We believe the impact of higher prices would be evident after a few months given the inventory in the trade channel (usually 1-2 months). Our channel checks indicate that the net impact from price hikes for the drug manufacturers may be limited as they transfer the benefit to the traders to offset the impact from lower trade margin. This is likely, in our view, given the reduction in trade margins under DPCO 2013 (wholesalers from 10% to 8%, while margins for retailers were reduced to 16% from 20% previously) was a point of contention between the traders and manufacturers impacting volume trends in later part of 2013 (due to traders boycott).
· 8-10% domestic market growth for FY15. While the March industry trend is not yet available, we expect 6-7% growth in FY14E (YTD Feb growth 6%, in our view). In our view, domestic growth is likely to recover moderately from FY14E to 8-10% in FY15E aided by volume increase, low single digit price increase and resolution of one off issues of FY14 (new pricing policy, trade destocking, drug bans). We expect SUNP, LPC and GNP’s domestic formulation revenue to outperform the IPM growth given focus on chronic segments.
Figure 3: Indian Pharma Market Growth has slowed… Source: DRRD 20F Filings (based on ORG IMS data) and J.P. Morgan estimates. | Figure 4: Growth in FY14 was impacted by several one-off issues |
Table 1: Indian Pharma companies – Contribution to Revenue and Focus Therapy Areas
India as % of revenue
|
Focus areas
| |
SUNP
|
26.0
|
CVS, Anti-Diabetic, Neuro Psychiatry, GI
|
LPC
|
25.2
|
CVS, Anti-Biotics + Cephs and Anti-Diabetic
|
DRRD
|
12.5
|
Cardiology, GI, Antineoplastics
|
GNP
|
26.4
|
Dermatology, Cardiology and Gynecology
|
Source: Company reports.
Table 3: Indian Pharma: Valuation Summary
Mcap
|
P/E
|
EV/EBITDA
|
P/BV
|
RoE
| ||||||
CMP
|
$Mn
|
CY14/FY15
|
CY15/FY16
|
CY14/FY15
|
CY15/FY16
|
CY14/FY15
|
CY15/FY16
|
CY14/FY15
|
CY15/FY16
| |
Sun Pharma
|
576
|
19,775
|
19.9
|
18.6
|
13.6
|
12.3
|
5.5
|
4.4
|
35.0
|
29.3
|
Dr Reddy's
|
2,656
|
7,480
|
17.8
|
15.8
|
11.8
|
10.3
|
4.0
|
3.3
|
25.0
|
23.1
|
Glenmark
|
587
|
2,638
|
18.5
|
14.3
|
12.2
|
9.7
|
3.8
|
3.1
|
22.9
|
24.1
|
Lupin
|
982
|
7,291
|
21.7
|
18.6
|
13.0
|
10.9
|
5.4
|
4.3
|
27.7
|
26.0
|
Cipla
|
398
|
5,297
|
19.6
|
16.5
|
12.5
|
10.4
|
2.7
|
2.4
|
14.9
|
15.5
|
Ranbaxy
|
442
|
3,103
|
15.5
|
23.3
|
11.2
|
13.4
|
3.8
|
3.3
|
30.6
|
16.0
|
Cadila Healthcare
|
1,023
|
3,471
|
21.8
|
17.4
|
15.8
|
12.7
|
4.9
|
4.1
|
24.4
|
25.5
|
Source: Company reports, J.P. Morgan estimates Note: Bloomberg consensus for Not covered (NC) stocks Cipla, Ranbaxy and Cadila.
Pharmaceuticals & Healthcare Services
|
