Indian pharma companies under pressure on bourses, MNC peers fare better

At a time when Indian pharmaceutical companies are under pressure on stock exchanges, many of their multinational (MNC) peers are performing much better. Abbott India, for instance, scaled to its 52-week high last week, while Pfizer did so in the latter half of November. Even for others like Sanofi India, GlaxoSmithKline Pharma (GSK) and Merck, analysts expect better days ahead.

The confidence stems from the expectation of domestic pharma market growth rebounding to healthy double digits in the second half of FY18, as the impact of disruptions caused by the goods and services tax (GST)-related trade adjustments and demonetisation are fading. Even Indian pharma companies would benefit from domestic growth, but given their exposure to the US market, which is under stress on account of pricing pressure and regulatory issues, a large part of their domestic gains could get offset. Comparatively, with a strong domestic focus and well-established brands, pharma MNCs are expected to clock better growth. Additionally, Ranjit Kapadia at Centrum Broking says that MNCs having a strong balance sheet and cash on books, given a stable interest rate environment, will see healthy other income, too.

More importantly, the business outlook appears pretty healthy. In the last two years, pharma MNCs were impacted as many of their products came under price control. As a result, their profitability suffered, and in turn, it became a major reason for their share prices underperforming. Nevertheless, as most of their products under essential list category are under price control already, there are no major risks on this front going ahead. Further, for established brands under price control now being economically priced, volume growth is improving. The companies have also been taking an effort to gain market share and grow their brands by introducing line extensions. The strength of many MNCs also lies in their high-margin vaccine range, which is another growth driver. Analysts say that many of these companies are in a sweet spot and should see more gains on the bourses.

Imaging: Ajaya Mohanty
Among key companies, Abbott India has already demonstrated a strong show in September quarter. Its revenue grew 28 per cent and margins expanded 710 bps, leading to net profit surging 83 per cent year-on-year. Thirteen of its 16 major brands grew faster than the market growth rate of 2.8 per cent and are expected to continue driving future growth, say analysts. Benefits accrued from the distribution of Novo Nordisk’s anti-diabetic products too (Abbott receives a distribution margin). Kapadia believes that the company’s presence in the high-margin vaccine segment and launch of new products will drive future growth.

Pfizer, too, reported a net profit growth of 90 per cent in September quarter with margins improving 1,290 basis points. While ten of its flagship brands are doing well, the company launched new line extension, Corex-T after discontinuing its brand Corex. And, there are plans for more line extensions. Pfizer has already sold some of its matured brands, but acquired brands from Astra Zeneca, and these will help drive growth for the company, say analysts.

Multinationals like Sanofi have demonstrated significant resilience, as a pickup in volume growth post price reduction has partially or in some cases to a large extent offset price cuts in a short period of time, say Param Desai and Aarti Rao at Elara Capital. Some of its top products, such as Lantus, Insuman, Combiflam and line extensions of Amaryl, continue to do well and new launches like Toujeo should push up growth further. Not surprising, analysts see 10-25 per cent upside for its stock from here on.Merck, a company highly dependent on the vitamin segment (45 per cent of its revenues), should benefit from its key brand Evion and API vitamin E coming out of price control. On the whole, with six of the 11 top brands growing faster than the domestic market in September quarter, its future prospects remain strong.

 
GSK, though has struggled due to price control impacting its margins. But, the company is still growing its product basket. The company already has four vaccines in the top 500 products and its Synflorix-pneumonia vaccine reported an excellent 24 per cent increase in revenues during the September quarter. Besides, GSK had successfully launched PriorixTetra, a combination of measles, mumps, rubella and varicella vaccine in the quarter.

Earlier, it acquired distribution rights for Novartis’ vaccine portfolio, including Rabipur, which also bodes well. Amongst other initiatives, GSK launched Entero Plus-probiotic food supplement, reinstated manufacturing of Neosporin and commissioned a dedicated facility for manufacturing Eltroxin (Thyroid drug). All these should help clock healthy increase in earnings and support its rich stock valuations.