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Three key reasons why CLSA is bullish on pharma MNCs in India

Shares of domestic pharma companies haven't been in the pink of health in the last two years, but those of multinational pharma companies (MNC pharma) have rewarded their investors handsomely. A focus on key brands and increasing acceptance for patented products have enabled MNCs to report strong revenue and Ebitda growth over the last 12-18 months. Analysts say these companies seem better placed to withstand disruption, if any, from government policies.

Besides, strong balance sheets provide defensive characteristics to such stocks, said CLSA in its recent report on Indian Pharma dated November 13.

"MNCs have witnessed an improved performance over the last 12-18 months. Revenue and Ebitda growth have been in strong double-digits. As per IQVIA, MNCs have a 20 per cent market share, with Abbott (Abbott India, Abbott Ltd) accounting for 6.4 per cent, GSK India 3 per cent, Pfizer India 2.1 per cent, and Sanofi India 2 per cent.

We believe growing focus on key brands and rising acceptance for patented products in India have been the key reasons behind this resurgence," wrote Alok Dalal, an investment analyst for the healthcare setor at CLSA in a co-authored note with Surajdev Yadav.

The report further added that MNC stocks have outperformed local peers for the first time in over a decade and have also significantly outperformed the Nifty over the last 18 months.

Stock performance

Data analysed from ACE Equity shows that shares of Astrazeneca Pharma India have zoomed 127 per cent since January 2018. Abbott India comes second on the list with a gain of 118 per cent, followed by Pfizer (up 94 per cent). Sanofi India and Glaxosmithkline Pharmaceuticals have gained 39 per cent and 29 per cent, respectively during the same period. In comparison, the benchmark Nifty50 index has gained around 13 per cent while Nifty Pharma index has lost over 21 per cent.

Meanwhile, domestic firms’ stocks such as Glenmark Pharmaceuticals, Cadila Healthcare, Aurobindo Pharma, Piramal Enterprises, and Sun Pharma have slipped in the range of 28-52 per cent. The only outlier has been Divi's Laboratories, which has surged 51 per cent during the window.

Here are three reasons why CLSA thinks MNCs have an upper hand going ahead

1) Focus on power brands and new launches to drive growth

CLSA notes that MNC power brands are prevalent in underpenetrated therapies such as diabetes, thyroid diseases, and cancer and they have the potential to generate a multiplier effect over the next few years. These brands have disproportionate market share despite high competition.

According to IQVIA, the Indian Pharma Market (IPM) is valued at US$20bn and CLSA expects it to reach US$50bn by FY30, due to increase in chronic ailments like cardiac, diabetes, and cancer. Branded generics account for 92 per cent of the market. "India’s growth and improving IPR laws makes it attractive for parent companies to launch patented products in India. Thus, new launches in areas like diabetes, cancer, and vaccines should continue to boost growth for MNCs," the report said.

2) Limited impact of disruptions

Affordable healthcare has been one of the priorities of the Narendra Modi-led government which has resulted in a broadening range of products falling under price controls, as well as the threat of substitution from Jan Aushadhi, a government initiative to promote quality generic-generic drugs at affordable prices. Amid this scenario, MNCs are better placed to thwart competition, thanks to significant brand recall and patented product portfolio.

3) Nature of business

Strong balance sheets, superior return ratios, and a predictable earnings profile lend defensive characteristics to MNC stocks, the global brokerage says. Defensive stocks are non-cyclical stocks; whose businesses are relatively immune from changes in economic conditions.

CLSA has initiated coverage on Abbott India with a "BUY" recommendation and Rs 14,500 target price based on 40x Sep-21CL EPS. This valuation represents a 20 per cent discount to comparable consumer peers, which takes into account the risks of government price controls, lower dividend payouts and lower return on equities (ROEs), it said.

“We believe Abbott India (AIL) is the best play on MNCs in India as it has under penetrated power brands in the chronic space, supportive parent and local strategy to drive growth. Ability to build mega brands has been the key feature of AIL, top ten brands account for 70 per cent of sales with significant market share despite high competitive landscape,” the brokerage said. 

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