The healthcare opportunity

Healthcare stocks seem to be on a bit of a roll recently. The BSE Healthcare index delivered 12 per cent compared to Sensex’s 8 per cent gain since January this year. A large part of the gains by pharma stocks has come over the last one month on the back of the passage of the US healthcare reform bill, the global generic opportunity, steady domestic sales and the defensive nature of the sector given the pressure on interest rates. Investors have also taken a liking to small and mid cap pharma companies due to lower valuations.

With larger companies having a pipeline of abbreviated new drug applications (ANDA), some with exclusivity period and drugs worth $80 billion coming off-patent over the next five years, investors are betting on Indian companies garnering a chunk of this generic opportunity. In this context, the passage of the US healthcare reform bill, which aims at reducing healthcare costs, will help Indian companies which are among the lowest cost producers of generic drugs. Further, with global MNCsevincing interest over the last couple of years and M&A’s increasing, analysts expect consolidation and demand for good quality pharma companies.

The healthcare reform bill
The reform bill which has recently been passed into law in the US has two key features. It increases health coverage and aims at the reduction in healthcare costs. The bill increases the coverage to an additional 32 million uninsured Americans who make up about 10 per cent of the total US population. The bill prohibits insurance companies from excluding people with pre-existing medical conditions and dropping policy holders on account of coverage limits.

Secondly, the bill which is expected to cost US taxpayers $940 billion over the next decade is expected to reduce the US fiscal deficit by $143 billion. Among the other provisions which is of interest to Indian companies is the inclusion of a 75 per cent discount on generic drugs bought through Medicare (health insurance for senior citizens) and the fact that the bill did not ban patent settlement deals between innovators and generics players helping Indian generic firms which agree to delay their launches and negotiate an out of court settlement.

The impact
Says Gaurav Khungar, head of Pharmaceutical Sector, KPMG, “The focus on reduction of healthcare budgets to bring down the US deficit is expected to give a further push for generics substitution. Moreover, MNC companies will look to lower the cost of production for many off-patent branded drugs that will lead to new outsourcing contracts for the CRAMs companies.” In addition to CRAMS companies he also believes that the healthcare bill provisions further expand the opportunity for Indian companies – primarily for generic players with a growing foothold in the US market.

Among the 14 countries mentioned that can offer low cost drugs, India and China are the only two that have the requisite scale to serve the growing US generics market. Says S Ramesh, president – Finance & Planning, Lupin, “While generics today have a share just under a fifth in the US market, they are likely to grow by over twice that number by 2013 as many of the innovator drugs go off-patent and the healthcare bill (which will be implemented in stages) comes into full effect.” While the bill will clearly boost the prospects of Indian generic players, another indication of the growing trends towards generics has been the shift in business models of innovator pharma majors, which have made acquisitions and entered into alliances.
 

EXPORTS DRIVEN
in Rs crore	Sales	% Chg y-o-y	OPM (%)	Chg y-o-y (in bps)	Net profit	% Chg y-o-y	Exports /  Sales (%)	P/E (x)	P/BV (x)	RoA (%)
Generic
Ranbaxy	9,168.0	12.5	16.0	537.0	939.0	58.0	77.0	24.1	3.5	8.5
Cipla	6,392.0	13.0	22.0	2.0	1,262.0	15.0	52.0	21.6	4.0	14.9
Dr Reddy's	8,093.0	13.0	24.0	393.0	1,075.0	54.0	80.0	19.9	4.0	14.2
Sun Pharma	4,641.0	15.0	32.0	30.0	1,549.0	20.0	55.0	24.0	4.0	18.4
Glenmark	2,886.0	18.0	26.0	88.0	462.0	32.0	66.0	15.5	2.5	11.3
Lupin	5,694.0	20.0	19.0	118.0	815.0	27.0	72.0	17.6	5.1	32.0
Aurobindo	4,341.0	20.0	30.0	70.0	602.0	24.0	63.0	9.5	2.2	14.9
Biocon	2,581.0	14.0	15.0	---

336.0 16.0 72.0 17.6 3.0 13.0 Cadila4,343.018.619.047.0592.022.044.019.05.215.7 Torrent2,126.014.516.0   ---309.022.052.014.84.217.4 CRAMS