Growth prospects, valuations aid Indian pharma firms surpass foreign MNCs

After outperforming their larger Indian generic peers over the last few years, foreign multinational pharma companies are losing steam. This is being reflected on both operational front and bourses. Since the start of CY20, the stocks of Indian subsidiaries of foreign drug giants have gained 6.9 per cent. This is not bad, given the benchmark Sensex has left investors poorer by 26.5 per cent over the same period. However, this pales in comparison to the 16.5 per cent returns that the top 16 Indian pharma companies have generated.

With the pharma sector being rerated, given steady growth prospects and attractive valuations, all the companies, including pharma MNCs, will see greater investor interest. Analysts believe pharma MNCs have a stable India business model with 100 per cent of their revenues coming from the domestic market and thus offer steady growth prospects and revenue visibility in the near to medium term. However, in recent months, they seem to have lost their way a bit.

The data from AIOCD-AWACS, a pharma market research body, indicated March was the fifth consecutive month when the pharma MNC pack lagged their Indian competitors. The companies comprising the top seven foreign MNCs by market share posted growth of 8.2 per cent, as compared to 10.2 per cent by Indian companies and overall market growth of 9.8 per cent.  Bansi Desai of HDFC Securities Institutional Research said: “The key reasons for lower growth of pharma MNCs as compared to Indian companies are a higher contribution to revenues from mature brands, fewer new launches, and a greater impact of price control on the portfolio.”

MNC drugs are priced at a premium of up to 30 per cent to their local variants and when prices are capped, it forces these companies to bring down prices by a bigger proportion than Indian companies. Further, given the reliance on top brands (account for half of their sales), price control dents revenue growth. The other issue is the muted rate of new launches by pharma MNCs, as compared to their Indian peers, which aggravates the issue in an already thin portfolio. Indian companies have been able to move to portfolios with lower controls quicker as compared to their foreign peers.

IIFL Research believes that the risk for pharma MNCs is greater going into the price control year. The drug price control order or DPCO is due for revision in 2020.

A change of strategy by Indian generic companies also explains the gains in market share. Given the large opportunities outside the country, Indian generic majors have been expanding their presence in developed and emerging markets. However, issues -- be it on the currency volatility front, or regulatory and growth challenges -- have forced them to rejig their stance.

Surajit Pal of Prabhudas Lilladher says: “Growth issues in overseas markets have led larger generic players to increase their focus and aggression on the Indian market. Further, given the slowdown, the buying capacity of Indian consumers has come down with preference for generic and lower-priced medications, rather than premium-priced products of multinational brands.”

The aggression in the Indian market is also evident from the string of acquisitions they have undertaken since 2015. Torrent Pharma acquired Elder's and Unichem’s portfolios in 2015 and 2018, respectively. The latest buy is from Zydus, which acquired Heinz’s portfolio.

The presence of 100 per cent-owned subsidiaries of pharma MNCs, which compete with their listed subsidiaries for product launches and support, create a conflict of interest. Abhishek Sharma and Rahul Jeewani cite the case of Sanofi India, where there is no distinction between therapy areas, which can be launched by the listed or fully owned company.

Among pharma MNCs, Abbott India has stood out, gaining market share consistently. The company, according to IIFL Research, has the best launch rate among MNC peers and as a result, has been the fastest-growing multinational pharma company in India despite having the largest base. Given the market share gains by Indian companies and premium valuations of pharma MNCs, analysts expect Indian companies to continue outperforming their foreign peers in the near- to medium-term period.