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Sector update: Pharmaceuticals - Domestic Pharma; top guns hold key to growth

IPM’s new product launch engine is weakening: Tightening norms on new product approvals by DGCI (Indian regulator) and implementation of patent regime have likely increased reliance of most Indian pharma players on existing products to drive growth across the Indian pharmaceutical market (IPM). Our view is based on the premise that contribution to IPM growth from new product launches has reduced from 6.7% in trailing twelve month (TTM) Nov 2014 to 3.5% in TTM Nov 2019. We believe the trend of increased reliance on existing products would sustain, given enhanced regulatory scrutiny on new product introductions. Moreover, a close look at the growth profile of top 25 brands across 24 leading companies within IPM shows a steady rise in revenue contribution from these brands, pointing to rising salience of leading brands in shaping the growth trajectory of pharma companies.

Top 25 brand concentration is growing across companies: We observe the portfolio of 25 top brands of most companies within our analysis universe has grown faster than the rest of the portfolio, which in turn has caused the product concentration of companies’ existing portfolio to rise. This trend is particularly visible in MNC pharma companies. On average, the product concentration of top 25 and top 10 brands has risen by 4.6% and 3.6%, respectively, over TTM Nov 2016-2019 (for the 24 companies). At a broader level, this trend yet again underlines the growing importance of brand building in domestic pharma market and the relevance of big brands in driving growth.

Top brands’ health analysis framework: How companies succeed in growing their top 25 brands would be key in deciding their overall growth outlook within the domestic pharma space. For instance, companies with a larger proportion of top 25 brands outpacing IPM growth would be better placed than those relying on relatively fewer brands to drive growth. Similarly, companies with a larger proportion of top 25 brands trailing IPM growth run the risk of medium-term slowdown, especially in a situation where their select fast-growing brands may begin to lose momentum. In a nutshell, we believe companies with larger proportion of top 25 brands outperforming IPM growth and fewer brands lagging IPM growth (<5% CAGR) would likely be at an advantage versus peers.

Healthy brands..: Our brand analysis shows that 19 and 17 of Intas and Abbott’s top 25 brands have registered >10% CAGR over TTM Nov 2016-2019, respectively. This suggests the presence of multiple growth engines within their top 25 brands, which adds solidity to their medium-term growth outlook. It would also help in de-risking the business against potential growth challenges in some of these brands. Apart from these two, 9 more companies have >50% of their top 25 brands surpassing 10% CAGR, which reflects a reasonably broad-based growth profile.

..and the not so healthy ones: An analysis of slow-growing brands shows that ~60% of Biocon, Sanofi, Wockhardt and Pfizer’s top 25 brands posted <5% CAGR over TTM Nov 2016-2019. Prima facie, this trend doesn’t bode well from a medium-term growth perspective, with a relatively large proportion of slow-growing brands likely dragging overall growth of these companies. On this count, Abbott and Intas yet again fare better versus peers, with only 2 of their 25 brands registering <5% CAGR over the analysis period. About 7 other local players too have relatively lesser proportion (<25%) of slow-growing top brands.

Key takeaways: Overall, while multiple players score (Mankind, Indoco, Cipla, Alkem, Lupin, and Sun) reasonably well on both aspects, Intas and Abbott fare better than peers on both counts. Based on this framework, we believe these players are relatively better placed to sustain growth over the medium term.