CLSA Indian Pharma (Turning A Corner) 20191113

Indian pharma
Sector outlook
Alok Dalal Turning a corner

alok.dalal@clsa.com Multiplier effect from power brands to help sustain MNC momentum
+91 22 6650 5063
A focus on growing key brands and increasing acceptance of patented products
Surajdev Yadav, CFA has boosted recent performance of multinational pharma companies in India. The
+91 22 6650 5071 multiplier effect generated by power brands and launches from parent’s pipeline
should sustain this trend. These firms are better placed to withstand disruption
from government policies. Strong balance sheets add a defensive characteristic to
such stocks. We initiate coverage on Abbott India with a BUY rating and target
price of Rs14,500 as we like its portfolio and brand building track record.
Improved MNC performance

13 November 2019 MNCs (global pharma innovators’ listed Indian subsidiaries) have seen improved
performance over the past 12-18 months, with strong double-digit revenue and
India Ebitda growth. We believe this resurgence is due to their increasing focus on key
Healthcare brands and a rising acceptance of patented products in India. MNC stocks have thus
outperformed both local peers and the Nifty Index over this period.
Power brands and new launches to drive growth

Initiation Power brands prevalent in underpenetrated therapies, such as diabetes, thyroid
diseases and cancer, have the potential to generate a multiplier effect over the next
Abbott India ABOT NS few years. We expect the Indian pharma market to enjoy a 10% Cagr, reaching
Rec BUY
Market cap US$3.5bn US$55bn by 2030, due to a rise in chronic ailments. Strengthened intellectual
3M ADV US$2.2m property right (IPR) laws make it attractive for parents of MNCs to launch new
Price Rs11,768 products in India and momentum should boost expansion.
Target Rs14,500
Up/downside +24%
Better placed to withstand policy disruption
The Modi administration’s drive to reduce healthcare costs has resulted in a broad
span of price controls and threat of substitution from Jan Aushadhi - a government
Non-rated MNCs
initiative to promote quality, low-cost generic-generic (substitution) drugs. MNCs
GSK Pharma GLAK NS patented-product portfolios and power brands are better placed to withstand such
Market cap US$3.9bn disruption, and enjoy significant unaided recall via patient outreach programmes.
3M ADV US$1.3m
Price Rs1,630
We initiate on Abbott India with a BUY
Pfizer India PFIZ NS Strong balance sheets, superior return ratios and stable earnings profiles lend
Market cap US$2.6bn defensive characteristics to MNCs. Abbott India (AIL) has a portfolio well aligned
3M ADV US$1.7m
Price Rs3,995 with its parent and a strong track record of building brands. We initiate on the stock
with a BUY recommendation & Rs14,500 target based on 40x Sep-21CL EPS.
Sanofi India SANO NS
Market cap US$2.1bn
3M ADV US$1.4m Positioning of MNCs in India
Price Rs6,571
High
share Legacy/Local plays
Legacy/Local Play India as the arrowhead
AstraZeneca India ASTR NS of
Generics Merck
Market cap US$0.9bn
3M ADV US$0.8m Pfizer Abbott
Price Rs2,495
(% of sales from generic molecules)
GSK
Focus on localisation
Janssen Sanofi
MSD
Novartis Allergan
AstraZeneca
Novo Nordisk
Low Roche
share Patent plays
of
Patend Plays Therapy Focussed plays
Generics Boehringer Eli Lilly
Comprehenisve offering/Solutions
Low High
(in focus therapies)
www.clsa.com Source: IQVIA, CLSA
CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) do and seek to do business with companies covered in its research reports. As such,
investors should be aware that there may be conflicts of interest which could affect the objectivity of the report. Investors should consider
this report as only a single factor in making their investment decisions. For important disclosures please refer to page 60.

Indian pharma
Contents
Investment thesis ............................................................................................................ 3
Improved MNC performance ....................................................................................... 5
Power brands and new launches to drive growth .................................................... 13
Better placed to withstand policy disruption ............................................................ 18
We initiate on Abbott India with a BUY .................................................................... 24
Company profile
Abbott India ............................................................................................................. 33

Distilling the essence of
India’s annual reports
Appendices
1: Draft pharma policy .................................................................................................. 57
2: Government’s Jan Aushadhi promotion.................................................................. 58
3: MNCs’ track record ................................................................................................... 59
All prices quoted herein are as at close of business 11 November 2019, unless otherwise stated
Insight on India
2 alok.dalal@clsa.com 13 November 2019

Investment thesis Indian pharma
Pharma MNCs well positioned: BUY Abbott

A focus on key brands and increasing acceptance for patented products have
MNCs revived with
mega brands and enabled MNCs to report strong revenue and Ebitda growth over the last year.
patented products Multiplier effect generated by focus brands and continued launches from their
parent’s pipeline should enable them to sustain this trend. MNCs are better placed
to withstand disruption from government policies and strong balance sheets
provide a defensive characteristics to such stocks.
Improved performance by MNCs over the last year

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% market share, with Abbott (Abbott India, Abbott Ltd) accounting for
6.4%, GSK India 3%, Pfizer India 2.1%, and Sanofi India 2%.
We believe growing focus on key brands and rising acceptance for patented
products in India have been the key reasons behind this resurgence. 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.
Revenue growth of MNCs Stock price performance of MNCs vs local peers

MNCs outperform local
16 (% YoY) 600 (rebased to 100) MN C Local
peers for first time in
14 500
over a decade
12 400
10
300
8
200
6
100
4
2 0
Nov 09
Nov 10
Nov 11
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Nov 17
Nov 18
Nov 19
0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Companies, CLSA Source: Bloomberg, CLSA
Focus on power brands and new launches to drive growth

MNC power brands are prevalent in underpenetrated therapies such as diabetes,
MNC mega brands in
underpenetrated thyroid diseases, and cancer. They have the potential to generate a multiplier effect
therapies should boost over the next few years. These brands have disproportionate market share despite
growth in coming years high competition.
Top 10 brands as percentage of revenue Brand building capability of MNCs

80 (% of sales) Company Brand Market Competitors
share (%)
60
GSK India Augmentin 27.5 266
40
Eltroxin 27.1 27
20
Abbott India Thyronorm 51.6 27
0
Duphaston 100 -
Cipla
GSK India
Cadila Health
Abbott India
Glenmark
Lupin
Dr Reddy's
Sun Pharma
Sanofi India
Torrent Pharma
Pfizer India
Pharma
Sanofi India Lantus 79.2 6

Allegra 79 49
Merck KGaA Concor 79.3 10
Source: IQVIA, CLSA Source: IQVIA, CLSA
The Indian Pharma Market (IPM) is valued at US$20bn, as per IQVIA, and based on
Parent companies
attracted towards
current trends we expect it to reach US$50bn by FY30, due to increase in chronic
India’s fast-growing ailments like cardiac, diabetes, and cancer. Branded generics account for 92% of
market 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.
13 November 2019 alok.dalal@clsa.com 3

Investment thesis Indian pharma
India Pharma Market to be US$55bn by FY30 AIL plans to launch 100 products over 5 years
New launches,
60 (Rsbn) Acute Chronic 55.2 25 (No.)
including patented
50
products, should 20
34.3
continue from parent 40
15
pipeline 30
17.1 18.9 19.5 21.3 Aim to launch
16.0 over 100
20 10.7 10
products over
10 5
0
FY10 0
FY15
FY17
FY18
FY19
FY20CL
FY25CL
FY30CL
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
Source: IQVIA, CLSA Source: Company, CLSA
MNCs better placed to withstand government policy disruptions

Reducing the cost of healthcare has been one of the focus areas of the government
Significant brand recall
and patented product and this has resulted in a broadening range of products falling under price controls,
portfolio can thwart as well as the threat of substitution from Jan Aushadhi, a government initiative to
competition promote quality generic-generic drugs at affordable prices.
With several power brands, significant brand recall via patient outreach programs,
and a patented product portfolio, MNCs are better placed to withstand these
disruptions. GSK’s leading brand, Augmentin, saw a sharp pick-up in volume after a
40% price cut in 2013-14 and has recouped lost value in less than three years.
MNCs less vulnerable to disruptions Case study-GSK’s lead brand Augmentin

4.5 (Rsbn)
Jan Aushadhi 4.2
4.0 Brought under

3.5 price control 3.6
3.5 3.2
3.1
2.9
3.0
Strong No 2.5
Patented available 2.5
brand
drugs
recall substitutes
2.0
1.5
1.0
MNC
Pharma 0.5
Companies
0.0
FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: CLSA Source: IQVIA, CLSA
Strong balance sheets, superior return ratios, and a predictable earnings profile lend
MNCs have non-
cyclical business defensive characteristics to MNC stocks. We initiate coverage on AIL with a BUY
models recommendation and Rs14,500 target price based on 40x Sep-21CL EPS, a 20%
discount to comparable consumer peers, which factors in the risk of government
price controls, a lower dividend payout and consequently lower ROE.
Valuation matrix
(US$m) MCap EV 3M PE (x) Ev/Sales (x) Ev/Ebitda (x) ROE (%) Yield (%)
ADTV
CY19/F CY20/ CY21/ CY19/ CY20/ CY21/ CY19/ CY20/ CY21/ CY20/ CY20/
Y20 FY21 FY22 FY20 FY21 FY22 FY20 FY21 FY22 FY21 FY21
GSK India 3,865 3,741 1.3 46.9 41.5 37.0 7.7 6.9 5.7 35.2 30.3 23.5 24.9 1.4
Abbott India 3,500 3,258 2.1 41.9 35.3 30.1 5.5 4.8 4.2 32.2 27.2 22.8 27.3 0.9
Pfizer India 2,558 2,272 1.7 34.9 30.3 27.5 7.1 6.5 6.1 23.5 21.1 20.1 16.9 0.6
Sanofi India 2,132 2,011 1.4 35.9 31.1 27.6 4.8 4.6 4.4 20.5 18.9 18.3 18.5 1.3
Average 39.9 34.6 30.6 6.3 5.7 5.1 27.8 24.3 21.2 21.9 1.1
Source: Bloomberg except for Abbott India

Section 1: Improved MNC performance Indian pharma
We would like to thank Evalueserve for its help in preparing our research reports. Bhavik Mehta (IT); Kushal Shah (Midcaps); Shreya Shivani (BFSI) and Akshay
Chandak (Strategy) provide research support services to CLSA.
Improved MNC performance

MNCs have spent Multinational pharma companies (MNCs) are the Indian subsidiaries (both listed and
significant time in India and privately held) of global innovators in India. Within MNCs, Abbott Group has the
control 20% of the highest market share at 6.4% followed by GSK India (3.0%), Pfizer India (2.1%) and
country’s pharma market
Sanofi India (2%). Other listed MNCs are Novartis India and Procter & Gamble
Health Ltd (earlier Merck KGaA). Privately held MNCs are Allergan, Boehringer
Ingelheim, Eli Lilly, J&J (Janssen), MSD (Merck, US) and Roche. Collectively MNCs
have 20% market share in India.
Figure 1
Snapshot of leading listed MNCs in India

Company Abbott India GSK India Sanofi India¹ Pfizer India AstraZeneca India
Established in India (year) 1944 1924 1956 1950 1979
Mcap (US$bn) 3.5 3.9 2.1 2.6 0.9
Revenue (Rsm), FY19 37,919 31,285 27,708 20,815 7,283
Local/Export, % 100/- 100/- 70/30 100/- 100/-
Ebitda (Rsm), FY19 8,080 6,065 6,235 4,743 880
PAT (Rsm), FY19 4,503 4,424 3,806 4,290 544
Market share (%), FY19 2.62 3.08 2.05 2.19 0.37
Top therapies Women's Derma (24%) Anti-diabetic (30%) Anti-infective (15%) Cardiac, Renal &
healthGastro Anti-infectives (20%) Cardiac (14%) Vitamins (13%) Metabolic (84%)
MetabolicsCNS Vaccines (16%) Vaccines (12%) Oncology (14%)
Multi-specialty Pain/Analgesics (9%) Respiratory (10%) Vaccines (12%)
Hormones (8%) Pain/Analgesics (8%) Gastro (9%)
Cardiac (8%)
Chronic/Acute, % 60/40 5/95 53/47 19/81 80/20
Products under price 24 30 20 15 25
control (%)
Does parent have another Yes Yes Yes Yes Yes
subsidiary in India
Subsidiary name Abbott Healthcare GSK Consumer (75%) Sanofi-Synthelabo Pfizer Ltd (100%) AstraZeneca India Pvt
(% holding by parent) (100%) (100%); Shantha Ltd (100%)
Biotechnics (99.5%)
¹ Y/E Dec. Note: GSK Consumer was acquired by Hindustan Unilever but transaction yet to be consummated, Mcap based on prices as on 4 Nov 2019.
Source: Companies, CLSA
Figure 2 Figure 3
Trend in MNC pharma market share Market share of top pharma companies in India
(%) Indian cos MNC cos (%)
100 8 7.5
90 21 21 21 20 20 7 6.4
29
80 6 5.1
70 5
3.8 3.7
4 3.6
60 3.2 3.1 3.1 3.1 3.0
3 2.5
50 2.2 2.1 2.1 2.0
40 79 79 79 80 80 2
71
30 1
20 0
Cadila
Man kin d
Torrent
Intas
Dr Reddy's
Glenmark
Cip la
GSK
Pfizer
Sun
Alkem
Ab bott
Aristo
Macleods
Sanofi
Lupin
10
0
FY10 FY15 FY16 FY17 FY18 FY19
Source: IQVIA, CLSA Source: IQVIA, CLSA

Improved performance over the last year

MNCs have been witnessing MNCs have witnessed improved performance over the last 12-18 months. Revenue
improved revenue and and Ebitda growth has been in strong double-digits. In FY19, MNCs reported 12%
Ebitda growth over the YoY revenue growth, which was the fastest pace since FY15. Along with the strong
last year
revenue growth, Ebitda rose 16% YoY in FY19. Amongst listed MNCs, we consider
Abbott India, GSK India, Sanofi India, Pfizer India and AstraZeneca India for analysis
in this report.
Figure 4 Figure 5
Trend in revenue growth for MNCs Trend in Ebitda growth for MNCs
16 (% YoY) 20 (% YoY)
14 15
12
10
10
5
8
0
6
(5)
4
2 (10)
0 (15)
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Bloomberg, CLSA Source: Bloomberg, CLSA
The secondary market data from IQVIA also shows an encouraging trend - MNCs
have enjoyed strong double-digit growth in two of the last four quarters.
Figure 6
Trend from secondary Trend in secondary market growth of MNCs

market also indicates an
14 (% YoY)
improved performance
12
10
(2)
1QFY17
2QFY17
3QFY17
4QFY17
1QFY18
2QFY18
3QFY18
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19
1QFY20
2QFY20
Source: IQVIA, CLSA
MNC stocks have As a result of a pick-up in growth momentum, MNC stocks have outperformed local
outperformed local peers peers for the first time in over a decade. MNCs have significantly beaten the Nifty
and Nifty over the last 12 over the last 18 months.
months

Figure 7 Figure 8
Stock price performance of MNCs vs local peers Stock price performance of MNCs vs Nifty
600 (rebased to 100) MNC Local 450 (rebased to 100) MNC Nifty
400
500
350
400 300
250
300
200
200 150
100
100
50
0 0
Nov 09
Nov 10
Nov 11
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Nov 17
Nov 18
Nov 19
Nov 09
Nov 10
Nov 11
Nov 12
Nov 13
Nov 14
Nov 15
Nov 16
Nov 17
Nov 18
Nov 19
Source: Bloomberg, CLSA, local includes CLSA covered pharma companies Source: Bloomberg, CLSA
Focus on key brands

The Indian pharma market (IPM) can be classified into five archetypes-brand
builders, therapy leaders, access drivers and specialty players. As per IQVIA, MNCs
have been the leaders in the brand builder/specialty player space, with legacy
brands developed over years.
Figure 9
MNCs are known to be Prevalent Business Archetypes in the IPM

mega brand builders and
specialty players Increasing
focus on
GPs
Access drivers Therapy leaders

Prescriber focus
Brand builders
Speciality players
Brand building
Increasing sales from
big brands
Source: IQVIA
The top 10 products for Focus on top brands is a reflection of the product concentration of MNCs whose
MNCs as a percentage of top 10 products as a percentage of revenue is significantly higher than local peers.
revenue is significantly Abbott India, Pfizer India, GSK India and Sanofi India derive over 50-70% of their
higher than local peers
revenue from top 10 products. GSK India has recently announced that it would
focus aggressively on its top 20 brands and has been selling off its non-focus brands
to local peers like Dr Reddy’s and FDC.

Figure 10
MNCs lead in product Product concentration vs peers-top 10 brands as % of sales

concentration suggesting 80 (% of sales)
strong brand building skills
70
60
50
40
30
20
10
0
Torrent Pharma
Sanofi India
Dr Reddy's
Sun Pharma
GSK India
Cadila Health
Lupin
Abbott India
Cipla
Pfizer India
Glenmark Pharma
Source: Company, IQVIA, CLSA
MNC portfolio is more geared Focus on key brands is also reflected in the field force productivity of a medical
towards Metros/Tier-I towns representative measured as Revenue/MR/year. As can be seen, MNCs lead the local
where per capita spend on peers on the productivity aspect as their portfolio is more geared towards
medicines is significantly
Metros/Tier-I towns where per capita spend on medicines is significantly higher
higher . . .
than the Tier towns/rural areas.
Figure 11
. . . which reflects higher Trend in field force productivity

field force productivity for
14 (Rsm/MR/year)
MNCs vs local peers
12
10
0
GSK
Dr Reddy's
Torrent
Sun Pharma
Glenmark
Sanofi
Lupin
Abbott India
Cipla
Pfizer India
Cadila
Focus brands stand out despite competition being high

MNCs have gained Delving deeper into the key brands of the MNCs suggests that focus brands such
disproportionate market as Lantus, Augmentin, Thyronorm, Duphaston, and Allegra have managed to
share through certain maintain disproportionate market. This is largely due to certain unique features
unique features despite
which have helped protect against the onslaught of competition. Many of these
high competition
brands have the ability to grow 3-4x as they represent under penetrated therapies.

Figure 12
Brand building ability of MNCs

Company Brand Therapy FY19 Market Competitors Specialty
revenue share about the
(Rsm) (%) brand
GSK India’s Augmentin has GSK India Augmentin Anti-infective 4,209 27.5 266 Original API
about 28% market share from parent
despite 266 competitors
Eltroxin Thyroid 1,878 27.1 27 Parent's
pipeline
Abbott India Thyronorm Thyroid 3,581 51.6 27 Parent's

pipeline
Duphaston Hormone 3,344 100.0 -
Sanofi India Lantus Diabetes 4,411 79.2 6 Parent's

pipeline
Allegra Anti-allergy 1,720 79.0 49
Merck KGaA Concor Cardiac 853 79.3 10 Parent's

pipeline
Source: Companies, IQVIA, CLSA
Figure 13
Mega brands have the Share of mega brands and its comparison with overall growth of the company
potential to generate
Number of mega brands Share of these mega brands in Mega brands
multiplier effect
(Brands over Rs500mn) overall revenues (%) growth multiple of
company growth
Abbott 27 Abbott 48 1.4x
GSK India 17 GSK India 64 1.7x
Sanofi 14 Sanofi 62 9.0x
Pfizer 14 Pfizer 65 1.3x
Novo Novo
Norodisk
8
Norodisk
96
1.0x
MSD 4 MSD 64
1.3x
Novartis 4 Novartis 63
1.2x
Source: IQVIA, CLSA
Increasing acceptance for patented products from parent’s pipeline

MNCs launching patented MNCs are becoming comfortable with launching products from their parent’s
products in India within 18 pipeline in India. Looking at the recent launch history it is notably visible that the
months of global launch time taken for MNCs to launch products in India has declined drastically. Prior to
2012, they took 18-48 months to launch a product from their parent’s pipeline, and
this has now fallen to just 6-18 months.

Figure 14
New launches from parent’s pipeline from MNCs
Months taken to launch in India after launch in developed market
Therapy Area Company Brand First launch year 0 1-6 7-12 13-18 19-24 25-36 37-48 >48
Diabetes MSD Januvia 2006

Prior to 2012
Oncology Pfizer Sutent 2006
Anti-HIV Merck Isentress 2007
Cardiac Boehringer Ingelheim Pradaxa 2008
Diabetes Novo Nordisk Ryzodeg 2013
Diabetes Lilly Trulicity 2014
Diabetes Boehringer Ingelheim Jardiance 2014
Asthma GSK India Nucala 2015

Post 2012
Immunotherapy Novartis Cosentyx 2015
Cardiac Novartis Entresto 2015
Vaccine Sanofi Pasteur Hexaxim 2016
Oncology Pfizer Ibrance 2016
Diabetes Sanofi Pasteur Toujeo 2018
Oncology AstraZeneca Imfinzi 2018
Source: IQVIA, CLSA
Recent launches from parent’s pipeline include Ryzodeg (Novo Nordisk product
marketed by Abbott India), Inflexa (Abbott Ltd), Nucala, Infranix Hexa (GSK India),
Lynparza and Xigduo XR (AstraZeneca India), Toujeo and DePura (Sanofi India),
Zavicefta, Enbrel, Xeljianz and Ibrance (Pfizer India), Hexaxim (Sanofi Pasteur),
Entresto (Novartis India). AstraZeneca India has recently launched Durvalumab
(Imfinzi) for cancer care in India.
Patented products have Among these, brands such as Ryzodeg and Hexaxim were blockbuster launches and
scaled up well managed to cross revenues of Rs1bn within a span of three-four years. More
importantly, patented products have seen introduction from the listed entities
rather than privately owned subsidiaries.

Figure 15
Recent launches from MNCs in India

Company Brand Therapy Launch Sales in FY19 (Rsm) From listed co
Abbott India Influvac Vaccine-Influenza May 2017 633 Yes
Enteroshield Vaccine July 2015 330 Yes
Betonin AST Vitamins March 2017 302 Yes
GSK India Nucala Asthma CY18 na Yes
Infranix Hexa Vaccine April 2018 805 Yes
Priorix Tetra Vaccine July 2016 316 Yes
Sanofi India Toujeo Diabetes Jan 2018 166 Yes
DePura Vitamin D Nov 2014 317 Yes
Sanofi Pasteur Hexaxim Vaccine Oct 2016 1,200 No
Pfizer India Zavicefta Anti-infective FY19-20 na Yes
Enbrel Arthritis FY16 na Yes
Xeljianz Arthritis Oct 2017 41 Yes
AstraZeneca India Lynparza Cancer Feb 2019 2 Yes
Xigduo XR Diabetes Feb 2018 288 Yes
Forxiga Diabetes May 2015 1,108 Yes
Novo Nordisk Ryzodeg Diabetes Dec 2014 1,953 Via Abbott India
Patented products launched

through leading local In addition, MNC’s have started launching many products in partnership with an
partners - Eli Lilly has Indian company, eg, Eli Lilly has partnered with Lupin for its diabetes franchise and
launched its diabetes UCB has entered into a partnership with Dr Reddy’s.
products through Lupin
Figure 16
New launches from parent’s pipeline from MNC’s
Therapy MNC Indian Partner Therapy MNC Indian Partner
Cardiac & Respiratory
Cardiac & Respiratory Anti-Viral
Diabetes
Diabetes Oncology
Oncology &
Oncology
Osteorporosis
Diabetes Diabetes

Local pricing strategy has worked well for patented products

Local pricing has led to We believe local pricing strategy has worked well for patented products in India
growing acceptance of leading to growing acceptance for such products. As per IQVIA, drugs priced
patented products according to local requirements have turned out to be successful launches gaining
acceptance in the country. This strategy is important as India is largely an ‘out of
pocket’ market. MNC pharma companies have also been cognisant of this fact and
interestingly kept launch prices well below their international price benchmarks.
Figure 17
Successful MNC Brands in India- Price at India launch vs International prices
45 (India and EU5 price indexed vs US prices) EU5 India
40 40
39
38
35 34
33
30
25
23
20
15 15
13
11
10 9 9
5 4
0
Janumet Jardiance Brilinta Januvia Pradaxa Entresto
India Launch India Launch India Launch India Launch India Launch India Launch
2008 2015 2012 2008 2012 2017
Source: IQVIA, CLSA

Section 2: Power brands and new launches to drive growth Indian pharma
Power brands and new launches to drive growth

Power brands of MNCs in Our analysis of MNCs’ power brands suggests they are largely prevalent in under-
under-penetrated therapies penetrated therapies such as diabetes, thyroid, anti-cancer and vaccines and have
have potential to multiply the potential to generate a multiplier effect over the next few years. India’s pharma
over the next few years
market is expected to reach US$55bn by 2030 (10% Cagr), led by chronic ailments.
A fast-growing market along with improving IPR laws is making it attractive for
parent companies to launch products in India, meaning new launch momentum
should remain strong for MNCs and help generate growth.
Power brands have potential to generate multiplier effect

MNCs are broadly positioning themselves in four categories (as per IQVIA) based
on the nature of the product or therapy. These are:
MNC business models can  India as the Arrowhead: It comprises of companies that consider India as a key
be positioned in four element of their overall global growth. MNCs in this segment have successfully
categories: created large mega brands (largely generic but few patented products too), eg,
Abbott, GSK India, Sanofi India
India as Arrowhead,
therapy-focused play,  Therapy-focused play: Companies with an objective of establishing leadership in
patented play and legacy a particular therapy area- Roche in oncology, Novo Nordisk in anti-diabetes
local play and Allergan in ophthalmology. These companies may rely on local partners to
market their products- Novo Nordisk with Abbott India
MNCs in the Arrowhead  Patented play: Companies which introduce select patented products from their
segment have successfully parent’s pipeline fall in this category. Co-marketing with local players has been
created large mega brands
one of the strategies used to penetrate the market. Local pricing is the key.
AstraZeneca, Eli Lilly, MSD and Boehringer Ingelheim are MNCs that largely fall
in this category
 Legacy-local play: MNCs under this category are characterised by substantial
focus on growing legacy brands (brands over 10 years old). However, they have
also managed to develop an “India-specific” portfolio, eg, Pfizer and Novartis.
Figure 18
Positioning of MNCs in India
High
share Legacy/Local plays
Legacy/Local Play India as the arrowhead
of
Generics Merck
Pfizer Abbott
(% of sales from generic molecules)
GSK
Focus on localisation
Janssen Sanofi
MSD
Novartis Allergan
AstraZeneca
Novo Nordisk
Low Roche
share Patent plays
of
Patend Plays Therapy Focussed plays
Generics Boehringer Eli Lilly
Comprehenisve offering/Solutions
Low High
(in focus therapies)
Source: IQVIA, CLSA

MNC brands in under-penetrated therapies

Many chronic and sub- Chronic and sub-chronic therapies have tremendous potential for growth in India
chronic therapies in particularly under-penetrated ones like diabetes, thyroid, cancer and vaccines.
diabetes, thyroid, cancer Certain MNC brands in the chronic space have room to grow 3-4x from here.
and vaccines have strong
potential for growth
Diabetes: India has 60m diabetics, projected to reach 100m by 2035. However, less
than 20% consume anti-diabetic drugs today due to lack of access and diagnosis of
India has 60m diabetics but the disease. Greater access and improving diagnosis could lead to a strong 5x
less than 20% consume market growth to US$8.5bn by 2030, on a conservative basis. Prescriptions are
anti-diabetic drugs due to sticky and the patient life cycle spans 20-30 years. Companies with products
lack of access and diagnosis
covering the entire value chain and strong doctor relationships will benefit the
of the disease
most. Sanofi India with a portfolio of oral and long lasting insulin drugs like Lantus
and Toujeo is well placed to take advantage of this opportunity.
Approximately 1 in 10 Thyroid: Thyroid disorders are the most common among all the endocrine diseases
Indian adults suffer from in India. Approximately 1 in 10 Indian adults suffer from hypothyroidism, a
hypothyroidism condition in which the thyroid gland does not produce enough thyroid hormones
to meet the body’s needs. This condition is twice as prevalent in women as in men
and is common among women of child-bearing age. There are only two leading
brands-Abbott India’s Thyronorm and GSK India’s Eltroxin, covering 80% of the
market. We estimate that the Thyroid market in India could witness 12% Cagr to
Rs24.3bn by FY30 and continue to be dominated by Thyronorm (grow ~3.6x to
Rs13bn from Rs3.5bn in FY19) and Eltroxin (grow 3.7x to Rs7bn from Rs1.8bn in
FY19). Given that these products come from the original portfolio of the parent, it
is unlikely that potential cheaper alternatives will have a material impact on their
market share.
Figure 19
Existing brands that have multiplier potential

Company Brand Therapy Revenue (Rsbn) Multiplier (x)
FY19 FY30CL
Many MNC brands are yet Abbott India Thyronorm Thyroid 3,581 12,932 3.61
to reach their full potential
Duphaston Hormone 3,344 14,495 4.33
Sanofi India Lantus Diabetes 4,411 11,108 2.52
Toujeo Diabetes 166 5,000 30.12
GSK India Eltroxin Thyroid 1,878 7,046 3.75

Attractive macro drivers for Indian healthcare

The IPM has favourable macro drivers in the form of increasing accessibility
(improvement in healthcare infrastructure through public-private partnership),
growing affordability (rising income levels and insurance penetration), awareness
(rising literacy levels and campaigns by the government/private companies) and
ailments (rising incidences of diabetes and cardiac ailments).

Figure 20
Indian healthcare should Growth drivers of Indian healthcare services

benefit from 4As-
accessibility, affordability,
awareness and ailments 4 As of healthcare
Accessibility Affordability Awareness Ailments
 Setting up of  Higher per capita  Rising literacy  Growing

new hospitals income incidence of non-
 Government communicable
 Higher number  Rising insurance initiatives diseases
of doctors penetration
 Growing
 Cost advantage urbanization
of India
Source: CLSA
In addition to the above macro drivers, National Health Protection Scheme or

Ayushman Bharat, a GoI initiative to cover over 100m poor and vulnerable families
(~500m beneficiaries) by providing up to Rs0.5m per family per year for secondary
and tertiary care hospitalization is expected to significantly drive growth for IPM.
IPM to be US$55bn by FY30, one of the fastest growing markets

India is one of the fastest Based on these trends, we expect the IPM to reach a size of US$55bn by FY30
growing pharma market (10% Cagr) due to favourable macro. Within the IPM, we expect the contribution
with strengthening IPR laws of chronic ailments to rise to 45% from 35% today and witness 12-13% Cagr.
Figure 21
IPM to be US$55bn market IPM by FY30 with rising contribution from chronic ailments
by FY30 and one of the
60 (Rs bn) Acute Chronic 55.2
fastest growing markets
globally
50
40 34.3
30
21.3
18.9 19.5
20 16.0 17.1
10.7
10
0
FY10 FY15 FY17 FY18 FY19 FY20CL FY25CL FY30CL
Source: IQVIA, CLSA
New launch momentum expected to remain strong

GSK India spent over An attractive Indian market along with strengthening IPR laws should keep MNC
Rs10bn for a new parents focused on India. Thus the new launch momentum is expected to remain
manufacturing site in strong over the next few years. In FY18, Abbott India announced that it would
Bengaluru which was
launch 100 products in India over next five years. Similarly GSK India spent Rs10bn
commissioned in 2018
for a new manufacturing site in Bengaluru which was commissioned in 2018.

Figure 22
In FY18, Abbott India New launches by Abbott India

announced that it would (No.)
25
launch 100 products in India
over the next five years
20
15
Aim to launch more
than 100 products
over five years
10
0
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
Source: Company
MNCs where the portfolio MNCs where the portfolio of the local company is aligned with that of the parents
of the local company is have historically done well in India. Such parent companies have a favourable view
aligned with that of the on India and are willing to look at the market from a longer term perspective and
parents have historically
thereby able to overcome setbacks like price controls/threat from substitution.
done well in India
Analysing the parent’s focus area with local subsidiary in India, Abbott, AstraZeneca
India, GSK India, Pfizer India and Sanofi India have strong alignment with their
parent’s portfolio. These companies have introduced products from their parent’s
pipeline in respective focus areas and most of the products have been launched
through the listed company
Figure 23
Our pipeline analysis of Mapping of parent’s interest with their Indian arms
leading MNCs suggests that
therapies like diabetes, anti- Abbott Group Sanofi India Pfizer India GSK India AstraZeneca India
cancer and vaccines could Womens Health Neuro/CNS Anti-infective Derma Inflammation
see huge demand Vaccines Respiratory Ophthal Anti-infectives Autoimmunity
Gastro Pain / Analgesics
Metabolics Anti-diabetic Respiratory; Gastric Hormones
Cardiac Women's Health Respiratory
Neuroscience
Diabetes Vaccines Vaccine, Cardiac, Renal and
Cardiovascular
Pain/Analgesics Vitamins, Minerals, Metabolic diseases
Cardiac Vaccines
Cough, cold, allergy Nutrients Oncology
CNS Inflammation and
Immunology Respiratory
Consumer Health and
Nutrition Multiple Sclerosis Hospitals
Diagnostics Oncology Consumer Health
HIV
Immunology
Immuno-Inflation
Rare blood disorder Rare Diseases Neuroscience
Consumer Health
Neuromodulation Digestive Health Oncology Vaccine
(Wellness; Oral Health;
Nutritional Health Generics Nutrition; Skin health) Infections
Abbott Global Sanofi Global Pfizer Global GSK Global AstraZeneca Global
Our pipeline analysis of leading MNCs suggests that therapies like diabetes, anti-
cancer and vaccines could see huge demand. Products like Influvac (Abbott India),
Toujeo, Hexaxim, Fluquadri (Sanofi India/Sanofi Pasteur), Xigduo (AstraZeneca
India), Infarnix (GSK India) have potential to become mega brands in India.

Tighter regulatory framework should help MNCs

Tighter regulations like We believe tighter regulations like quality of products, uniform code of marketing
quality of products, uniform practice are expected to benefit the MNCs. Some of these changes were notified
code of marketing practice by the government in a draft pharma policy in 2017.
are expected to benefit the
MNCs
Recently, the Ministry of Health & Family Welfare notified the New Drugs and
Clinical Trials Rules 2019, applicable to all new drugs, investigational new drugs
(IND) for human use, clinical trials, bio-equivalence studies and ethics committees.
Important highlights include the reduction in time for approving applications to 30
Draft pharma policy
days for drugs manufactured in India and 90 days for those developed outside the
released in 2017 talks of country, waiver of the requirement to conduct local trials, if the drug is approved
improving quality standards and marketed in any of the countries specified by the Drugs Controller General (EU,
in India UK, Australia, Canada, Japan and US) with the approval of the Government of India.
These new rules are expected to facilitate R&D activities in India and pave way for
faster introductions of innovative medicines in the Indian market.
Please refer to Appendix 1 for details.
Capita spend on India

As per IQVIA data, the annual per capita spend in a class II-IV should remain the central theme and help sustain the 10%
town is just 48% of that per person in a metro city with annual growth rate for the industry. Government initiatives to
disparity even larger when it comes to rural areas. Given low boost primary health should lead to higher volume offtake
per capita spend on medicines in India, volume led growth over the next few years.
Per capita spend on medical

4,500 (Rs/person/annum) FY17 FY18 FY19
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
Rural Class II to IV Class I Metro
Note: based on 2011 census; Class I town – having population of 0.1mn and above; Class II – population of 50,000-99,999; Class IV – population of 10,000-19,999.
Source: IQVIA

Section 3: Better placed to withstand policy disruption Indian pharma
Better placed to withstand policy disruption

Reducing the cost of healthcare has been a focus of the government and this has
resulted in a rising span of price controls as well as the threat of substitution from
Jan Aushadhi, a government initiative. We believe MNCs through their power
brands, significant brand recall via patient outreach programs and patented product
portfolio are better placed to withstand these disruptions.
Figure 24
Jan Aushadhi, trade MNCs could be less vulnerable to threats from trade Gx, Jan Aushadhi and E-pharmacy
generics and e-pharmacies
are new threats to the
existing business models of Jan Aushadhi
Indian pharma companies
Strong
Patented No available
brand
drugs substitutes
recall
MNC Pharma
Companies
Source: CLSA
India has seen an Jan Aushadhi, epharmacies and trade generics potential disruptors
emergence of an alternate Over the last few years, the branded generic market in India seen an emergence of
source of medicines supply
an alternate source of medicines supply in the form of government promoted
cheaper generics branded as Jan Aushadhi. Furthermore, e-pharmacies have also
been gaining scale driven by robust growth and consolidation. In the long run, these
e-pharmacies (with scale) can potentially dent manufacturer margins and induce
substitution at chemist level (called trade generics). Over and above these, there is
the constant threat from the increasing the span of price controls i.e addition of
new products to the national list of essential medicines (NLEM).
We look at the positioning of each vertical in detail.
Jan Aushadhi offers cheaper generics, promoted by government of India

Jan Aushadhi is a government of India initiative to promote quality generic-generic
drugs at affordable prices. Jan Aushadhi stores have expanded to over 4,000 now,
most of which have opened over last three to four years. Under a new CEO, a large
state-of-the-art warehouse has been opened in Gurugram to resolve availability
issues, whereas medicines are now procured only from PSUs and WHO cGMP
Jan Aushadhi is a companies and tested at a NABL-accredited lab to address perception related to
government initiative to
the quality of drugs. While Jan Aushadhi is gaining ground and expands the reach
promote quality generic-
generic drugs at affordable of healthcare in lower Tier towns, it will need continued improvement in supply
prices chain/quality of drugs and provide more incentives to franchisee partners in the
initial years.

Figure 25
Jan Aushadhi has gained Number of Jan Aushadhi stores added every year in India
traction under current 2,500 (No. of stores added during the year)
government
2128
2,000
1,500
1,000 811 841
500
165
4 19 7 17 25 6 18
0
Source: Government of India
Second-line-therapy How can MNCs combat threat from expansion of Jan Aushadhi- We believe Jan
products will help mitigate Aushadhi can lead to significant cost savings in chronic ailments like diabetes and
the impact of Jan Aushadhi card iac where a patient has to consume medicine on a periodic basis. These would
largely be first line therapies (eg insulin or hypertension drugs) and MNCs may feel
the pinch there. However we expect second or third line therapy products to remain
unaffected. Also it will be difficult for Jan Aushadhi manufacturers (government
owned companies or private companies participating in a tender) to match the
quality of MNC products in comparable molecules and it would not be possible for
them to target patented products of MNCs.
E-pharmacies gaining scale can dent manufacturer margin

E-pharmacies are likely to E-pharmacies are likely to grow 7x to US$3.7bn by CY22 and they are aiming to
grow 7x to US$3.7bn by grab a large pie of the highly fragmented Indian market. Different business models,
CY22 deep discounting and heavy investment in A&P have been the main growth drivers
for e-pharmacies but cash burn is high at c.Rs70-80m/month. Improving logistics
and wider product offering may enable them to address a much larger portion of
the pharma market, win customer loyalty and achieve scale. While e-pharmacies
have limited bargaining power with drug manufacturers today, scale benefits could
dent manufacturers’ margins in the long run. Automatic substitution of a doctor
prescription to an unbranded generic could be a game changer for e-pharmacies.
Figure 26
Size of India’s e-pharmacy market
2018E 63% Cagr 2022E

US$0.51bn US$3.7bn
Source: Frost and Sullivan, CLSA

E-pharmacies will have no How can MNCs combat threat from e-pharmacies: - We believe e-pharmacies will
bargaining power in have no bargaining power in patented products even if they gain scale. On non-
patented products and patented products, we believe MNCs may have to concede higher margins on first
power brands of MNCs
line therapy treatments in competitive products, they would have limited say in
power brands mainly due to quality of products/brand recall.
Substitution at the chemist level (trade generics)

The trade generic market in India is valued at US$1.6bn (8% of the IPM). A doctor
prescription of a branded generic product is substituted by the chemist with
another similar molecule which is cheaper. Trade generic market is more prevalent
in lower Tier markets where per capita spend on medicines is low.
Figure 27
Trade generics (substitution Branded and generic mix of Indian pharma market
at chemist) accounts for 8%
of the IPM and more
Overall India Urban India Rural India
prevalent in lower Tier
towns
Generic Gx Generic Gx Generic Gx
8% 6% 15%
Branded Gx Branded Gx Branded Gx

92% 94% 85%
Source: IQVIA, CLSA
Presence can help mitigate How can MNCs combat threat from trade generics? - MNCs derive a higher
the impact of substitution proportion of their sales from Metros and tier-1 cities where the impact of trade
generics is significantly lower. Also, MNCs’ patient-outreach efforts have been
channelised very well to create strong brand recall for patients.
Widening span of price controls in India

Government has widened The government of India has over the last 20 years been increasing the span of price
the span of price controls controls. Currently 15-20% of the IPM is under price control which is based on a
over the last 25 years list of essential medicines (NLEM) prepared by the government. Although the list is
to be revised every five years (implemented in 2011 so the next revision is due in
2021), the government can use its powers if it feels it is necessary to include certain
medicine in the NLEM.
For products under price controls, a company can increase prices up to the
prevailing inflation rate (WPI) in the country. For products outside price controls, a
maximum 10% price increase is allowed annually.

Figure 28
We acknowledge that Price controls in India

widening scope of price Year Scope of price control announced
controls will remain a risk
for MNCs . . . 1995 Covered 74 bulk drugs and their formulations based on cost plus method
2013 652 formulations covering 348 drugs brought under price control as part of the National
List of Essential Medicines (NLEM). Price control methodology changed to market based
. . . however past precedent pricing as compared to cost plus method
suggests that many strong 2015 NLEM expanded to include essential cardiac and diabetes drugs
brands gain share over time
as they become more 2016 Reduced prices of 33 essential medicines by 30-50%
affordable 2018 Revised ceiling and retain prices of 68 formulations
2019 Trade margins of 42 anti-cancer drugs capped to 30%
Source: NPPA
Case study-GSK India’s leading anti-infective drug Augmentin

GSK India’s leading anti- GSK India’s leading drug Augmentin was subjected to significant price control in
infective drug Augmentin FY13-14 which saw the prices of the drug come down by over 40%. However that
witnessed 40% price drop in led to a sharp increase in volumes over time as the drug become more affordable
FY14 but was able to
and started getting prescribed by more number of general practitioners/dentists
recover ground in 3 years
due to rising volume etc. While it hit GSK India’s profitability immediately, over a three year period,
Augmentin was able to completely recover its lost sales. This underscores the power
that MNC brands have.
Figure 29 Figure 30
Value of Augmentin sales India (MAT) Volume of Augmentin sales India (MAT)
4.5 (Rsbn) 4.2 45 (m units)
39.0
4.0 40
3.5 Brought under 3.6
34.9
3.5 price control Brought under
3.1 3.2 35
price control
2.9
3.0 30 26.6
27.7
2.5
23.8
2.5 25 22.7
21.2
2.0 20
1.5 15
1.0 10
0.5 5
0.0 0
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: IQVIA Source: IQVIA
Strong patient outreach program leads to strong brand recall

Patient outreach efforts MNCs patient outreach efforts have been ahead of their local peers for some years
helps in creating strong now. We believe this helps in creating strong brand recall as awareness for drugs
brand recall increases and patient become self-prescribing especially for acute ailments/
OTC drugs.
Patient outreach to create awareness

Abbott India has launched Abbott India’s a:care platform is a technology led service to bridge the
awareness for Thyroid communication gap between patients and doctors across multiple therapy areas.
whereas Pfizer India did the Using the platform, a doctor can get access to the latest science, medical education
same for using antibiotics
and patient support services, and consumers can access educational health
responsibly
information or participate in a motivational program to help them adhere to
treatments prescribed by their doctors.

Abbott India has also launched programmes like Thyroweight (increases awareness
among women around the correlation between weight gain and thyroid disorders),
Fryday Campaign, Digene Campaign, Win Over Migraine (WoW-reached out to
10,000 doctors), Win Over Epilepsy (3.8m people across 39 cities via Radio).
Pfizer India, in partnership with the Indian Council of Medical Research (ICMR),
launched one of largest public awareness campaigns - ‘AMR ko Aao Milkar Rokein’
(Let us work together to curb AMR) to raise awareness and empower the general
public with information on using antibiotics responsibly. The campaign reached over
100m people through multiple mass-media channels.
Figure 31 Figure 32
Abbott India’s Thyroweight campaign for Thyroid Pfizer India’s AMR campaign on using antibiotics responsibly
Source: Company Source: Company
GSK India ran vaccine GSK India ran a mass TV and digital campaign for Synflorix, a pneumococcal vaccine.
awareness programmes for It also ran awareness programmes for school-going kids who may have either
school-going kids whereas missed childhood vaccines or may be due for certain vaccines.
Sanofi India’s Saath 7
program was aimed at
adequate diabetes
Sanofi India’s Saath 7 program is aimed to understand the needs of the patients and
management communicate relevant information to them and their caregivers. Sanofi’s
programme called KiDS involved more than 1,400 teachers and 10,000 students
across India on ways to support children with type-1 diabetes.
Figure 33 Figure 34
Sanofi India advertisement on Mumbai Metro for new Combiflam Sanofi India’s Saath-7 campaign for diabetes

Patient/chemist engagement helps as OTC market expands

We believe patient/chemist engagement should help improve brand recall as the
US$2bn OTC market expands in India.
Apart from patients, MNCs According to Abbott India, pharmacists today are most influential when it comes to
also reached out to dispensing medications. They believe strengthening channel management
pharmacists as part of capabilities and resources to ensure connect with the patients can be a key
getting closer to the patient
differentiator for them.
As quality standards improve, brand recall will play a significant role in preventing
substitution by the chemist. Such small initiatives could help in the longer run for
MNCs by expanding coverage.

Section 4: Initiate coverage on Abbott India with a BUY Indian pharma
Initiate coverage on Abbott India with a BUY

MNCs are non-cyclical Strong balance sheets, superior return ratios and predictable earnings profiles lend
business models defensive characteristics to MNC stocks. These strong points have enabled them
to enjoy a PE premium versus local peers, which should continue thanks to a ramp-
up of existing brands, the increased pace of new launches and continued margin
expansion. We initiate coverage on Abbott India (AIL) with a BUY rating and
Rs14,500 target, based on 40x Sep-21CL EPS.
Strong balance sheets

MNCs have strong balance sheets and are net cash (around 8-10% of their market
cap is cash and cash equivalents), which can be used for selective M&A in India.
Figure 35
MNCs are net cash Net cash per share as at 31 March 2019
companies with strong 900 (Rs/Share)
balance sheets
800
700
600
500
400
300
200
100
0
Abbott India Pfizer India Sanofi India AstraZeneca India GSK India
Source: Bloomberg
Figure 36
High dividend payout Dividend-payout ratio

versus local peers (%) Abbott India Sanofi India Pfizer India GSK India
160
140
120
100
80
60
40
20
0
FY2016 FY2017 FY2018 FY2019
Note: AstraZeneca India does not pay dividends. Source: Bloomberg
Robust ROE generation

Track record of MNCs suggests robust ROE generation, largely due to their strong
business models. Abbott India’s Du-Pont analysis over last few years, clearly
indicates an improving operational performance as a driver of improving ROE.

Figure 37
Consistent ROE generation Return on equity

largely driven by their (%) Abbott India Sanofi India Pfizer India
30
strong business models GSK India AstraZeneca India
25
20
15
10
0
FY2016 FY2017 FY2018 FY2019
Source: Bloomberg
Figure 38
Du Pont analysis of Abbott India's ROE

Ebit margin (%) 12.8 13.2 13.0 15.4 16.0 16.2 16.8 17.4
Asset turnover (x) 8.9 8.1 9.0 6.9 7.5 11.1 10.4 10.6
Financial leverage (x) 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2
Interest burden (x) 1.2 1.1 1.1 1.2 1.2 1.2 1.2 1.2
Tax burden (x) 0.7 0.6 0.6 0.6 0.6 0.7 0.8 0.8
ROAE 26.5 23.9 21.4 26.1 24.3 27.2 27.4 27.0
Source: Company, CLSA
Low working capital, minimal capex requirements

Abbott India’s Du-Pont MNCs have low working-capital requirements in the range of 15-20 days. This is
analysis clearly indicates an mainly due to low receivable days given the strength of their brands. MNCs either
improving operational
source their products from third party manufacturers in India via tech transfer of
performance as a driver of
improving ROE
procure directly from the parent and hence have minimal capex requirements. Thus
the FCF generation is very strong.
Figure 39
Low working capital Trend in working capital

requirement thanks to
150 (No. of days) FY16 FY17 FY18 FY19
strong brand pull resulting
in lower receivable days
100
50
(50)
(100)
Abbott India GSK India Pfizer India Sanofi India

Figure 40
Strong FCF generation due Trend in free cash generation

to lower capex (Rsbn) FY16 FY17 FY18 FY19
8
requirements
7
6
5
4
3
2
1
0
(1)
(2)
Abbott India GSK India Pfizer India Sanofi India
Predictable earnings profile

MNC earnings more Given that MNCs are mainly India-focused plays, their revenue, Ebitda and earnings
predictable than companies profiles are more predictable compared to companies operating in the volatile US
operating in volatile US and and European generics markets.
EU generics market
Premium valuations to local peers

MNCs have traded at a premium PE valuation to local peers due to their defensive
nature business models and less volatile earnings. We expect the premium PE
valuations to continue.
Figure 41
Premium valuations to local PE valuations of MNCs vs local peers based on one-year forward PE basis
players mainly due to non- 100 (%)
cyclical business models
90 MNC premium/(disc) to local peers Average +1sd -1sd
80
70
60
50
40
30
20
10
0
Feb 15
Feb 16
Feb 17
Feb 18
Feb 19
Aug 15
Aug 16
Aug 17
Aug 18
Aug 19
Dec 15
Dec 16
Dec 17
Dec 18
Apr 15
Apr 16
Apr 17
Apr 18
Apr 19
Jun 15
Jun 16
Jun 17
Jun 18
Jun 19
Oct 15
Oct 16
Oct 17
Oct 18
Source: Bloomberg
MNCs comparable to FMCG peers

MNC pharma business MNCs can be compared with local FMCG players such as HUL, Nestle, Dabur,
model is similar to local Britannia, Marico, Colgate and Emami. The FMCG players have strong brands and
FMCG peers in terms of line extensions for their key brands as well as a well-established distribution model
distribution, brand building
and robust operating margins.
effort

Similarly, MNC pharma companies operating in India, have established strong key
brands that form over 50-70% of their revenues. Distribution is also strong in the
metro and tier-1 cities with expansion into tier II & III cities expected to only be a
driver of revenue growth.
In terms of financial performance, AIL should see 22.7% earnings Cagr over FY19-
22CL which is stronger than most FMCG peers forecasted by our coverage.
Figure 42
AIL earnings growth second Earnings growth of MNC pharma companies vs consumer companies
fastest after Emami (% cagr)
30 27.8
25 22.6
20
16.1 16.2
15.3
14.1 14.3 14.6
15
10
0
Marico Dabur Colgate HUL Nestle Britannia Abbott India Emami
Source: CLSA for covered companies, Bloomberg for GSK India, Pfizer India and Sanofi India
Initiate coverage on Abbott India

Abbott India has a well We believe Abbott India (AIL) is the best play on MNCs in India as it has under
aligned portfolio with its penetrated power brands in the chronic space, supportive parent and local strategy
parent company that has a to drive growth. Ability to build mega brands has been the key feature of AIL, top
strong track record of
ten brands account for 70% of sales with significant market share despite high
building brands
competitive landscape.
Figure 43 Figure 44
AIL product concentration vs peers AIL growth in top brands

80 (% of sales) 30 (5 year cagr, %)
70 25
60 20
50
15
40
10
30
5
20
0
10
0 (5)
Glenmark Pharma
GSK Ind ia
Dr Reddy's
Cadila Health
Cip la
Torrent Pharma
(10)
Pfizer India
Sanofi India
Sun Ph arma
Ab bott India
Lupin
Ep toin
Cremaffin
Udiliv
Prothiaden
Influ vac
Dup haston
Dup halac
Vertin
Thyronorm
Top 10 brands
Digene

BUY with a target price of Rs14,500

New launches from its own pipeline and partnered products along with market
share gains from top brands should drive 12.7% revenue Cagr over FY19-22CL and
23% profit Cagr over FY19-22CL. We initiate coverage with a BUY and Rs14,500
target based on 40x Sep-21CL EPS.
Figure 45
We expect AIL to witness Revenue of Abbott India Limited

12.7% earnings Cagr over
FY19-22CL 60 (Rsbn) Revenue % YoY growth (RHS) (%) 16
14.2
13.6
50 14
12.9
12.7 12.4
11.5
40 11.0 12
30 10
20 8
10 6
0 4
Figure 46
We expect 190bps Ebitda and Ebitda margin for Abbott India

improvement in Ebitda
margins for AIL over 12 (Rsbn) Ebitda Ebitda margin (RHS) (%) 20
FY19-22CL 18.4
17.8
10 17.2 18
16.4
15.9
8 16
13.6 13.9 13.7

6 14
4 12
2 10
0 8

Figure 47
We expect AIL to witness Net profit of Abbott India

23% earnings Cagr over
FY19-22CL 9 (Rsbn) PAT % YoY growth (RHS) (%) 50
8 45.0 45
7 40
32.5 35
6
30
5
25
4 18.6
17.4 20
3
15
2 12.2 10
11.5
1 8.4
5
0 0
FY16 FY17 FY18 FY19 FY20CL FY21CL FY22CL
Figure 48
AIL rerating due to AIL PE valuations

improving performance
along with subdued outlook 45 (x) PE Average +1 SD -1 SD
for US-focused local players
40
35
30
25
20
15
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Jul 15
Jul 16
Jul 17
Jul 18
Jul 19
Apr 15
Apr 16
Apr 17
Apr 18
Apr 19
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
Oct 19
MNCs trade at premium to local peers due to non-cyclical nature of business

Premium valuations for As a group, MNCs enjoy a significant premium valuation to local peers, mainly due
MNCs justified due to non- to the non-cyclical nature of their business models and overall subdued outlook for
cyclical business models US-focused generic companies. We note that MNCs trade at 40% premium to
Torrent Pharma which is the closest peer in terms of revenue mix.

Figure 49
Valuation matrix
(US$m) Price/Earnings (x) Ev/Sales (x) Ev/Ebitda (x) ROE (%) Yield (%)
CY19/ CY20/ CY21/ CY19/ CY20/ CY21/ CY19/ CY20/ CY21/ CY20/ CY20/
MNC pharma companies in India
GSK India 3,865 46.9 41.5 37.0 7.7 6.9 5.8 35.5 29.5 23.7 26.5 1.4
Abbott Inda 3,500 43.5 35.7 32.3 5.6 4.9 4.2 33.0 27.6 23.1 27.2 0.9
Sanofi India 2,132 35.9 31.1 27.6 4.9 4.6 4.5 20.8 19.1 18.5 18.5 1.3
Pfizer India 2,558 34.9 30.3 27.5 7.1 6.5 5.9 23.4 20.8 18.2 16.9 0.6
Average 40.3 34.7 31.1 6.3 5.7 5.1 28.2 24.3 20.9 22.3 1.1
Local Indian pharma companies
Sun Pharma 14,153 22.2 18.7 16.6 3.1 2.8 2.6 14.0 12.1 10.9 11.4 0.8
Dr Reddy's 6,546 21.0 19.3 16.9 2.8 2.5 2.3 12.8 11.3 10.0 14.1 0.9
Cipla 5,132 20.7 17.9 16.0 2.2 2.0 1.9 10.9 10.0 9.2 11.8 0.7
Lupin 4,662 29.6 20.8 17.4 2.1 1.9 1.8 11.9 9.9 8.8 10.6 1.0
Torrent 4,263 33.4 25.9 21.0 4.1 3.8 3.4 15.7 13.9 12.5 20.4 1.1
Biocon 4,424 33.0 25.3 20.7 4.9 4.0 3.4 17.9 14.1 11.4 16.2 0.5
Aurobindo Pharma 3,590 9.0 7.9 7.6 1.3 1.1 1.1 6.3 5.5 5.2 17.6 0.8
Cadila Healthcare 3,302 15.2 13.3 12.5 2.2 2.1 1.9 11.0 10.0 9.3 13.8 1.5
Ipca 1,929 23.9 19.3 16.4 3.2 2.8 2.5 16.2 13.6 11.8 17.7 0.4
Glenmark 1,148 10.9 9.0 8.1 1.1 1.0 0.9 6.9 6.1 5.4 13.0 0.8
Average 21.9 17.7 15.3 2.7 2.4 2.2 12.4 10.6 9.4 14.7 0.9
Global pharma companies
Johnson & Johnson 350,039 15.3 14.6 13.6 4.4 4.2 4.0 12.2 11.0 10.0 35.0 3.0
Roche 257,532 15.0 14.4 13.8 4.3 4.2 4.1 10.6 10.1 9.3 42.0 3.1
Novartis 225,051 16.9 15.4 14.0 5.2 5.0 4.7 15.1 13.9 12.8 17.9 3.5
Merck 212,819 16.5 15.0 13.4 5.0 4.7 4.5 12.2 11.2 10.1 49.1 2.8
Pfizer 205,039 12.7 13.5 12.6 4.8 5.2 5.1 10.0 10.8 10.6 26.7 4.0
Abbott Laboratories 148,090 25.8 23.2 20.8 5.1 4.8 4.5 19.3 17.1 15.3 17.7 1.6
AstraZeneca 123,215 26.2 22.0 17.7 5.7 5.1 4.6 19.6 16.1 13.1 26.4 3.0
Abbvie 126,010 9.6 8.7 7.8 4.6 4.3 4.1 8.9 8.3 7.5 NA 5.6
Sanofi 115,088 14.1 13.3 12.4 3.4 3.3 3.2 11.1 10.1 9.1 12.8 3.9
GlaxoSmithKline 110,718 14.3 14.5 13.7 3.7 3.5 3.3 10.1 9.6 8.9 87.0 4.6
Eli Lilliy 109,004 19.6 17.2 15.4 5.6 5.2 5.0 16.6 NA NA 87.1 2.4
Merck KGAA 52,574 19.7 17.6 16.4 3.6 3.3 3.2 13.0 11.4 10.4 13.4 1.3
Average 17.1 15.8 14.3 4.6 4.4 4.2 13.2 11.8 10.6 37.7 3.2
Indian consumer
Hindustan Unilever 63,064 61.4 51.8 44.2 10.5 8.9 7.9 43.0 35.8 30.8 76.7 1.5
Nestle 19,039 70.4 59.3 50.3 10.6 9.4 8.4 45.6 39.1 34.1 74.0 1.1
Dabur 11,809 50.5 43.8 38.2 9.0 8.0 7.1 42.2 36.9 32.1 27.0 1.0
Britannia 10,493 55.1 47.0 40.0 6.2 5.5 4.9 39.3 33.7 29.3 29.3 0.8
Marico 6,709 43.1 37.9 33.9 6.0 5.3 4.8 30.3 26.7 24.0 35.9 1.7
Colgate 6,052 49.5 43.9 38.8 9.0 8.2 7.5 32.9 29.1 25.9 61.5 1.7
Emami 2,059 27.7 23.6 20.3 5.1 4.6 4.2 18.4 16.8 15.2 26.2 1.9
Average 51.1 43.9 37.9 8.0 7.1 6.4 36.0 31.1 27.3 47.2 1.4
Overall average 28.6 24.6 21.7 5.0 4.5 4.2 19.6 17.2 15.2 30.7 1.9
Source: Bloomberg, CLSA

Indian pharma
Company profile
Abbott India ................................................................................................................... 33
All prices quoted herein are as at close of business 11 November 2019, unless otherwise stated

Indian pharma
Notes

Abbott India
Rs11,698.85 - BUY
Alok Dalal Marketing powerhouse

alok.dalal@clsa.com New launches and growth in existing mega brands to drive growth
+91 22 6650 5063
Abbott India (AIL) is a leading MNC pharma in India. The company’s ability to build
Surajdev Yadav, CFA mega brands is key, as its top 10 brands account for about 70% of sales and
+91 22 6650 5071 command significant market share despite a highly competitive landscape. We
expect new launches, partnered products and market-share gains within existing
brands to drive a 13% revenue Cagr and a 23% earnings Cagr over FY19-22CL. We
initiate coverage with a BUY rating and a price target of Rs14,500.
Leading MNC in India

13 November 2019 Abbott India (AIL), which is 75% owned by parent Abbott, is one of the leading
pharma MNCs in India and holds 2.2% market share. Its areas of focus include
India women’s health, gastro, metabolics, vaccines and consumer health. It also
distributes anti-diabetes products from Novo Nordisk, which account for about35%
Healthcare
of its revenue with a distribution margin of 5%.
Reuters ABOT.NS
Bloomberg BOOT IN Ability to build mega brands
Priced on 11 November 2019 AIL’s top 10 brands comprise about 70% of sales, significantly higher than peers.
CNX Nifty @ 11,913.5 Nine out of its top ten brands produce over Rs1bn in revenue and have consistently
12M hi/lo Rs11,987.25/7,189.05 outperformed their addressable market. Its key brands, which include Thyronorm
12M price target Rs14,500.00 (Rs3.6bn with 53% market share) and Duphaston (Rs3.3bn with 100% market
±% potential +24% share), hold disproportionately large percentages of the market and cater to
Shares in issue 21.2m
underpenetrated therapies, indicating strong potential.
Free float (est.) 25.0%
Market cap US$3.5bn New launches to drive growth along with existing brands
3M ADV US$2.2m AIL aims to launch 100 products in India over the next five years. While the majority
will be line extensions, the company may also pursue partnerships, such as its deal
Foreign s'holding 76.7%
with Bharat Serum for vaccines. Another source of growth could come from the
Major shareholders OTC side by leveraging Digene as a mother brand. We expect a 12.7% revenue Cagr
Promoter 75.0%
DII 6.9% over FY19-22CL and reported margins to expand 190bps to 18.4%, driven by a
ramp-up of existing brands and new launches.
BUY with a target price of Rs14,500

We initiate coverage of Abbott India (AIL) with a BUY rating and a target price of
Blended ESG Score (%)*
Rs14,500, based on 40x Sep-21CL EPS of Rs362. We expect strong revenue and
Overall 78.1
Country average 63.8
margin growth to drive a 23% earnings Cagr over FY19-22CL. AIL also has a strong
GEM sector average 64.6 balance sheet with ROE of 27% despite a cash position of Rs793/share. AIL’s
*Click to visit company page on clsa.com for details
valuation represents a 20% discount to its specialised consumer peer group,
Stock performance (%) primarily to account for risks related to government price controls.
1M 3M 12M
Absolute 6.5 29.3 55.5 Financials
Relative 1.0 20.6 38.1 Year to 31 March 18A 19A 20CL 21CL 22CL
Abs (US$) 6.4 29.0 58.6 Revenue (Rsm) 33,071 36,786 41,544 46,800 52,618
9,000 (Rs) (%) 170 Ebitda (Rsm) 5,245 6,047 7,153 8,325 9,699
8,500
150
Net profit (Rsm) 4,012 4,503 5,966 7,078 8,307
8,000 EPS (Rs) 188.8 211.9 280.8 333.1 390.9
7,500 130
EPS growth (% YoY) 45.0 12.2 32.5 18.6 17.4
7,000
110 CL/consensus (4) (EPS%) - - 115 115 -
6,500
ROE (%) 26.1 24.3 27.2 27.3 27.0
6,000 90
PB (x) 14.7 12.4 10.5 8.8 7.5
5,500
Abbott India 70 PE (x) 62.0 55.2 41.7 35.1 29.9
5,000
Rel to Nifty ( RHS) EV/Ebitda (x) 45.4 38.3 32.0 27.0 22.7
4,500 50
Nov 17 May 18 Oct 18 Mar 19 Dividend yield (%) 0.5 0.6 0.8 0.9 1.1
Source: Bloomberg Source: www.clsa.com
Find CLSA research on Bloomberg, Thomson Reuters, Factset and CapitalIQ - and profit from our evalu@tor proprietary database at clsa.com

Abbott India - BUY Indian pharma
Financials at a glance
Year to 31 March 2018A 2019A 2020CL (% YoY) 2021CL 2022CL
Profit & Loss (Rsm)

Revenue 33,071 36,786 41,544 12.9 46,800 52,618
Cogs (ex-D&A) (19,134) (20,886) (23,514) (26,349) (29,466)
Gross Profit (ex-D&A) 13,938 15,900 18,030 13.4 20,452 23,152
SG&A and other expenses (8,693) (9,853) (10,878) (12,127) (13,454)
Op Ebitda 5,245 6,047 7,153 18.3 8,325 9,699
Depreciation/amortisation (162) (169) (441) (512) (583)
Op Ebit 5,083 5,878 6,712 14.2 7,813 9,115
Net interest inc/(exp) 1,132 1,110 1,350 21.6 1,624 1,961
Other non-Op items 0 0 - - -
Profit before tax 6,215 6,989 8,062 15.4 9,437 11,077
Taxation (2,203) (2,485) (2,096) (2,359) (2,769)
Profit after tax 4,012 4,503 5,966 32.5 7,078 8,307
Minority interest 0 0 0 0 0
Net profit 4,012 4,503 5,966 32.5 7,078 8,307
Adjusted profit 4,012 4,503 5,966 32.5 7,078 8,307
Cashflow (Rsm) 2018A 2019A 2020CL (% YoY) 2021CL 2022CL
Operating profit 5,083 5,878 6,712 14.2 7,813 9,115
Depreciation/amortisation 162 169 441 160.3 512 583
Working capital changes (3,977) 3,593 (444) (381) (362)
Other items (1,782) (2,175) (2,096) (2,359) (2,769)
Net operating cashflow (514) 7,465 4,612 (38.2) 5,585 6,568
Capital expenditure 196 (388) (500) (500) (500)
Free cashflow (318) 7,076 4,112 (41.9) 5,085 6,068
M&A/Others 1,170 1,133 1,400 23.6 1,674 2,011
Net investing cashflow 1,365 745 900 20.9 1,174 1,511
Increase in loans - - - - -
Dividends (1,409) (1,657) (2,295) (2,677) (3,187)
Net equity raised/other (38) (22) (50) (50) (50)
Net financing cashflow (1,447) (1,680) (2,345) (2,727) (3,237)
Incr/(decr) in net cash (596) 6,529 3,167 (51.5) 4,031 4,842
Exch rate movements - - - - -
Balance sheet (Rsm) 2018A 2019A 2020CL (% YoY) 2021CL 2022CL
Cash & equivalents 10,314 16,843 20,010 18.8 24,041 28,883
Accounts receivable 2,634 2,761 2,959 7.2 3,462 3,892
Other current assets 8,173 8,514 9,262 8.8 10,191 11,207
Fixed assets 835 1,057 1,116 5.6 1,104 1,021
Investments - - - - -
Intangible assets 0 0 0 0 0
Other non-current assets 2,205 234 234 0 234 234
Total assets 24,162 29,409 33,582 14.2 39,033 45,238
Short-term debt - - - - -
Accounts payable 4,806 6,635 7,086 6.8 7,941 8,880
Other current liabs 2,428 2,688 2,738 1.9 2,935 3,080
Long-term debt/CBs - - - - -
Provisions/other LT liabs 0 0 0 0 0
Shareholder funds 16,928 20,086 23,757 18.3 28,157 33,277
Minorities/other equity 0 0 0 0 0
Total liabs & equity 24,162 29,409 33,582 14.2 39,033 45,238
Ratio analysis 2018A 2019A 2020CL (% YoY) 2021CL 2022CL
Revenue growth (% YoY) 12.5 11.2 12.9 12.7 12.4
Ebitda margin (%) 15.9 16.4 17.2 17.8 18.4
Ebit margin (%) 15.4 16.0 16.2 16.7 17.3
Net profit growth (%) 45.0 12.2 32.5 18.6 17.4
Op cashflow growth (% YoY) (116.1) nm (38.2) 21.1 17.6
Capex/sales (%) 0.6 1.1 1.2 1.1 1.0
Net debt/equity (%) (60.9) (83.9) (84.2) (85.4) (86.8)
Net debt/Ebitda (x) - - - - -
ROE (%) 26.1 24.3 27.2 27.3 27.0
ROIC (%) 68.6 76.9 142.1 149.0 160.7
Source: www.clsa.com

Leading MNC in India

Abbott Laboratories is the Abbott India (AIL) is a leading multi-national corporations (MNC) in India and
No. 2 leading MNC in India commands 2.2% of the market. Abbott Laboratories, its parent company, owns 75%
with market share of 6.4% of Abbott India and also has a 100% owned subsidiary in India named Abbott
Healthcare Private Limited (AHPL), which represents the Piramal Healthcare
portfolio it acquired in 2010. Collectively, Abbott has 6.4% market share in India
and is ranked the No.2 pharma company in India.
In 2012, Abbott Laboratories split into two separate, publicly traded companies.
The legacy company, Abbott Laboratories, largely kept its established products
while AbbVie, the new firm, holds the big-name, research based products. In India,
Abbott is further divided into Abbott India Limited and Abbott Healthcare Private
Limited.
Figure 1
Abbott India is listed and Structure of Abbott in India

75% owned by Abbott
Laboratories Abbott Laboratories
Abbott Healthcare Private 75% 100%
Limited is wholly owned by
Abbott and represents the
former Piramal Healthcare
Abbott India Limited Abbott Healthcare Private Limited
portfolio (Piramal Healthcare portfolio acquired in 2010;
(In India since 1944)
Diagnostics and Medical Devices)
Market share: 2.2% Market share: ~4%
Key therapies: Key therapies

 Women's Health  Anti-Diabetes
 Gastro  Vitamins/Minerals
 Neuroscience  Neuro/CNS
 Metabolism  Anti-Infectives
 Consumer Health  Cardiac
 Vaccines  Pain
Figure 2
India is a highly fragmented Top players in India pharma by market share

market where the top 10 8 (%) 7.5
companies hold 44% market
share 7 6.4
6
5.1
5
3.8 3.7
4 3.6
3.2 3.1 3.1 3.1 3.0
3 2.5
2.2 2.1 2.1 2.0
2
1
0
GSK
Alkem
Dr Reddy's
Sun
Torrent
Glenmark
Sanofi
Lupin
Mankind
Intas
Aristo
Abbott
Cipla
Pfizer
Cadila
Macleods
Source: IQVIA, CLSA

AIL’s areas of focus include women’s health, gastro, metabolics, vaccines and
consumer health. It also distributes anti-diabetes products from Novo Nordisk,
which account for ~35% of its revenue. We estimate that Abbott India receives
distribution margins of ~5% from this business. It also has a partnership with Bharat
Serum for vaccine distribution in India.
Figure 3
AIL’s core portfolio includes AIL’s portfolio mix

women’s health, gastro,
metabolics and distribution Consumer Health
Vaccines
of Novo Nordisk diabetes 3%
4%
products
Multi-Specialty
5%
Novo Nordisk
Central Nervous portfolio
System 37%
9%
Metabolics
9%
Gastroenterology Women’s Health

25% 8%
Source: IQVIA, CLSA
Core portfolio therapies, such as women’s health, gastro and metabolics, have
outperformed addressable market growth, led by mother brands in each therapy
category.
Figure 4
Key therapies have grown Growth profile of AIL’s core therapies over the last four years
faster than addressable
market 40 (FY16-19 Cagr %)
35
30
25
20
15
10
0
Vaccines Women’s Novo Gastro Metabolics Central Multi- Consumer
Health Nordisk Nervous Specialty Health
portfolio System

Ability to build mega brands

High concentration of sales AIL’s top-10 brands account for ~70% of sales, a proportion that is significantly
from AIL’s top brands higher than peers such as Sanofi India, GSK India, Pfizer India and other local
driven by product mix and pharma companies. In addition, six of Abbott India’s brands feature amongst the
geographical presence in
top 100 brands in India. These positives reflect AIL’s ability to build brands and
India
focus on select products. The high concentration of sales that come from its top-
10 brands is primarily due to the company’s significant presence in metro and Tier
1 cities. Its robust branding is also an indicator of strong relationships with doctors.
Figure 5
Rising contribution of top- Product concentration of AIL (excluding Novo Nordisk products)
10 brands (%) Top 10 Next 15 Remaining
100
90
80
70
60
50
40
30
20
10
0
FY16 FY17 FY18 FY19
Figure 6
AIL’s top-10 brands Product concentration vs peers – Top-10 brands as % of sales

comprise about70% of (% of sales)
80
sales, the highest
concentration vs peers 70
60
50
40
30
20
10
0
Torrent Pharma
Sanofi India
Dr Reddy's
Sun Pharma
GSK India
Cadila Health
Lupin
Abbott India
Cipla
Pfizer India
Glenmark Pharma
Top-10 brands witnessed 15% revenue Cagr over the last five years
Strong growth of top-ten The top ten brands combined experienced a healthy 15% revenue Cagr from FY14-
brands over last five years FY19, despite price controls being enacted in FY17 for the leading Thyronorm
despite price controls for brand. Pertinently, nine out of the top ten brands generate over Rs1bn in revenue
Thyronorm
and growth has consistently outperformed their addressable market.

Figure 7
Mega brands like Growth profile of top 10 brands at AIL

Duphaston and Thyronorm
continue to grow well 30 (5 year Cagr, %)
25
20
15
10
5
0
(5)
(10)
Thyronorm
Eptoin
Prothiaden
Cremaffin
Duphaston
Digene
Influvac
Vertin
Duphalac
Top 10 brands
Udiliv
Disproportionately large market share for top brands

Ability to retain market AIL’s key brands, which include megabrands Thyronorm (Rs3.6bn with 53% market
share despite high share) and Duphaston (Rs3.3bn with 100% market share), hold disproportionately
competition is a reflection large shares of the market and cater to underpenetrated therapies, indicating strong
of the strength of AIL’s
potential.
portfolio
Figure 8
Competitive landscape for key AIL brands

Brand Therapy FY19 revenue (Rsm) Market share (%) Competitors (No.)
Thyronorm Thyroid 3,581 51.6 27
Duphaston Hormone 3,344 100.0 -
Udilliv Gastro 2,484 16.7 62
Vertin 1,649 30.8 57
Duphalac Gastro 1,637 13.9 64
Influvac Vaccine 1,356 63.4 12
Digene Gastro/OTC 1,254 13.3 163
Cremaffin Gastro 2,219 9.5 55

Highest field force productivity among peers

Strong brands allow AIL to We estimate AIL’s pharma sales force at ~3,000 medical representatives (MR) as of
enjoy higher field force the end of March 2019. At Rs12m, AIL’s field force productivity (Rsm/MR/year) is
productivity significantly higher than its MNC and local peers mainly due to its concentrated
portfolio and Metro/Tier-I focus.

Figure 9
AIL field force productivity AIL’s field force productivity vs peers

higher than MNC and local (Rsm/MR/year)
14
peers
12
10
8
6
4
2
0
Torrent Pharma
Sanofi India
Dr Reddy's
Sun Pharma
GSK India
Cadila Health
Lupin
Abbott India
Cipla
Pfizer India
Glenmark Pharma
Patient outreach programmes create strong brand recognition

Significant efforts on AIL’s patient outreach efforts have been strong and consistent over the past several
patient/doctor awareness years. As awareness for certain drugs increase, patients begin to self-prescribe
programmes . . . specific brands for acute ailments as well as many OTC drugs. This only helps
improve one’s brand recognition. AIL also operates a platform called a:care, a
technology led service that bridges the communication gap between patients and
doctors across multiple therapy areas. Using the platform, a doctor can access the
latest scientific research, medical education and patient support services while
consumers are able to access educational health information or participate in
motivational programmes to help adhere to treatments prescribed by their doctors.
. . . lead to strong brand AIL has launched programmes like Thyroweight in order to increase awareness
recognition among women about the correlation between weight gain and thyroid disorders.
Other educational campaigns include the Fryday Campaign, the Digene Campaign,
Win Over Migraine (WoW reached 10,000 doctors) and Win Over Epilepsy (3.8m
people across 39 cities reached via radio).
Figure 10 Figure 11
Digene campaign showcased product as solution to lifestyle- Fryday campaign for Pankreoflat focused on how food habits
related acidity contribute to gastric disorders
Source: Company, CLSA Source: Company, CLSA

Figure 12
Abbot India has been A&P expenses as a % of sales

investing 3-3.2% of sales in (% of sales)
4.0
A&P and we expect it to
continue as it expands its 3.5
patient outreach
programmes 3.0
2.5
2.0
1.5
1.0
0.5
0.0
New launches to drive growth along with existing brands

AIL has a consistent record of launching new brands in India. Over the last five
years, AIL has launched 73 new brands. The brand launches mostly consist of line
extensions of existing products, products from Novo Nordisk and four vaccines
through a partnership with Bharat Biotech (agreement till 2020).
Figure 13
AIL aims to launch 100 New launches by AIL

products in India between (No.)
25
FY19 and FY24
20
15
Aim to launch over
100 products over the
next five years
10
0
Source: Company
Recent launches have scaled up well

New launches are mostly New launches have focused in areas such as women’s health, gastro, pain
line extensions and management, CNS (Central Nervous System)) and metabolics. Meaningful launches
partnership based products over the last few years include Ryzodeg (Novo Nordisk product), Influvac (vaccine,
MAT March-19 sales of Rs633m), Enteroshield (vaccine, MAT March-19 sales of
Rs330m) and Betonin AST (vitamins, MAT March-19 sales of Rs302m)
The company aims to launch 100 products over the next five years. While the
majority of these launches are expected to be line extensions, the company may
also pursue partnership models similar to the one with Bharat Serum for vaccines.

New launches between AIL The profile of new launches for AIL and Abbott Healthcare Private Limited (AHPL)
and AHPL are well are well segregated and based on the therapeutic presence and connections with
segregated and based on doctors within each entity. For example, products in the nutrition space, such as
the therapeutic presence
Ensure Diabetescar and Ensure, have been launched through AHPL around the
and doctor connect of each
entity established Pediasure brand over the last five to six years. We note that AIL and
AHPL cross-sell some products based on an intercompany transfer agreement.
Figure 14
Strong performance of Strong performance of recent launches

select products, driven by Brand Launch date FY19 Revenue (Rsm)
focused approach Ryzodeg December 2015 1,953
Influvac May 2016 633
Enteroshield July 2015 330
Betonin AST March 2017 302
Arachitol Nano May 2014 218
OTC an important growth driver

OTC market in India is OTC is another possible area of growth for AIL, using Digene as a mother brand.
valued at ~US$2bn According to IQVIA, Digene’s revenue is about Rs1.2bn and has been growing in
the low-single digits. We believe the company has identified a basket of products
for the OTC space and we expect to see new launches over the next few years.
Figure 15
AIL can expand its OTC Revenue from Digene

portfolio with Digene as the 1.4 (Rsbn)
mother brand
1.2
1.0
0.8
0.6
0.4
0.2
0.0
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: IQVIA, CLSA
Connecting with pharmacists is an important part of building a strong OTC portfolio

due to the strong influence of pharmacists in this space. AIL is strengthening
channel management capabilities and resources to ensure connections with
patients through the pharmacy engagement network.
Initiate coverage with a BUY and target price of Rs14,500

Among MNCs, AIL has a We believe pharma MNCs are turning the corner in India due to their improved
well aligned portfolio with performance over the last year. When compared to its MNC pharma peers, AIL’s
its parent and a strong track portfolio is well aligned with its parent and the company has a strong track record
record of building brands
of building brands. We initiate coverage on AIL with a BUY rating and a target price
of Rs14,500 based on applying a 40x multiple to our Sep-21CL EPS estimate. This
valuation represents a 20% discount to comparable consumer peers, which takes
into account the risks of government price controls, lower dividend payouts and
lower ROEs.

We estimate 12.7% revenue Cagr over FY19-22CL

Revenue growth to be We expect 12.7% revenue Cagr over FY19-22CL, driven by a ramp up of existing
driven by existing mega brands like Thyronorm, Duphaston Udiliv, as well as new launches. This growth rate
brands and new launches is higher than the current 10% rate experienced by the overall India Pharma market.
Among AIL’s key therapies, we expect women’s health, gastro, metabolics and the
Novo Nordisk portfolio to be the key drivers of growth.
Figure 16
Key assumptions of revenue growth

Most key segments should % YoY growth FY17 FY18 FY19 FY20CL FY21CL FY22CL
see low double digit growth Novo nordisk portfolio 11.4 14.7 12.7 12.5 12.5 12.5
over FY20-22CL Women’s health 15.9 19.1 28.5 21.0 19.0 18.0
Gastroenterology 14.2 10.5 12.4 14.0 13.0 12.0
Metabolics 7.6 15.3 9.1 11.0 11.0 11.0
Central nervous system 3.4 8.8 1.4 5.0 5.0 5.0
Multi-specialty (1.2) (2.6) 14.4 12.0 12.0 12.0
Vaccines 30.0 59.7 20.4 22.0 22.0 22.0
Consumer health 10.4 10.6 (17.2) 12.0 12.0 12.0
Overall operating revenue 11.1 12.8 11.2 13.0 12.8 12.5
Figure 17
AIL expected to outperform Revenue trends

industry growth
60 (Rsbn) Revenue % YoY growth (RHS) (%) 16
14.2 13.6
50 12.9 14
12.4
12.7
11.5
40 11.0 12
30 10
20 8
10 6
0 4
Figure 18
AIL’s core portfolio AIL: Revenue composition by segment

accounts for nearly 75%of Novo Nordisk portfolio Women’s Health Gastroenterology
(% of sales)
total revenue Metabolics Central Nervous System Multi-Specialty
Vaccines
100
80
60
40
20
0

Margins expected to expand over the next three years

AIL’s overall margins are AIL’s Ebitda margins for FY19 stand at 16.4%. This is significantly lower than local
lower than peers due to and MNC peers, which we estimate to be in the range of 20-35%. We expect
relatively low margin reported margins to increase 190bps to 18.4% over FY19-22CL and core margins
distribution arrangement
to expand even more.
with Novo Nordisk
Figure 19
Excluding Novo Nordisk, AIL core portfolio margins vs peers

core margins are on the 40 (%)
higher end of the peer
35
group range
30
25
20
15
10
5
0
GSK
Torrent
AIL¹
Zeneca
Glenmark
Sanofi
Lupin
Dr Reddy
Cipla
Pfizer India
Pharma
Cadila
India
Astra
India
Sun
¹ Ebitda margin on its own portfolio. Source: Company, CLSA
Abbott India’s-lower-than peer margins are likely the result of the distribution
agreement with Novo Nordisk products (35% of revenue). We estimate distribution
margins to be only about 5% for Abbott through this partnership. Excluding the Novo
Nordisk portfolio, we estimate core margins to be 23.4%, which is in-line with peers.
By our analysis, core margins expanded 450bp over the last four years as key brands
gained scale. We expect further margin improvement of 2ppts to 18.4% by FY22CL,
largely coming from its own portfolio. We assume that the distribution arrangement
with Novo Nordisk will continue at current margins.
Figure 20
Core portfolio margins Ebitda margins

estimated at 23.4% for 30 (%) AIL own portfolio margin Overall margin
FY19 and expected to 26.0
expand 260bps over FY19- 24.0
25.0
25 23.4
22CL 22.4
18.9
20 18.6
17.8
18.4
17.2
15.9 16.4
13.9 13.7
15
10
0
AIL profit has high AIL is a debt free company with significant free cash flow generation. FCF yield is
contribution from other 3% as of FY19. Strong free cashflow generation leads to higher levels of cash, which
income due to its high cash is the main driver of increasing other income. AIL’s dividend payout has been in the
on balance sheet
range of 35% and high cash levels on the balance sheet is retained for M&A
activities in our view.

Figure 21
Income statement of Abbott India

(Rsm) FY16 FY17 FY18 FY19 FY20CL FY21CL FY22CL
Revenue 26,145 29,026 32,985 36,786 41,544 46,800 52,618
Revenue growth (%) 14.2 11.0 13.6 11.5 12.9 12.7 12.4
Cogs 14,920 17,121 19,047 20,886 23,514 26,349 29,466
Gross margin 11,225 11,905 13,938 15,900 18,030 20,452 23,152
Gross margin (%) 42.9 41.0 42.3 43.2 43.4 43.7 44.0
Staff cost 3,411 3,453 3,937 4,356 4,791 5,271 5,798
Other expenses 4,170 4,479 4,756 5,497 6,086 6,856 7,656
Ebitda 3,644 3,973 5,245 6,047 7,153 8,325 9,699
Ebitda margin 13.9 13.7 15.9 16.4 17.2 17.8 18.4
Depreciation 144 164 162 169 441 512 583
Ebit 3,499 3,809 5,083 5,878 6,712 7,813 9,115
Ebit margin 13.4 13.1 15.4 16.0 16.2 16.7 17.3
Interest costs 25 20 38 22 50 50 50
Interest/Other income 506 576 1,170 1,133 1,400 1,674 2,011
Reported PBT 3,980 4,365 6,215 6,989 8,062 9,437 11,077
Tax 1,428 1,598 2,203 2,485 2,096 2,359 2,769
Tax rate 35.9 36.6 35.4 35.6 26.0 25.0 25.0
PAT 2,552 2,766 4,012 4,503 5,966 7,078 8,307
Robust 23% earnings Cagr estimated over FY19-22CL

A strong 12.7% revenue Cagr coupled with margin expansion of 190bp over FY19-
22 should drive 23% profit Cagr over this period. Profit is higher than Ebitda growth
due to a decline in the effective tax rate from 35.4% to 25% over the next few years.
Figure 22
Strong profit growth Trend in profit growth

expected over FY19-22CL (Rsbn) PAT % YoY Growth (RHS)
9 (%) 50
8 45.0 45
7 40
35
6
30
5 32.5
25
4 18.6
17.4 20
3 12.2
11.5
15
8.4
2 10
1 5
0 0
Strong balance sheet and FCF generation

AIL has a strong balance sheet with cash and cash equivalents of ~Rs793/share as
of March 2019. Its working capital cycle stood at 17 days in FY19 and its capex
requirements are minimal since the majority of its top products are sourced from a
third party or partner.

Figure 23
Cash at Rs793 per share as Cash per share

of March 2019 1,600 (Rs/share)
1,400
1,200
1,000
800
600
400
200
0
Working capital fluctuated AIL has a strong balance sheet with no debt and high cash levels. The working
over FY17-19 due to an capital requirements spiked in FY18 and unwound in FY19, mainly on account of an
Rs2bn loan given to Rs2bn loan given to its subsidiary Alere Medical Private Limited in FY18 at a 10%
subsidiary that was
interest rate that was subsequently returned in FY19. Adjusting for this loan,
returned in FY19
working capital requirements of the company have not seen any major volatility.
Figure 24
Working capital cycle for Trade working capital cycle for Abbott India
Abbott India fell to 17 days 140 (No. of days) Inventory days Debtors days Payable days
for FY19
120
100
80
60
40
20
0
FY15 FY16 FY17 FY18 FY19
Figure 25
Abbot has seen strong cash Cashflow of Abbott India

flow generation and this 10 (Rsbn) Operating cash flow Free cash flow
should continue
8
4
FY18/19 cashflows were
impacted due to FY18 loan
2
to subsidiary that was
repaid in FY19
0
(2)
Note: FY18/19 cash flow impacted by a loan to sub in FY18 that was repaid in FY19. Source: Company, CLSA

Figure 26
Balance sheet of Abbott India

Abbott India has a net cash (Rsm) FY16 FY17 FY18 FY19 FY20CL FY21CL FY22CL
balance sheet Share capital 212 212 212 212 212 212 212
Reserves 11,743 13,657 16,715 19,873 23,545 27,945 33,065
Net worth 11,956 13,869 16,928 20,086 23,757 28,157 33,277
Total debt - - - - - - -
Total liabilities 11,956 13,869 16,928 20,086 23,757 28,157 33,277
Net fixed assets 1,085 1,096 814 1,050 1,106 1,094 1,011
Capital work in progress 28 63 22 7 10 10 10
Investments - - - - - - -
Cash and bank 8,394 10,909 10,314 16,843 20,010 24,041 28,883
Inventories 3,701 5,006 5,853 6,068 6,700 7,508 8,396
Sundry debtors 1,450 1,762 2,634 2,761 2,959 3,462 3,892
Loans and advances 83 75 2,205 234 234 234 234
Deferred tax asset 94 124 146 131 131 131 131
Other current assets 1,330 1,623 2,174 2,316 2,431 2,553 2,680
Total current assets 6,658 8,590 13,013 11,509 12,455 13,887 15,334
Trade payables 2,301 4,747 4,806 6,635 7,086 7,941 8,880
Provisions 985 704 1,328 1,708 1,708 1,708 1,708
Other liabilities 922 1,338 1,100 980 1,031 1,227 1,372
Total current liabilities 4,209 6,789 7,234 9,323 9,825 10,876 11,960
Net current assets 2,449 1,801 5,779 2,186 2,630 3,012 3,373
Total assets 11,956 13,869 16,928 20,086 23,757 28,157 33,277
Figure 27
Cash flow statement

(Rsm) FY16 FY17 FY18 FY19 FY20CL FY21CL FY22CL
Cash from operations 1,431 3,185 (514) 7,465 4,612 5585 6568
Ebitda 3,644 3,973 5,245 6,047 7,153 8,325 9,699
Current Taxes (1,437) (1,569) (2,235) (2,485) (2,096) (2,359) (2,769)
Change in WC (512) 647 (3,977) 3,593 (444) (381) (362)
Others (264) 133 453 309 - - -
Cash from investing 1,445 373 1,365 745 900 1,174 1,511
Capex 939 (203) 196 (388) (500) (500) (500)
Interest/other Income 506 576 1,170 1,133 1,400 1,674 2,011
Cash from financing (920) (1,043) (1,447) (1,680) (2,345) (2,727) (3,237)
Interest (25) (20) (38) (22) (50) (50) (50)
Debt raised - - - - - - -
Dividends (895) (1,023) (1,409) (1,657) (2,295) (2,677) (3,187)
Equity raised - - - - - - -
Change in cash 1,955 2,515 (596) 6,529 3,167 4,031 4,842
High return ratios

AIL’s return ratios are robust due to the strength of its business model and a solid
balance sheet. Its ROE has been consistently in the 24-26% range and we expect
ROE to expand further with an improving profit profile.

Figure 28
Consistently strong return Return ratios

ratios by AIL
30 (%) ROAE ROACE
28
26
24
22
20
18
16
14
12
10
DuPont Analysis
AIL’s Du-Pont analysis over the last few years clearly indicates an improving
operational performance as a driver of improving ROE.
An improving margin profile An improving margin profile has been the main driver of expansion in ROAE. Ebit
has been the main driver of margins have risen 3.1ppts over the past five years and should expand by a further
expansion in ROAE 1.4ppts by FY22CL. We bake in payout at current levels for FY20-22CL but strong
cash generation will be a drag and limit any further gains in ROE.
Figure 29
Du-Pont analysis of Abbott India's ROE

Ebit margin (%) 12.8 13.2 13.0 15.4 16.0 16.2 16.7 17.3
Asset turnover (x) 8.9 8.1 9.0 6.9 7.5 11.9 11.9 12.4
Financial leverage (x) 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.1
Interest burden (x) 1.2 1.1 1.1 1.2 1.2 1.2 1.2 1.2
Tax burden (x) 0.7 0.6 0.6 0.6 0.6 0.7 0.8 0.8
ROAE (%) 26.5 23.9 21.4 26.1 24.3 27.2 27.3 27.0
Initiate coverage at BUY with a target price of Rs14,500

We value AIL at a 20% We initiate coverage of Abbott India with a BUY rating and a target price of
discount to comparable Rs14,500, which is based on applying a 40x multiple to our Sep-21CL EPS estimate.
FMCG peers due to risk of Our target PE of 40x represents a 20% discount to comparable consumer staples
price controls by the
peers and takes into account the risk of price controls by the government.
government

Figure 30 Figure 31
AIL PE multiples AIL PE premium to local peers
45 (x) PE Average +1 SD -1 SD 100 (%) MNC p remium/(d isc) to local peers

90 Average
40 +1sd
80
-1sd
70
35
60
30 50
40
25 30
20
20
10
15 0
May 15
May 16
May 17
May 18
May 19
Nov 15
Nov 16
Nov 17
Nov 18
Au g 15
Au g 16
Au g 17
Au g 18
Au g 19
Feb 15
Feb 16
Feb 17
Feb 18
Feb 19
Jan 15
Jan 16
Jan 17
Jan 18
Jan 19
Ap r 15
Ap r 16
Ap r 17
Ap r 18
Ap r 19
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
Oct 19
Jul 15
Jul 16
Jul 17
Jul 18
Jul 19
Source: Bloomberg Source: Bloomberg, CLSA
Comparing AIL with consumer peers

In our opinion, applying the one-year forward PE multiple of the local pharma peer
group does not provide the correct picture for AIL’s valuation as a significant
portion of the revenue of local pharma peers comes from outside India. Instead,
we believe AIL’s business model is more comparable to that of fast-moving
consumer goods (FMCG) players in the local market, such as HUL, Nestle, Dabur,
Britannia, Marico, Colgate and Emami.
AIL’s business model is FMCG companies are characterised by strong brands, line extensions for key
more similar to local FMCG brands, a well-established distribution model and robust operating margins. In a
peers in terms of similar way, MNC pharma companies operating in India, such as Abbott India, have
distribution and brand
established strong key brands that comprise 50-70% of total revenue. AIL also has
building effort
strong distribution, particularly in metro and tier-1 cities with expansion into tier-2
and tier-3 cities expected to be a further driver of revenue growth.
In terms of financial performance, AIL is expected to produce 12.7% revenue Cagr

over FY19-22CL, a stronger growth rate than its FMCG peers as forecasted by our
coverage.
Figure 32
AIL’s revenue growth likely Revenue Cagr of Abbott India vs leading consumer companies (FY19-22CL)
to be stronger than most
FMCG peers 14 (% Cagr) 12.7 13.2
11.7
12
10.7
9.7 10.0 10.0
10
8.3
8
0
Colgate HUL Emami Marico Britannia Nestle Dabur Abbott India

Similarly, we expect AIL to achieve 17% Ebitda Cagr over FY19-22CL, which is also
higher than its FMCG peers. Estimated earnings Cagr of 22% over this period is only
beaten by Emami.
Figure 33
AIL’s Ebitda Cagr also likely Ebitda Cagr of Abbott India vs leading consumer companies (FY19-22CL)
to be better than FMCG 18 (% Cagr) 17.1
peers 15.7
16 15.0 15.5
14
12 10.9 11.5
10.6
10.2
10
8
6
4
2
0
Emami Colgate Britannia Nestle HUL Dabur Marico Abbott India
Figure 34
AIL’s core margins similar to Ebitda margins of Abbott India vs leading consumer companies
FMCG peers 35 (% Cagr) FY19 FY22CL Consumer average (FY19)
30
25
20
15
10
0
HUL Nestle Dabur Britannia Marico Colgate Emami Abbott India
Figure 35
AIL’s earnings growth Earnings growth of Abbott India vs leading consumer companies
second fastest after Emami 30 (% Cagr) 27.8
25 22.6
20
16.1 16.2
15.3
14.1 14.6 14.6
15
10
0
Marico Dabur Colgate HUL Britannia Nestle Abbott India Emami

Despite maintaining a 35-40% dividend payout ratio over the last several years,
Abbott India has a net cash position of Rs793/share (c.7% of market cap) as at 31st
March 2019 due to strong free cashflow generation. However, this payout ratio is
much lower than most other consumer companies and thus leads to a lower ROE.
However, we believe that AIL has maintained this cash trove in order to look for
potential acquisitions. Thus, there could be hope of a higher payout in the future if
acquisitions do not happen. Given AIL’s strong free cashflow generation, an
increase in the dividend payout policy may be a rerating trigger for the company.
Figure 36
AIL’s dividend payout ratio Dividend payout ratio of Abbott India vs leading consumer companies
is lower than consumer
peers due to cash retained 100 (FY21CL div payout, %)
for potential M&A 90
80
70
60
50
40
30
20
10
0
Abbott Britannia Dabur Emami Marico Nestle HUL Colgate
India
Figure 37
ROE is also lower than Return on equity for Abbott India vs leading consumer companies
consumer peers as a result
100 (FY21CL ROE, %)
90
80
70
60
50
40
30
20
10
0
Emami Dabur Abbott Britannia Marico Colgate HUL Nestle
India
We value AIL at 20% discount to comparable consumer staple companies

Target PE of 40x Sep-21CL Building in the overhang of possible government price controls, the risk of adverse
EPS based on 20% discount regulatory actions resulting in margins getting capped and lower dividend payout
to FMCG peers compared to consumer companies, we value AIL at a 20% discount to the average
one year forward PE multiple (50x ) of consumer peers. We initiate coverage with a
BUY rating and a target price of Rs14,500.

Figure 38
One year forward price to earnings of leading FMCG companies

80 (% Cagr) One year forward PE Average
70
60
50
40
30
20
10
0
HUL Nestle Dabur Britannia Marico Colgate Emami Abbott India
Source: CLSA
Pharma MNCs trade at premium to local peers due to non-cyclical nature

AIL is fastest growingin As evidenced by the comparative valuations, Abbott India is the fastest growing
terms of earnings vs peers company in terms of earnings vs its peers but trades at a discount to GSK India on
but trades at a discount to FY21 PE valuations (Bloomberg consensus estimate). However, AIL deservedly
GSK India on FY21 PE
trades at a premium to Sanofi India and Pfizer India.
valuations
MNCs as a group trade at a significant premium valuation to its local peers mainly
due to the non-cyclical nature of their business models and overall subdued outlook
for US focused generic companies. We note that MNCs trade at a 40% premium to
Torrent Pharma, which is the closest peer in terms of revenue mix.
Figure 39
Valuation matrix
MNC pharma companies in India
GSK India 3,865 46.9 41.5 37.0 7.7 6.9 5.8 35.5 29.5 23.7 26.5 1.4
Abbott Inda 3,500 43.5 35.7 32.3 5.6 4.9 4.2 33.0 27.6 23.1 27.2 0.9
Sanofi India 2,132 35.9 31.1 27.6 4.9 4.6 4.5 20.8 19.1 18.5 18.5 1.3
Pfizer India 2,558 34.9 30.3 27.5 7.1 6.5 5.9 23.4 20.8 18.2 16.9 0.6
Average 40.3 34.7 31.1 6.3 5.7 5.1 28.2 24.3 20.9 22.3 1.1
Local Indian pharma companies
Sun Pharma 14,153 22.2 18.7 16.6 3.1 2.8 2.6 14.0 12.1 10.9 11.4 0.8
Dr Reddy's 6,546 21.0 19.3 16.9 2.8 2.5 2.3 12.8 11.3 10.0 14.1 0.9
Cipla 5,132 20.7 17.9 16.0 2.2 2.0 1.9 10.9 10.0 9.2 11.8 0.7
Lupin 4,662 29.6 20.8 17.4 2.1 1.9 1.8 11.9 9.9 8.8 10.6 1.0
Torrent 4,263 33.4 25.9 21.0 4.1 3.8 3.4 15.7 13.9 12.5 20.4 1.1
Biocon 4,424 33.0 25.3 20.7 4.9 4.0 3.4 17.9 14.1 11.4 16.2 0.5
Aurobindo Pharma 3,590 9.0 7.9 7.6 1.3 1.1 1.1 6.3 5.5 5.2 17.6 0.8
Cadila Healthcare 3,302 15.2 13.3 12.5 2.2 2.1 1.9 11.0 10.0 9.3 13.8 1.5
Ipca 1,929 23.9 19.3 16.4 3.2 2.8 2.5 16.2 13.6 11.8 17.7 0.4
Glenmark 1,148 10.9 9.0 8.1 1.1 1.0 0.9 6.9 6.1 5.4 13.0 0.8
Average 21.9 17.7 15.3 2.7 2.4 2.2 12.4 10.6 9.4 14.7 0.9
Continued on the next page

Figure 39
Valuation matrix (cont’d)

Global pharma companies
Johnson & Johnson 350,039 15.3 14.6 13.6 4.4 4.2 4.0 12.2 11.0 10.0 35.0 3.0
Roche 257,532 15.0 14.4 13.8 4.3 4.2 4.1 10.6 10.1 9.3 42.0 3.1
Novartis 225,051 16.9 15.4 14.0 5.2 5.0 4.7 15.1 13.9 12.8 17.9 3.5
Merck 212,819 16.5 15.0 13.4 5.0 4.7 4.5 12.2 11.2 10.1 49.1 2.8
Pfizer 205,039 12.7 13.5 12.6 4.8 5.2 5.1 10.0 10.8 10.6 26.7 4.0
Abbott Laboratories 148,090 25.8 23.2 20.8 5.1 4.8 4.5 19.3 17.1 15.3 17.7 1.6
AstraZeneca 123,215 26.2 22.0 17.7 5.7 5.1 4.6 19.6 16.1 13.1 26.4 3.0
Abbvie 126,010 9.6 8.7 7.8 4.6 4.3 4.1 8.9 8.3 7.5 na 5.6
Sanofi 115,088 14.1 13.3 12.4 3.4 3.3 3.2 11.1 10.1 9.1 12.8 3.9
GlaxoSmithKline 110,718 14.3 14.5 13.7 3.7 3.5 3.3 10.1 9.6 8.9 87.0 4.6
Eli Lilliy 109,004 19.6 17.2 15.4 5.6 5.2 5.0 16.6 na na 87.1 2.4
Merck KGAA 52,574 19.7 17.6 16.4 3.6 3.3 3.2 13.0 11.4 10.4 13.4 1.3
Average 17.1 15.8 14.3 4.6 4.4 4.2 13.2 11.8 10.6 37.7 3.2
Indian consumer
Hindustan Unilever 63,064 61.4 51.8 44.2 10.5 8.9 7.9 43.0 35.8 30.8 76.7 1.5
Nestle 19,039 70.4 59.3 50.3 10.6 9.4 8.4 45.6 39.1 34.1 74.0 1.1
Dabur 11,809 50.5 43.8 38.2 9.0 8.0 7.1 42.2 36.9 32.1 27.0 1.0
Britannia 10,493 55.1 47.0 40.0 6.2 5.5 4.9 39.3 33.7 29.3 29.3 0.8
Marico 6,709 43.1 37.9 33.9 6.0 5.3 4.8 30.3 26.7 24.0 35.9 1.7
Colgate 6,052 49.5 43.9 38.8 9.0 8.2 7.5 32.9 29.1 25.9 61.5 1.7
Emami 2,059 27.7 23.6 20.3 5.1 4.6 4.2 18.4 16.8 15.2 26.2 1.9
Average 51.1 43.9 37.9 8.0 7.1 6.4 36.0 31.1 27.3 47.2 1.4
Overall average 28.6 24.6 21.7 5.0 4.5 4.2 19.6 17.2 15.2 30.7 1.9
Source: Bloomberg, CLSA
Key risks
Expansion in the span of Expansion in the span of price controls: We estimate that ~25-30% of AIL’s products
price controls is the key risk are under price controls, including its lead brand Thyronorm. A significant expansion
for AIL in the span of price controls can hurt revenue and profitability given the
concentrated nature of the portfolio.
Risk of faster pace of substitution: Most of AIL’s products are industry leading brands
and in underpenetrated areas. As such, they have demonstrated strong volume led
growth. However, substitution from cheaper generics like Jan Aushadhi or trade
generics (substitution at the chemist level) can impact overall profitability.
Loans and advances to a subsidiary: In FY18, AIL gave a short term loan of Rs2bn to
a fellow subsidiary, Alere Medical Private Limited, at 10% interest per annum. The
loan was fully guaranteed by Abbott Laboratories, the parent company, and
extended to funding working capital requirement. The loan amount was duly
recovered in FY19.

Valuation details
We value Abbott India at 40x 12-month forward PE due to its strong earnings
growth prospects and high ROE. We use a PE-based valuation approach, as we
believe it better captures company growth and allows investors to easily compare
stocks across sub-sectors.
Investment risks
Execution risks, price controls by the government, parent losing focus on India
Figure 40
Abbott India ranks highly on Earnings and balance sheet risk scores (lower the better)
EQRS/BQRS parameters Score Comments
Earnings quality flags
Capex indiscipline 0
Cash burn 0
Rising non-core or intangibles 0
Rising working capital 1 Adjusted working capital does not raise
a flag as change is primarily on account
of a Rs2bn loan to a fellow subsidiary
which was returned in next fiscal year
Poor cash conversion 0
Earnings quality risk score (EQRS) 1/5
Balance sheet quality flags
Cash burn 0
Excessive leverage 0
Frequent fundraising 0
Liquidity concerns 0
Operational stress 1 Risk on operational stress is mainly on
account of rising working capital which
as mentioned above was one-off event
Balance sheet quality risk score (BQRS) 1/5
Source: CLSA

Detailed financials
Profit & Loss (Rsm)
Year to 31 March 2016A 2017A 2018A 2019A 2020CL 2021CL 2022CL
Revenue 26,456 29,387 33,071 36,786 41,544 46,800 52,618
Cogs (ex-D&A) (15,232) (17,482) (19,134) (20,886) (23,514) (26,349) (29,466)
Gross Profit (ex-D&A) 11,225 11,905 13,938 15,900 18,030 20,452 23,152
Research & development costs 0 0 (7) 0 0 0 0
Selling & marketing expenses - - - - - - -
Other SG&A (901) (870) (916) (1,182) (1,309) (1,474) (1,657)
Other Op Expenses ex-D&A (6,680) (7,062) (7,770) (8,671) (9,569) (10,653) (11,796)
Op Ebitda 3,644 3,973 5,245 6,047 7,153 8,325 9,699
Depreciation/amortisation (144) (164) (162) (169) (441) (512) (583)
Op Ebit 3,499 3,809 5,083 5,878 6,712 7,813 9,115
Interest income 506 576 1,170 1,133 1,400 1,674 2,011
Interest expense (25) (20) (38) (22) (50) (50) (50)
Net interest inc/(exp) 481 556 1,132 1,110 1,350 1,624 1,961
Associates/investments - - - - - - -
Forex/other income - - - - - - -
Asset sales/other cash items - - - - - - -
Provisions/other non-cash items - - - - - - -
Asset revaluation/Exceptional items - - - - - - -
Profit before tax 3,980 4,365 6,215 6,989 8,062 9,437 11,077
Taxation (1,428) (1,598) (2,203) (2,485) (2,096) (2,359) (2,769)
Profit after tax 2,552 2,766 4,012 4,503 5,966 7,078 8,307
Preference dividends - - - - - - -
Profit for period 2,552 2,766 4,012 4,503 5,966 7,078 8,307
Minority interest 0 0 0 0 0 0 0
Net profit 2,552 2,766 4,012 4,503 5,966 7,078 8,307
Extraordinaries/others 0 0 0 0 0 0 0
Profit avail to ordinary shares 2,552 2,766 4,012 4,503 5,966 7,078 8,307
Dividends (895) (1,023) (1,409) (1,657) (2,295) (2,677) (3,187)
Retained profit 1,657 1,743 2,603 2,846 3,671 4,400 5,120
Adjusted profit 2,552 2,766 4,012 4,503 5,966 7,078 8,307
EPS (Rs) 120.1 130.2 188.8 211.9 280.8 333.1 390.9
Adj EPS [pre excep] (Rs) 120.1 130.2 188.8 211.9 280.8 333.1 390.9
Core EPS (Rs) 120.1 130.2 188.8 211.9 280.8 333.1 390.9
DPS (Rs) 35.0 40.0 55.0 65.0 90.0 105.0 125.0
Profit & loss ratios

Growth (%)
Revenue growth (% YoY) 14.2 11.1 12.5 11.2 12.9 12.7 12.4
Ebitda growth (% YoY) 16.7 9.0 32.0 15.3 18.3 16.4 16.5
Ebit growth (% YoY) 17.7 8.8 33.5 15.6 14.2 16.4 16.7
Net profit growth (%) 11.5 8.4 45.0 12.2 32.5 18.6 17.4
EPS growth (% YoY) 11.5 8.4 45.0 12.2 32.5 18.6 17.4
Adj EPS growth (% YoY) 11.5 8.4 45.0 12.2 32.5 18.6 17.4
DPS growth (% YoY) 12.9 14.3 37.5 18.2 38.5 16.7 19.0
Core EPS growth (% YoY) 11.5 8.4 45.0 12.2 32.5 18.6 17.4
Margins (%)
Ebitda margin (%) 13.8 13.5 15.9 16.4 17.2 17.8 18.4
Ebit margin (%) 13.2 13.0 15.4 16.0 16.2 16.7 17.3
Net profit margin (%) 9.6 9.4 12.1 12.2 14.4 15.1 15.8
Core profit margin 9.6 9.4 12.1 12.2 14.4 15.1 15.8
Op cashflow margin 5.4 10.8 (1.6) 20.3 11.1 11.9 12.5
Returns (%)
ROE (%) 23.9 21.4 26.1 24.3 27.2 27.3 27.0
ROA (%) 15.0 13.1 14.6 14.1 15.8 16.1 16.2
ROIC (%) 69.1 74.0 68.6 76.9 142.1 149.0 160.7
ROCE (%) 127.3 119.7 139.4 158.5 205.8 211.3 226.7
Other key ratios (%)
Effective tax rate (%) 35.9 36.6 35.4 35.6 26.0 25.0 25.0
Ebitda/net int exp (x) - - - - - - -
Exceptional or extraord. inc/PBT (%) - - - - - - -
Dividend payout (%) 29.1 30.7 29.1 30.7 32.1 31.5 32.0

Balance sheet (Rsm)

Cash & equivalents 8,394 10,909 10,314 16,843 20,010 24,041 28,883
Accounts receivable 1,450 1,762 2,634 2,761 2,959 3,462 3,892
Inventories 3,701 5,006 5,853 6,068 6,700 7,508 8,396
Other current assets 1,424 1,747 2,320 2,446 2,562 2,684 2,811
Current assets 14,969 19,424 21,121 28,118 32,231 37,694 43,982
Fixed assets 1,113 1,159 835 1,057 1,116 1,104 1,021
Goodwill 0 0 0 0 0 0 0
Other intangible assets 0 0 0 0 0 0 0
Other non-current assets 83 75 2,205 234 234 234 234
Total assets 16,165 20,658 24,162 29,409 33,582 39,033 45,238
Short term loans/OD - - - - - - -
Accounts payable 2,301 4,747 4,806 6,635 7,086 7,941 8,880
Accrued expenses - - - - - - -
Taxes payable 0 0 0 0 0 0 0
Other current liabs - - - - - - -
Current liabilities 4,209 6,789 7,234 9,323 9,825 10,876 11,960
Long-term debt/leases/other - - - - - - -
Convertible bonds - - - - - - -
Provisions/other LT liabs 0 0 0 0 0 0 0
Total liabilities 4,209 6,789 7,234 9,323 9,825 10,876 11,960
Share capital 212 212 212 212 212 212 212
Retained earnings 11,743 13,657 16,715 19,873 23,545 27,945 33,065
Reserves/others 0 0 0 0 0 0 -
Shareholder funds 11,956 13,869 16,928 20,086 23,757 28,157 33,277
Minorities/other equity 0 0 0 0 0 0 0
Total equity 11,956 13,869 16,928 20,086 23,757 28,157 33,277
Total liabs & equity 16,165 20,658 24,162 29,409 33,582 39,033 45,238
Total debt 0 0 0 0 0 0 0
Net debt (8,394) (10,909) (10,314) (16,843) (20,010) (24,041) (28,883)
Adjusted EV 240,170 237,620 238,257 231,742 228,572 224,541 219,699
BVPS (Rs) 562.7 652.7 796.6 945.2 1,118.0 1,325.1 1,566.0
Balance sheet ratios

Key ratios
Current ratio (x) 3.6 2.9 2.9 3.0 3.3 3.5 3.7
Growth in total assets (% YoY) 17.7 27.8 17.0 21.7 14.2 16.2 15.9
Growth in capital employed (% YoY) 72.3 (17.1) 52.8 (31.8) 16.7 10.5 7.2
Net debt to operating cashflow (x) - - - - - - -
Gross debt to operating cashflow (x) - - - - - - -
Gross debt to Ebitda (x) - - - - - - -
Net debt/Ebitda (x) - - - - - - -
Gearing
Net debt/equity (%) (70.2) (78.7) (60.9) (83.9) (84.2) (85.4) (86.8)
Gross debt/equity (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Interest cover (x) 158.6 215.3 163.6 311.8 162.2 189.7 222.5
Debt Cover (x) 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Working capital analysis
Inventory days 90.4 90.9 103.6 104.2 99.1 98.4 98.5
Debtor days 18.9 19.9 24.3 26.8 25.1 25.0 25.5
Creditor days 50.8 73.6 91.1 100.0 106.5 104.1 104.2
Working capital/Sales (%) 8.9 5.9 10.8 5.3 5.8 5.9 6.0
Capital employed analysis
Sales/Capital employed (%) 760.5 1,018.5 750.1 1,222.6 1,182.7 1,205.6 1,264.7
EV/Capital employed (%) 6,903.9 8,235.3 5,403.8 7,701.8 6,506.8 5,784.2 5,280.8
Working capital/Capital employed (%) 68.0 59.8 81.1 64.9 68.2 71.6 75.5
Fixed capital/Capital employed (%) 32.0 40.2 18.9 35.1 31.8 28.4 24.5
Other ratios (%)
EV/OCF (x) 167.9 74.6 (463.6) 31.0 49.6 40.2 33.5
EV/FCF (x) 101.3 79.7 (748.3) 32.7 55.6 44.2 36.2
EV/Sales (x) 9.1 8.1 7.2 6.3 5.5 4.8 4.2
Capex/depreciation (%) 650.2 123.6 120.8 229.5 113.5 97.7 85.7

Cashflow (Rsm)
Operating profit 3,499 3,809 5,083 5,878 6,712 7,813 9,115
Operating adjustments - - - - - - -
Depreciation/amortisation 144 164 162 169 441 512 583
Working capital changes (512) 647 (3,977) 3,593 (444) (381) (362)
Interest paid / other financial expenses - - - - - - -
Tax paid (1,437) (1,569) (2,235) (2,485) (2,096) (2,359) (2,769)
Other non-cash operating items (264) 133 453 309 0 0 0
Net operating cashflow 1,431 3,185 (514) 7,465 4,612 5,585 6,568
Capital expenditure 939 (203) 196 (388) (500) (500) (500)
Free cashflow 2,370 2,982 (318) 7,076 4,112 5,085 6,068
Acq/inv/disposals - - - - - - -
Int, invt & associate div 506 576 1,170 1,133 1,400 1,674 2,011
Net investing cashflow 1,445 373 1,365 745 900 1,174 1,511
Increase in loans - - - - - - -
Dividends (895) (1,023) (1,409) (1,657) (2,295) (2,677) (3,187)
Net equity raised/others (25) (20) (38) (22) (50) (50) (50)
Net financing cashflow (920) (1,043) (1,447) (1,680) (2,345) (2,727) (3,237)
Incr/(decr) in net cash 1,955 2,515 (596) 6,529 3,167 4,031 4,842
Exch rate movements - - - - - - -
Opening cash 6,439 8,394 10,909 10,314 16,843 20,010 24,041
Closing cash 8,394 10,909 10,314 16,843 20,010 24,041 28,883
OCF PS (Rs) 67.3 149.9 (24.2) 351.3 217.0 262.8 309.1
FCF PS (Rs) 111.5 140.3 (15.0) 333.0 193.5 239.3 285.6
Cashflow ratio analysis

Growth (%)
Op cashflow growth (% YoY) (66.9) 122.6 (116.1) nm (38.2) 21.1 17.6
FCF growth (% YoY) 11.1 25.8 (110.7) - (41.9) 23.7 19.3
Capex growth (%) (142.9) - (196.3) - 28.8 0.0 0.0
Other key ratios (%)
Capex/sales (%) 3.5 0.7 0.6 1.1 1.2 1.1 1.0
Capex/op cashflow (%) 65.6 6.4 (38.0) 5.2 10.8 9.0 7.6
Operating cashflow payout ratio (%) 52.0 26.7 - 18.5 41.5 40.0 40.4
Cashflow payout ratio (%) 62.6 32.1 - 22.2 49.8 47.9 48.5
Free cashflow payout ratio (%) 37.8 34.3 - 23.4 55.8 52.7 52.5
DuPont analysis
Ebit margin (%) 13.2 13.0 15.4 16.0 16.2 16.7 17.3
Asset turnover (x) 1.8 1.6 1.5 1.4 1.3 1.3 1.2
Interest burden (x) 1.1 1.1 1.2 1.2 1.2 1.2 1.2
Tax burden (x) 0.6 0.6 0.6 0.6 0.7 0.8 0.8
Return on assets (%) 15.0 13.1 14.6 14.1 15.8 16.1 16.2
Leverage (x) 1.4 1.4 1.5 1.4 1.4 1.4 1.4
ROE (%) 23.9 21.4 26.1 24.3 27.2 27.3 27.0
EVA® analysis
Ebit adj for tax 2,244 2,414 3,282 3,788 4,967 5,860 6,837
Average invested capital 3,249 3,261 4,787 4,929 3,495 3,931 4,255
ROIC (%) 69.1 74.0 68.6 76.9 142.1 149.0 160.7
Cost of equity (%) 12.6 12.6 12.6 12.6 12.6 12.6 12.6
Cost of debt (adj for tax) 6.4 6.3 6.5 6.4 7.4 7.5 7.5
Weighted average cost of capital (%) 12.0 12.0 12.0 12.0 12.1 12.1 12.1
EVA/IC (%) 57.0 62.0 56.5 64.8 130.0 136.9 148.5
EVA (Rsm) 1,853 2,022 2,705 3,194 4,543 5,383 6,320

Appendices Indian pharma
Appendix 1: Draft pharma policy

Key proposals and the implications for the Indian pharma industry
Proposal Details Implications
Encourage indigenous drug  End to end production be given preference in government procurements Help local API
manufacturing including manufacturers
APIs and intermediates
Enhance quality control  BA/BE tests mandatory for all drugs and future renewals of manufacturing To benefit large and mid-
licenses sized pharma companies
cGMP adoption  National/central government level procurement only from GMP and GLP
compliant plants
 Annual inspection of manufacturing units
Faster approval cycle  Current approval timeline of ~2 years is proposed to be reduced to 3

months
Branding of drug names  Use of generic name for sale of single ingredient drugs but manufacturer
name to be allowed on the drug package
 For patented drugs and fixed dose combinations, brand names may be used
Trade margins and  The level of trade margins will be prescribed to create a level playing field Likely to impact 'trade
bonus offers and to bring down the prices generic' products
Loan licensing  It has served its purpose and currently does not provide adequate benefit Unlikely to be
implemented in current
 Except biopharma, loan licensing will not be allowed. Alternatively, (i)
form or even if
phasing out over 3 years (ii) loan licensing to be allowed only for WHO
implemented enough
GMP approved facility (iii) loan licensing to be allowed up to only 10% of
timeframe to be given for
the total production of the Company will be considered
a transition
Product to product  One manufacturer, one salt, one brand name and one price Rs60bn market (less than
manufacturing to be 5% of the pharma market),
phased out companies with multiple
brands looking to divest
such brands
Uniform code of marketing  Regulation to be made compulsory, penalty for violations and an agency for To benefit large and mid-
practice implementation to be assigned sized pharma companies
Span of price controls to  Drug pricing will be made more poor oriented while retaining at the same First line therapies in
increase time its industry friendliness chronic areas likely to be
 National List of Essential Medicines will remain the basis of the medicines impacted, currently 30-
to be brought under price regulation 35% of the Indian pharma
market is under price
 Regulator and Government would be two distinct agencies control
 All regulators/commissions pertaining to pharma to be brought under one
department
 NPPA to be strengthened and will be assisted by advisory body
 All strengths and dosage forms of respective medicine shall be liable for
price cap.
 DPCO will be reoriented to move from price-control to monitoring of drug
prices, their availability and accessibility
e-prescription will be put  Prescriptions will be computerised and the medicine name will be picked up
into operation from a drop down menu of salt names
Source: Government of India, CLSA

Appendix 2: Government’s Jan Aushadhi promotion

Jan Aushadhi poster for diabetes drugs
Price differential between Price comparison chart between Jan Aushadhi and leading brands
Jan Aushadhi and key
branded generics in various
therapy areas

Appendix 3: MNCs’ Track Record

Abbott India has been the Revenue cagr (FY15-FY19)
fastest growing MNC
14 (%)
pharma company over the
past four years
12
10
0
Abbott India AstraZeneca India Sanofi India GSK India Pfizer India
Source: Bloomberg
Leading pharma MNCs have Trend in Ebitda margin

had relatively stable or (%) Abbott India Abbott India own portfolio
32
improving margins over the Sanofi India Pfizer India
recent past 28 GSK Pharma AstraZeneca
24
20
16
12
0
FY2016 FY2017 FY2018 FY2019
Source: Bloomberg
Profit growth has been the Net profit Cagr (FY15-FY19)

strongest for Pfizer but this (%)
50
is largely due to a low base
45
40
35
30
25
20
15
10
5
0
Pfizer India Abbott India Sanofi India GSK Pharma
Source: Bloomberg

Important disclosures Indian pharma
Companies mentioned
Abbott India (N-R)
Abbott Labs (N-R)
Alkem Laboratories (N-R)
Allergan (N-R)
Amgen (N-R)
Aristo (N-R)
Aurobindo Pharma (ARBP IB - RS477.6 - BUY)
Britannia Industries (BRIT IS - RS3,239.8 - BUY)
Cadila Healthcare (CDH IB - RS241.4 - BUY)
Cipla (CIPLA IB - RS467.9 - SELL)
Colgate India (CLGT IB - RS1,552.8 - BUY)
Dabur (DABUR IS - RS460.4 - BUY)
Dr Reddy's (DRRD IB - RS2,795.2 - BUY)
Eli Lilly (N-R)
Emami (HMN IS - RS329.6 - BUY)
FDC Limited (N-R)
Gilead Sciences (N-R)
Glenmark Pharma (GNP IS - RS316.1 - SELL)
GSK (N-R)
GSK Consumer (SKB IS - RS9,174.6 - O-PF)
GSK India (N-R)
Hindustan Unilever (HUVR IB - RS2,158.9 - O-PF)
Intas Pharma (N-R)
Ipca (IPCA IB - RS1,004.1 - SELL)
IQVIA (N-R)
Johnson & Johnson (N-R)
LG Chem (051910 KS - ₩315,000 - BUY)
Lupin (LPC IB - RS760.0 - SELL)
Macleods Pharma (N-R)
Mankind (N-R)
Marico (MRCO IB - RS365.5 - O-PF)
Merck KGAA (N-R)
Nestle India (NEST IB - RS14,817.0 - U-PF)
Novartis AG (N-R)
Novartis India (N-R)
Novo Nordisk (N-R)
Pfizer (N-R)
Pfizer India (N-R)
Piramal (N-R)
Roche (N-R)
Sanofi (N-R)
Sun Pharma (SUNP IB - RS437.9 - BUY)
Torrent Pharma (TRP IB - RS1,809.2 - O-PF)
UCB (N-R)
Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.

Important disclosures
The policy of CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) is to CLSA: 0.18%; Restricted - CLSA: 0.00%. Data for 12-month period
only publish research that is impartial, independent, clear, fair, and not ending 31 Oct 2019.
misleading. Regulations or market practice of some Overall rating distribution for CLST only Universe: Overall rating
jurisdictions/markets prescribe certain disclosures to be made for distribution: BUY / Outperform - CLST: 71.15%, Underperform / SELL
certain actual, potential or perceived conflicts of interests relating to - CLST: 28.85%, Restricted - CLST: 0.00%. Data as of 31 Oct 2019.
a research report as below. This research disclosure should be read in Investment banking clients as a % of rating category: BUY /
conjunction with the research disclaimer as set out at Outperform - CLST: 0.00%, Underperform / SELL - CLST: 0.00%,
www.clsa.com/disclaimer.html and the applicable regulation of the Restricted - CLST: 0.00%. Data for 12-month period ending 31 Oct
concerned market where the analyst is stationed and hence subject 2019.
to. Investors are strongly encouraged to review this disclaimer before There are no numbers for Hold/Neutral as CLSA/CLST do not
investing. have such investment rankings. For a history of the recommendation,
Neither analysts nor their household members/associates/may price targets and disclosure information for companies mentioned in
have a financial interest in, or be an officer, director or advisory board this report please write to: CLSA Group Compliance, 18/F, One Pacific
member of companies covered by the analyst unless disclosed herein. Place, 88 Queensway, Hong Kong and/or; (c) CLST Compliance (27/F,
In circumstances where an analyst has a pre-existing holding in any 95, Section 2 Dun Hua South Road, Taipei 10682, Taiwan, telephone
securities under coverage, those holdings are grandfathered and the (886) 2 2326 8188). EVA® is a registered trademark of Stern, Stewart
analyst is prohibited from trading such securities. & Co. "CL" in charts and tables stands for CLSA estimates, “CT” stands
Unless specified otherwise, CLSA/CLST or its respective affiliates, for CLST estimates, "CRR" stands for CRR Research estimates and
did not receive investment banking/non-investment banking income “CS” for Citic Securities estimates unless otherwise noted in the
from, and did not manage/co-manage a public offering for, the listed source.
company during the past 12 months, and it does not expect to receive This publication/communication is subject to and incorporates
investment banking compensation from the listed company within the the terms and conditions of use set out on the www.clsa.com website
coming three months. Unless mentioned otherwise, CLSA/CLST does (https://www.clsa.com/disclaimer.html). Neither the
not own 1% or more of any class of securities of the subject company, publication/communication nor any portion hereof may be reprinted,
and does not make a market, in the securities. (For full disclosure of sold, resold, copied, reproduced, distributed, redistributed, published,
interest for all companies mention on this report, please refer to republished, displayed, posted or transmitted in any form or media or
http://www.clsa.com/member/research_disclosures/ for details.) by any means without the written consent of CLSA and/or CLST.
The analysts included herein hereby confirm that they have not CLSA and/or CLST has/have produced this
been placed under any undue influence, intervention or pressure by publication/communication for private circulation to professional,
any person/s in compiling this research report. In addition, the institutional and/or wholesale clients only, and may not be distributed
analysts attest that they were not in possession of any material, non- to retail investors. The information, opinions and estimates herein are
public information regarding the subject company at the time of not directed at, or intended for distribution to or use by, any person
publication of the report. Save from the disclosure below (if any), the or entity in any jurisdiction where doing so would be contrary to law
analyst(s) is/are not aware of any material conflict of interest. or regulation or which would subject CLSA, and/or CLST to any
As analyst(s) of this report, I/we hereby certify that the views additional registration or licensing requirement within such
expressed in this research report accurately reflect my/our own jurisdiction. The information and statistical data herein have been
personal views about the securities and/or the issuers and that no obtained from sources we believe to be reliable. Such information has
part of my/our compensation was, is, or will be directly or indirectly not been independently verified and we make no representation or
related to the specific recommendation or views contained in this warranty as to its accuracy, completeness or correctness. Any
report or to any investment banking relationship with the subject opinions or estimates herein reflect the judgment of CLSA and/or
company covered in this report (for the past one year) or otherwise CLST at the date of this publication/communication and are subject
any other relationship with such company which leads to receipt of to change at any time without notice. Where any part of the
fees from the company except in ordinary course of business of the information, opinions or estimates contained herein reflects the views
company. The analyst/s also state/s and confirm/s that he/she/they and opinions of a sales person or a non-analyst, such views and
has/have not been placed under any undue influence, intervention or opinions may not correspond to the published view of CLSA and/or
pressure by any person/s in compiling this research report. In CLST. Any price target given in the report may be projected from one
addition, the analysts included herein attest that they were not in or more valuation models and hence any price target may be subject
possession of any material, nonpublic information regarding the to the inherent risk of the selected model as well as other external
subject company at the time of publication of the report. The analysts risk factors. Where the publication does not contain ratings, the
further confirm that none of the information used in this report was material should not be construed as research but is offered as factual
received from CLSA's Corporate Finance department or CLSA's Sales commentary. It is not intended to, nor should it be used to form an
and Trading business. Save from the disclosure below (if any), the investment opinion about the non-rated companies.
analyst(s) is/are not aware of any material conflict of interest. This publication/communication is for information purposes only
Key to CLSA/CLST investment rankings: BUY: Total stock return and it does not constitute or contain, and should not be considered as
(including dividends) expected to exceed 20%; O-PF: Total expected an offer or invitation to sell, or any solicitation or invitation of any
return below 20% but exceeding market return; U-PF: Total expected offer to subscribe for or purchase any securities in any jurisdiction
return positive but below market return; SELL: Total return expected and recipient of this publication/communication must make its own
to be negative. For relative performance, we benchmark the 12- independent decisions regarding any securities or financial
month total forecast return (including dividends) for the stock against instruments mentioned herein. This is not intended to provide
the 12-month forecast return (including dividends) for the market on professional, investment or any other type of advice or
which the stock trades. recommendation and does not take into account the particular
We define as “Double Baggers” stocks we expect to yield 100% investment objectives, financial situation or needs of individual
or more (including dividends) within three years at the time the stocks recipients. Before acting on any information in this
are introduced to our “Double Bagger” list. "High Conviction" Ideas publication/communication, you should consider whether it is
are not necessarily stocks with the most upside/downside, but those suitable for your particular circumstances and, if appropriate, seek
where the Research Head/Strategist believes there is the highest professional advice, including tax advice. Investments involve risks,
likelihood of positive/negative returns. The list for each market is and investors should exercise prudence and their own judgment in
monitored weekly. making their investment decisions. The value of any investment or
Overall rating distribution for CLSA (exclude CLST) only Universe: income my go down as well as up, and investors may not get back the
Overall rating distribution: BUY / Outperform - CLSA: 69.78%, full (or any) amount invested. Past performance is not necessarily a
Underperform / SELL - CLSA: 30.03%, Restricted - CLSA: 0.19%; Data guide to future performance. CLSA and/or CLST do/does not accept
as of 31 Oct 2019. Investment banking clients as a % of rating any responsibility and cannot be held liable for any person’s use of or
category: BUY / Outperform - CLSA: 0.42%, Underperform / SELL - reliance on the information and opinions contained herein. To the

extent permitted by applicable securities laws and regulations, CLSA and/or CLST (for research compiled by Taiwan analyst(s)) in Australia
and/or CLST accept(s) no liability whatsoever for any direct or by CLSA Australia Pty Ltd (AFSL License No: 350159); in Hong Kong
consequential loss arising from the use of this by CLSA Limited (Incorporated in Hong Kong with limited liability); in
publication/communication or its contents. India by CLSA India Private Limited, (Address: 8/F, Dalamal House,
To maintain the independence and integrity of our research, our Nariman Point, Mumbai 400021. Tel No: +91-22-66505050. Fax No:
Corporate Finance, Sales Trading, Asset Management and Research +91-22-22840271; CIN: U67120MH1994PLC083118; SEBI
business lines are distinct from one another. This means that CLSA’s Registration No: INZ000001735 as Stock Broker, INM000010619 as
Research department is not part of and does not report to CLSA Merchant Banker and INH000001113 as Research Analyst,; in
Corporate Finance department or CLSA’s Sales and Trading business. Indonesia by PT CLSA Sekuritas Indonesia; in Japan by CLSA
Accordingly, neither the Corporate Finance nor the Sales and Trading Securities Japan Co., Ltd.; in Korea by CLSA Securities Korea Ltd.; in
department supervises or controls the activities of CLSA’s research Malaysia by CLSA Securities Malaysia Sdn. Bhd.; in the Philippines by
analysts. CLSA’s research analysts report to the management of the CLSA Philippines Inc (a member of Philippine Stock Exchange and
Research department, who in turn report to CLSA’s senior management. Securities Investors Protection Fund); in Singapore by CLSA
CLSA has put in place a number of internal controls designed to manage Singapore Pte Ltd and solely to persons who qualify as an
conflicts of interest that may arise as a result of CLSA engaging in "Institutional Investor", "Accredited Investor" or "Expert Investor"; in
Corporate Finance, Sales and Trading, Asset Management and Research Thailand by CLSA Securities (Thailand) Limited; in Taiwan by CLST and
activities. Some examples of these controls include: the use of in United Kingdom by CLSA (UK).
information barriers and other controls designed to ensure that United States of America: Where any section is compiled by non-
confidential information is only shared on a “need to know” basis and in US analyst(s), it is distributed into the United States by CLSA solely to
compliance with CLSA’s Chinese Wall policies and procedures; persons who qualify as "Major US Institutional Investors" as defined
measures designed to ensure that interactions that may occur among in Rule 15a-6 under the Securities and Exchange Act of 1934 and who
CLSA’s Research personnel, Corporate Finance, Asset Management, deal with CLSA Americas. However, the delivery of this research
and Sales and Trading personnel, CLSA’s financial product issuers and report to any person in the United States shall not be deemed a
CLSA’s research analysts do not compromise the integrity and recommendation to effect any transactions in the securities discussed
independence of CLSA’s research. herein or an endorsement of any opinion expressed herein. Any
Subject to any applicable laws and regulations at any given time, recipient of this research in the United States wishing to effect a
CLSA, CLST, their respective affiliates, officers, directors or employees transaction in any security mentioned herein should do so by
may have used the information contained herein before publication and contacting CLSA Americas.
may have positions in, or may from time to time purchase or sell or have United Kingdom: In the United Kingdom, this research is a
a material interest in any of the securities mentioned or related securities, marketing communication. It has not been prepared in accordance
or may currently or in future have or have had a business or financial with the legal requirements designed to promote the independence
relationship with, or may provide or have provided corporate of investment research, and is not subject to any prohibition on
finance/capital markets and/or other services to, the entities referred to dealing ahead of the dissemination of investment research. The
herein, their advisors and/or any other connected parties. As a result, you research is disseminated in the EU by CLSA (UK), which is authorised
should be aware that CLSA and/or CLST and/or their respective affiliates, and regulated by the Financial Conduct Authority. This document is
officers, directors or employees may have one or more conflicts of directed at persons having professional experience in matters relating
interest. Regulations or market practice of some jurisdictions/markets to investments as defined in Article 19 of the FSMA 2000 (Financial
prescribe certain disclosures to be made for certain actual, potential or Promotion) Order 2005. Any investment activity to which it relates
perceived conflicts of interests relating to research reports. Details of the is only available to such persons. If you do not have professional
disclosable interest can be found in certain reports as required by the experience in matters relating to investments you should not rely on
relevant rules and regulation and the full details are available at this document. Where the research material is compiled by the UK
http://www.clsa.com/member/research_disclosures/. Disclosures analyst(s), it is produced and disseminated by CLSA (UK). For the
therein include the position of CLSA and CLST only. Unless specified purposes of the Financial Conduct Rules this research is prepared and
otherwise, CLSA did not receive any compensation or other benefits from intended as substantive research material.
the subject company, covered in this publication/communication, or from For all other jurisdiction-specific disclaimers please refer to
any third party. If investors have any difficulty accessing this website, https://www.clsa.com/disclaimer.html. The analysts/contributors to
please contact webadmin@clsa.com on +852 2600 8111. If you require this publication/communication may be employed by any relevant
disclosure information on previous dates, please contact CLSA entity or CLST, which is different from the entity that
compliance_hk@clsa.com. distributes the publication/communication in the respective
This publication/communication is distributed for and on behalf jurisdictions.© 2019 CLSA and/or CL Securities Taiwan Co., Ltd.
of CLSA (for research compiled by non-US and non-Taiwan analyst(s)), (“CLST”).

Indian pharma
Notes

Research & sales offices
www.clsa.com
Australia - Melbourne Hong Kong Malaysia Taiwan

CLSA Australia Pty Ltd CLSA Limited CLSA Securities Malaysia Sdn Bhd CL Securities Taiwan
Level 30 18/F, One Pacific Place Suite 20-01, Level 20 Company Limited*
35 Collins Street 88 Queensway Menara Dion 27/F, 95, Section 2
Melbourne VIC 3000 Hong Kong 27 Jalan Sultan Ismail Dun Hua South Road
Tel: +61 2 8571 4200 Tel: +852 2600 8888 50250 Kuala Lumpur Taipei 10682
Fax: +61 2 9221 1188 Fax: +852 2868 0189 Tel: +60 3 2056 7888 Tel: +886 2 2326 8188
Fax: +60 3 2056 7988 Fax: +886 2 2326 8166
Australia - Sydney India Philippines Thailand

CLSA Australia Pty Ltd CLSA India Private Limited CLSA Philippines, Inc CLSA Securities (Thailand) Ltd
Level 35 8/F, Dalamal House 19/F, Tower 2 16/F, M. Thai Tower
Grosvenor Place Nariman Point The Enterprise Center All Seasons Place
225 George Street Mumbai 400021 6766 Ayala corner Paseo de Roxas 87 Wireless Road,
Sydney NSW 2000 Tel: +91 22 6650 5050 Makati City Pathumwan, Bangkok 10330
Tel: +61 2 8571 4200 Fax: +91 22 2284 0271 Tel: +63 2 860 4000 Tel: +66 2 257 4600
Fax: +61 2 9221 1188 Fax: +63 2 860 4051 Fax: +66 2 253 0532
China - Beijing Indonesia Singapore United Kingdom

CLSA Limited - Beijing Rep Office PT CLSA Sekuritas Indonesia CLSA Singapore Pte Ltd CLSA (UK)
26/F, CITIC Securities Tower Sequis Tower, Suite 16-01 80 Raffles Place, No.18-01 12/F, Moor House
No.48 Liangmaqiao Road Jl. Jend. Sudirman No. 71 UOB Plaza 1 120 London Wall
Chaoyang District Jakarta 12190 Singapore 048624 London EC2Y 5ET
Beijing 100026 Tel: +62 21 5088 7888 Tel: +65 6416 7888 Tel: +44 20 7614 7000
Tel: +86 10 5965 2088 Fax: +62 21 724 7795 Fax: +65 6533 8922 Fax: +44 20 7614 7070
Fax: +86 10 5965 2018
China - Shanghai Japan Sri Lanka USA - New York

CLSA Limited - Shanghai Rep Office CLSA Securities Japan Co. Ltd CT CLSA Securities (PVT) Ltd CLSA Americas, LLC
Room 910, 9/F 16/F, Shiodome Sumitomo Building 4-14 Majestic City, 1301 Avenue of The Americas
100 Century Avenue 1-9-2, Higashi-Shimbashi 10 Station Road, 15th Floor,
Pudong New Area Minato-ku, Tokyo 105-0021 Colombo 4, Sri Lanka New York 10019
Shanghai 200120 Tel: +81 3 4578 8000 Tel: +94 11 255 2290 to 2294 Tel: +1 212 408 5888
Tel: +86 21 2020 5888 Fax: +81 3 4578 8080 Fax: +94 11 255 2289 Fax: +1 212 261 2502
Fax: +86 21 2020 5777
China - Shenzhen Korea * CLST is an exclusive Taiwan

CLSA Limited - Shenzhen Rep Office CLSA Securities Korea Ltd research provider to CLSA
Room 3111, Shun Hing Square 30/F, One IFC
Di Wang Commercial Centre 10 Gukjegeumyung-ro
5002 Shennan Road East Yeongdeungpo-gu
Shenzhen 518008 Seoul, 07326
Tel: +86 755 8246 1755 Tel: +82 2 397 8400
Fax: +86 755 8246 1754 Fax: +82 2 771 8583
CLSA Sales Trading Team

Australia +61 2 8571 4201 Malaysia +60 3 2056 7852 CLEAN
China (Shanghai) +86 21 2020 5810 Philippines +63 2 860 4030 & GREEN TM
Hong Kong +852 2600 7003 Singapore +65 6416 7878 At CLSA we support
India +91 22 6622 5000 Taiwan* +886 2 2326 8124 sustainable development.
We print on paper sourced from
Indonesia +62 21 5088 7777 Thailand +66 2 257 4611 environmentally conservative
Japan +81 3 4580 5169 UK +44 207 614 7260 factories that only use fibres
from plantation forests.
Korea +82 2 397 8512 US +1 212 408 5800 CLSA is certified ISO14001 Please recycle.
Research subscriptions
To change your report distribution requirements, please contact your CLSA sales representative or email us at cib@clsa.com.
You can also fine-tune your Research Alert email preferences at https://www.clsa.com/member/tools/email_alert/.
© 2019 CLSA Limited (“CLSA”) and/or CL Securities Taiwan Co. Ltd (“CLST”).
Key to CLSA/CLST investment rankings: BUY: Total stock return (including dividends) expected to exceed 20%; O-PF: Total expected return below 20% but
exceeding market return; U-PF: Total expected return positive but below market return; SELL: Total expected return to be negative. For relative performance, we
benchmark the 12-month total forecast return (including dividends) for the stock against the 12-month forecast return (including dividends) for the market on
which the stock trades. • We define as “Double Baggers” stocks we expect to yield 100% or more (including dividends) within three years at the time the stocks
are introduced to our “Double Bagger” list. "High Conviction" Ideas are not necessarily stocks with the most upside/downside but those where the Research
Head/Strategist believes there is the highest likelihood of positive/negative returns. The list for each market is monitored weekly. 26/04/2019

CLSA Indian Pharma (Turning A Corner) 20191113

Caricato da

Informazioni sul documento

Titolo originale

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

CLSA Indian Pharma (Turning A Corner) 20191113

Caricato da

Copyright:

Formati disponibili

Indian pharma

Alok Dalal Turning a corner

Improved MNC performance

Power brands and new launches to drive growth

www.clsa.com Source: IQVIA, CLSA

Improved MNC performance ....................................................................................... 5

Power brands and new launches to drive growth .................................................... 13

Better placed to withstand policy disruption ............................................................ 18

We initiate on Abbott India with a BUY .................................................................... 24

Abbott India ............................................................................................................. 33

1: Draft pharma policy .................................................................................................. 57

2: Government’s Jan Aushadhi promotion.................................................................. 58

3: MNCs’ track record ................................................................................................... 59

2 alok.dalal@clsa.com 13 November 2019

Pharma MNCs well positioned: BUY Abbott

Improved performance by MNCs over the last year

Revenue growth of MNCs Stock price performance of MNCs vs local peers

Source: Companies, CLSA Source: Bloomberg, CLSA

Focus on power brands and new launches to drive growth

Top 10 brands as percentage of revenue Brand building capability of MNCs

Sanofi India Lantus 79.2 6

13 November 2019 alok.dalal@clsa.com 3

MNCs better placed to withstand government policy disruptions

MNCs less vulnerable to disruptions Case study-GSK’s lead brand Augmentin

4.0 Brought under

Source: CLSA Source: IQVIA, CLSA

4 alok.dalal@clsa.com 13 November 2019

Improved MNC performance

Snapshot of leading listed MNCs in India

Source: IQVIA, CLSA Source: IQVIA, CLSA

13 November 2019 alok.dalal@clsa.com 5

Improved performance over the last year

Source: Bloomberg, CLSA Source: Bloomberg, CLSA

Trend from secondary Trend in secondary market growth of MNCs

Source: IQVIA, CLSA

6 alok.dalal@clsa.com 13 November 2019

Focus on key brands

MNCs are known to be Prevalent Business Archetypes in the IPM

Access drivers Therapy leaders

13 November 2019 alok.dalal@clsa.com 7

MNCs lead in product Product concentration vs peers-top 10 brands as % of sales

. . . which reflects higher Trend in field force productivity

Source: Companies, CLSA

Focus brands stand out despite competition being high

8 alok.dalal@clsa.com 13 November 2019

Brand building ability of MNCs

Abbott India Thyronorm Thyroid 3,581 51.6 27 Parent's

Sanofi India Lantus Diabetes 4,411 79.2 6 Parent's

Merck KGaA Concor Cardiac 853 79.3 10 Parent's

Abbott 27 Abbott 48 1.4x

GSK India 17 GSK India 64 1.7x

Sanofi 14 Sanofi 62 9.0x

Pfizer 14 Pfizer 65 1.3x

Source: IQVIA, CLSA

Increasing acceptance for patented products from parent’s pipeline

13 November 2019 alok.dalal@clsa.com 9

New launches from parent’s pipeline from MNCs

Months taken to launch in India after launch in developed market

Diabetes MSD Januvia 2006

Oncology Pfizer Sutent 2006

Anti-HIV Merck Isentress 2007

Cardiac Boehringer Ingelheim Pradaxa 2008

Diabetes Novo Nordisk Ryzodeg 2013