Sector Update | 20 April 2018
Healthcare
Healthcare
US base business to remain weak
Potential approvals remain key for growth
Healthcare - P/E Relative to
Sensex PE (%)
PE Relative to Sensex PE (%)
Avg (x)
80.0
50.0
20.0
-10.0
-40.0
Sandoz’s 1QCY18 results indicate that its generics business is impacted by
6% YoY price reduction
Novartis’ generics arm, Sandoz reported 4% YoY reduction in 1QCY18 net sales on
constant currency basis. The decline is largely due to 6% YoY price erosion, mainly in
the US market. The price decline was partially offset by 2% YoY increase in volumes.
Ex-US business grew 5% YoY on constant currency basis.
31.8
16.5
Interestingly, Sandoz’s base business has seen consistent price erosion for
three years now
We examined Sandoz’s price data for the past 12-13 quarters. The base business has
seen consistent price erosion of 6-8% (3QCY15 data-point being exceptional) in
CY15, CY16 and CY17. Even the 1QCY18 data point implies continued pricing
pressure in base business. Novartis has guided in-line to slightly lower revenue for
Sandoz in CY18. Since ex-US business continues to grow well (5% YoY on constant
currency basis in 1QCY18), the guidance implies continued weakness in US base
business.
Lack of potential approvals for coverage companies has impacted financial
performance for past one year
Though Sandoz’s generics business has continued to show price decline for the past
three years, the pharmaceuticals companies under our coverage have shown
phenomenal growth during the period.
This implies that though the base business
for most of the companies continued to decline, new approvals and subsequent
launch of higher value-added products not only offset the adverse impact on base
business but also helped deliver growth in sales and profitability.
YoY contraction
in 9MFY18 US revenue for most of the companies under our coverage implies lack of
high-value approvals or price cuts in key products due to faster ANDA approvals by
USFDA. The high base of last year and continued price erosion in older products
further worsened the situation.
Expect healthy growth for under coverage companies in 4QFY18
Research Analyst
Tushar Manudhane
Tushar.Manudhane@motilaloswal.com
+91 22 6129 1536
Kumar Saurabh
(Kumar.Saurabh@motilaloswal.com)
+91 22 6129 1519
Rajat Srivastava
Rajat.Srivastava@motilaloswal.com
+91 22 6129 1557
Ankeet Pandya
Ankeet.Pandya@motilaloswal.com
+91 22 6129 1552
For the pharmaceuticals companies under coverage, we expect weakness to
continue in the base business. However, there would be healthy YoY growth in
overall US sales in 4QFY18 on low base of last year. Product-specific opportunities
would also aid better growth for some companies.
Valuation and view
The base business remains impacted by pricing pressure. Companies have been
developing niche molecules to offset decline in base business and have better
profitability. The timing of approvals and evolving competitive scenario for
respective products remain the key parameters to track the US generics growth over
the next 2-3 years. We remain positive on Sun Pharma among large caps, and
Granules, Ipca and Shilpa Medicare among midcaps.
20
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
April 2018
1
Investors are advised to refer through important disclosures made at the last page of the Research Report.

Healthcare
Exhibit 1: Consistent price erosion in base business for 3 years now for Sandoz
Price Change YoY (%)
(4)
(6)
(8)
(12)
1QCY15
2QCY15
3QCY15
4QCY15
1QCY16
(7)
(5)
(6)
(6)
(8)
(8)
(7)
(6)
(8)
2QCY16
3QCY16
4QCY16
1QCY17
2QCY17
3QCY17
4QCY17
1QCY18
Source: Company, MOSL
Exhibit 2: Volume growth muted in 1QCY18 for Sandoz
21
17
13
8
11
8
5
Volume Growth YoY (%)
9
9
4
8
4
2
1QCY18
1QCY15
2QCY15
3QCY15
4QCY15
1QCY16
2QCY16
3QCY16
4QCY16
1QCY17
2QCY17
3QCY17
4QCY17
Source: MOSL, Company
Exhibit 3: Considerable decline in US Sales in 9MFY18
INR b
Sun Pharma
Growth (%)
Dr. Reddys
Growth (%)
Lupin
Growth (%)
Aurobindo
Growth (%)
Glenmark
Growth (%)
Cadila
Growth (%)
Cipla
Growth (%)
Torrent Pharma
Growth (%)
Alembic
Growth (%)
Alkem
Growth (%)
Ajanta Pharma
Growth (%)
FY14
97.8
59.0
55.3
46.1
48.9
29.6
34.0
94.2
20.3
20.0
21.7
44.0
FY15
137.2
40.2
64.7
17.0
56.6
15.8
48.3
42.0
20.4
0.6
33.9
56.4
FY16
135.2
-1.5
75.4
16.6
59.4
5.0
60.8
25.8
24.2
18.7
40.2
18.5
21.1
26.7
221.2
10.8
9.9
53.3
0.14
250.0
FY17
137.6
1.8
63.6
-15.7
82.6
39.1
68.3
12.3
37.0
52.9
37.1
-7.8
26.2
24.7
13.5
-49.6
9.1
-15.4
12.0
21.5
1.85
1221.4
9MFY18
64.0
-42.8
45.3
-6.0
44.0
-30.9
57.0
10.0
25.1
-7.1
41.9
53.9
19.1
-3.3
7.9
-25.6
6.4
-11.1
9.6
5.1
1.5
4QFY18E
21.4
-16.2
16.2
5.8
14.0
-26.2
20.1
22.4
7.2
-27.7
14.2
44.2
7.4
14.0
3.0
6.9
2.2
16.5
3.4
17.1
0.6
7.8
118.6
8.3
7.2
4.2
127.8
6.5
53.2
0.04
7.9
33.3
Source: MOSL, Company
20 April 2018
2

Healthcare
NOTES
20 April 2018
3

Explanation of Investment Rating
Investment Rating
BUY
SELL
NEUTRAL
UNDER REVIEW
NOT RATED
Expected return (over 12-month)
>=15%
< - 10%
> - 10 % to 15%
Rating may undergo a change
We have forward looking estimates for the stock but we refrain from assigning recommendation
Healthcare
*In case the recommendation given by the Research Analyst becomes inconsistent with the investment rating legend, the Research Analyst shall within 28 days of the inconsistency, take appropriate measures to make the recommendation consistent with the investment rating legend.
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4