China VS. India: Stock Picks From Citi Investment Research
November 12, 2009 - The Wall Street Transcript has just published Pharmaceuticals Report offering a timely review of the Pharmaceuticals sector. This 76 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Prashant Nair is a Mumbai-based Director and Analyst who covers the Indian pharmaceutical, health care and agrochemical sectors for Citi Investment Research. Mr. Nair joined Citigroup in July 2005 from Motilal Oswal Securities. Prior to that, he was with Edelweiss Capital and Pranav Securities. Mr. Nair obtained his MBA from the Institute of Technology & Management and a Bachelor of Commerce from the University of Mumbai. He is also a CFA charterholder and a Cost Accountant by training.
TWST: Tell me about Piramal Healthcare's story.
Mr. Nair: Piramal Healthcare is one of the larger players on the contract-manufacturing opportunity. Its basic business model is to work with the larger pharmaceutical companies such as Pfizer (PFE), Glaxo (GSK), etc., at the back end. So they do the manufacturing for Pfizer, they do the manufacturing for Glaxo and for many other companies. They have got relationships with about seven or eight out of the Top 10 big pharma companies globally. And we think outsourcing, as an opportunity, is set to grow significantly over the next four to five years because we believe that big pharma will gradually move to a model where they focus more on R&D and marketing of products, and leave most of the manufacturing in the hands of their outsourcing partners. And I think that will benefit outsourcing companies in India, of which we believe Piramal is the best player.
TWST: How about Lupin?
Mr. Nair: Lupin is an emerging Indian generics company, and it has done very well. It has got a business model that focuses not so much on scale but more on niche products. And therefore, it's able to generate a lot more out of product basket than most other companies that we have looked at. It's the only Indian company to have a reasonably large presence in the Japanese market, which we feel is a strong market insofar as growth for generics is concerned. And again, like Dr.Reddy's, it is also fully integrated and enjoys significant cost advantage, which gives them a competitive advantage versus most of the other players targeting the same products.
TWST: What would you tell investors to watch for? Partnerships and deals with bigger companies?
Mr. Nair: I think partnerships and deals with bigger companies is something that we will see more of. We have already seen, besides the outright acquisitions that we spoke of - Glaxo entered into a deal with Dr.Reddy's for some of the emerging markets - we've seen Pfizer entering into a deal with Aurobindo Pharma (AUROBINDOP.BO) and Claris Lifesciences (CLARICH.BO), two Indian companies, again for generics. We have seen Mylan entering into a deal with Biocon (BIOCON.BO) for biosimilars, and Mylan has entered into a deal with Famy Care, which is a small Indian company for oral contraceptives in the U.S. So I think a lot more such deals will come about, primarily because of the one factor that I mentioned earlier - we believe that most of the larger pharmaceutical companies will opt to focus on R&D and marketing, and leave a lot of the manufacturing and basic research work, the initial research work, to other companies. And I think Indian companies will have a role to play out there. On the other hand, Indian companies have also come to a conclusion that they cannot, with the kind of balance sheets that they have and the kind of scale that they currently are at, they cannot practically hope to target each and every market and opportunity on their own. So they would also leverage their product basket much better by approaching certain key markets on their own and entering into alliances to target some of the other markets. So there is a need on both sides, and I think we will see a lot of that going forward. The other area which we think investors can watch out for - and you may not see as many examples as in the case of alliances for products - but an area to watch out for is drug discovery, research and consequent out-licensing of molecules which are in the clinical trial phase. We already had a company called Glenmark (GLENMARK.BO) from India, which has licensed out three to companies such as Forest Laboratories (FRX), Eli Lilly (LLY) and Merck KGaA (MKGAY.PK). We think we could see more of this going forward. Most Indian companies have some effort on the drug discovery research side. And none of these companies have the financial muscle to take a molecule all the way through the clinical development part up to the market. In general, the strategy is to take it up to a certain phase and then license it out to some of the larger companies. So you could see news flows on this front also coming through, although it's a bit more difficult to figure out how soon they will come in this area because the odds are different compared to normal products.
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