India Pharma Under Fire From GOI - 050517 Emkay

Pharmaceuticals
India Equity Research | Pharmaceuticals

May 5, 2017
Sector Update Emkay
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Refer to important disclosures at the end of this report
Healthcare industry in government

crosshairs
Aurobindo Pharma BUY
Recent moves by various authorities to control healthcare costs have placed the issue
CMP Target Price
right at the centre of what could be a bruising public relations battle for the Indian
592 860
healthcare industry
Moves to ensure doctors prescribe generics likely to cause confusion given absence of a
Cadila Healthcare HOLD
strong Indian regulatory agency similar to US FDA, but again this has placed cost of
CMP Target Price
medicines at centre stage of political debate
458 353
Similarly the West Bengal Clinical Establishments Act reads as being extremely intrusive
in trying to micro manage the healthcare services industry, but appearing to do something
Cipla ACCUMULATE
may be perhaps electorally popular
CMP Target Price
The sting in the tale could very well be a committee formed in April 2017 for enhancing 550 640
scope of DPCO 2013, with members of NPPA and Pharma industry. Panel to study
improving medicine affordability & availability with report to be submitted by mid-May 17 Dr. Reddy's Lab HOLD
CMP Target Price
A number of recent developments have placed the Indian healthcare industry in the Centre 2,606 3,300
of political debate over healthcare costs including cost of drugs. The first shot across the
bow was fired way back in September 2014 when the NPPA (National Pharma Pricing Glenmark Pharma ACCUMULATE
Authority) widened the number of drugs under NLEM (National List of Essential Medicines) CMP Target Price
by 108 drugs from 835 agreed earlier (move later withdrawn), followed by authorities 859 1,013
banning 344 FDCs (Fixed Dose Combinations) in 2016 (suspended by court). Then came
the Oct 2016 gazette notification requiring doctors to prescribe generics along with the
Granules India BUY
brand names. This was followed by another notification in April 2017 which mandated that
CMP Target Price
the generic names so prescribed should be more prominently mentioned than the brand.
141 152
There have been other not-so-subtle hints of increasing government intervention in the
sector including a new committee which would take a relook at drug pricing to ensure better Ipca Lab REDUCE
affordability, availability etc. with the committee to submit report as soon as mid May 2017. CMP Target Price
The recently articulated National health policy document talks ominously about the industry 548 440
having benefitted over the years from government largesse including beneficial tax
structures, duty free imports, higher depreciation rates etc. and therefore it was time for Lupin HOLD
industry to contribute (or payback). At the state level, the West Bengal Clinical
CMP Target Price
Establishment Act, while deeply intrusive should be seen in light of the articulation of
1,262 1,580
National health policy. These are few of the many moves authorities seem to be making to
curb rising healthcare costs which we have detailed in a timeline in the following pages.
Sun Pharma ACCUMULATE
CMP Target Price
Financial Snapshot (Consolidated) 627 750
EPS EV/EBITDA P/E
(Rs mn)
FY17E FY18E FY17E FY18E FY17E FY18E Torrent Pharma REDUCE
Aurobindo Pharma 41.5 47.4 9.9 8.6 14.3 12.5 CMP Target Price
Cadila Healthcare 12.8 16.2 25.2 18.7 35.9 28.3 1,312 1,339
Cipla 17.4 23.4 17.4 14.4 31.6 23.5
Dr. Reddy's Lab 95.0 131.7 16.1 11.5 27.4 19.8 This report is solely produced by Emkay Global. The
following person(s) are responsible for the
Glenmark Pharma 57.6 47.0 10.1 11.7 14.9 18.3 production of the recommendation:
Granules India 6.9 8.9 12.2 9.9 20.3 15.8

Jatin Kotian
Ipca Lab 15.1 20.8 16.6 13.9 36.2 26.3 jatin.kotian@emkayglobal.com
Lupin 63.8 69.5 13.6 11.6 19.8 18.2 +91 22 66121254
Sun Pharma 29.8 31.1 13.0 12.6 21.1 20.2 Vishal Advani
Torrent Pharma 54.8 59.8 16.5 14.3 24.2 22.2 vishal.advani@emkayglobal.com
Source: Company, Emkay Research
+91 22 66242341
Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.
Pharmaceuticals India Equity Research | Sector Update
Exhibit 1: Growth drivers in IPM from 2013
16.0 16.0
13.4 14.5
14.0 14.0
12.0 5.0 12.0
10.7 9.9
10.0 6.1 9.1 10.0
8.0 5.5 4.0 8.0
6.3 2.2 5.0
6.0 6.0
4.0 2.3 4.0
1.2 1.6
5.1 5.5
2.0 2.0
2.9 2.4 2.6
0.0 0.0
MAT 2013 MAT 2014 MAT 2015 MAT 2016 MAT 2017
Volume Growth Price Growth N.I Growth Value Growth (RHS)

Source: IMS, Emkay Research
While it is difficult to fathom at this point of time the impact on overall sector growth as well as
specific companies impacted. However we believe that early on the impact of some the moves
being contemplated would largely fall on the acute category particularly in anti-infectives though
again difficult to filter the same based on sub therapies or a company wise impact. Exhibit 2
below details the exposure of percentage of revenues and the respective market shares in acute
and chronic therapy for the top 15 companies in the Indian branded space.
Near term with the overall policy confusion that has gripped the sector from an over-enthusiastic
NPPA, sector value growth has clearly suffered past 12 months. The IMS MAT data for March
2017 clearly shows overall value growth has been the lowest for past 5 years with price growth
being sharply lower in from previous 2 years.
Exhibit 2: Breakup of acute & chronic revenue and overall mkt share for top 15 companies(MAT17)
Acute Chronic Acute Chronic
Total
Ranks Companies share of share of overall overall
revenues
revenues revenue mkt share mkt share
1 SUN 9268 49% 51% 7.72% 15.34%
2 CIPLA 5924 51% 49% 5.12% 9.45%
3 MANKIND 4347 73% 27% 5.36% 3.86%
4 ALKEM 3986 85% 15% 5.78% 1.89%
5 LUPIN LIMITED 3779 47% 53% 3.01% 6.51%
6 ZYDUS CADILA 3775 67% 33% 4.31% 4.01%
7 MACLEODS PHARMA 3679 74% 26% 4.62% 3.12%
8 INTAS PHARMA 3217 36% 64% 1.99% 6.64%
9 ARISTO PHARMA 2759 83% 17% 3.89% 1.52%
10 DR REDDYS LABS 2621 63% 37% 2.80% 3.15%
11 TORRENT PHARMA 2609 41% 59% 1.82% 5.00%
12 EMCURE 2559 69% 31% 3.00% 2.58%
13 GLENMARK PHARMA 2479 67% 33% 2.81% 2.68%
14 MICRO LABS 1865 58% 42% 1.84% 2.53%
15 ALEMBIC 1809 72% 28% 2.22% 1.63%
Source: IMS, Emkay Research
May 5, 2017 2
Exhibit 3: Table of timeline of various measures made over the last one year with hyperlinks to the
articles
Date Events
NPPA fixed prices of 108 non-scheduled formulation packs over & above the 835 dosages
10-Jul-14
under DPCO, 2013.
NPPA withdrew its previous order dated on 10th July as several industry bodies, like Indian
29-Sep-14
Pharma Alliance (IPA) had challenged NPPA in Bombay High Court.
Government banned 344 FDCs citing health risk & lack of therapeutic justification. Ban
10-Mar-16 followed the Kokate panel report which had termed 963 FDCs drugs "irrational", having
health threats.
Govt. published gazette notification making it mandatory for doctors to prescribe drugs with
8-Oct-16
generic names along with the brand names.
Delhi High Court lift the ban on 344 Fixed dosage combination drugs. There were total 453
1-Dec-16
petitions filed by pharmaceutical companies challenging the government ban on FDC.
13-Feb-17 NPPA brought stents prices under control and capped their prices.
West Bengal Clinical Establishment Act, 2017 was passed by the state govt which aimed to
3-Mar-17 regulate the functioning of private clinical establishments. The act also empowered
regulatory body to fix the prices for all the inpatient and outpatient treatments.
Govt. constitutes pharma committee which will involve in making pricing policy, strengthen
31-Mar-17 DPCO, 2013 provisions and re-engineering of NPPA to make effective implementation of
govt. policies.
National Health Policy, 2017 is aim to provide the universal access to health care by
16-Apr-17 increasing the quality and infrastructure and lowering the cost of treatment. It also aim to
restructuring of the national public health initiative and enhancing healthcare spending.
In an inauguration event of hospital in Surat, PM Narendra Modi had made comments on
18-Apr-17
making medicines more affordable and also alluded to push back from the industry.
MCI mandates doctors to write prescribed drug with generic names legibly and preferably
21-Apr-17
in capital letters.
Government published another gazette notification which detailed physicians should write
22-Apr-17
generic names with two fonts bigger along with the brand names in the prescription.
Uttarakhand directed govt. hospital doctors to give three copies of prescription for generic
2-May-17 medicines to patients to enable an audit trail that doctors were prescribing generics and not
brands alone
Source: Company, Emkay Research
May 5, 2017 3
MCI mandates doctors write generic drug names

In a move that is fraught with uncertainties for the domestic branded pharmaceutical industry
and akin to placing the cart before the horse by the authorities, MCI (Medical Council of India)
has now mandated that all physicians write generic names on prescriptions rather than the
brand names. Note that the gazette notification mandating change in MCI guidelines was
first done in October 2016 which was followed up with another gazette notification in early
April 2017. A few thoughts on the govt action which we have been highlighting as a risk now for
sometime now.
The power of mandating any medicine could shift from the physician to the Chemist.
Its not clear how FDCs (Finished dosage combination) can be prescribed with only
the generic names mentioned. FDCs account for over 45% of the pharma market by
value and some of these combos run into 4-5 names or even more.
Gradually we should see more activist CDSCO (Central drugs Standards control
organization) For instance CDSCO publishes on a monthly basis list of drugs found
substandard. This has been a practice for several years now with the most recent update
for March having found drugs brands belonging to Sanofi India, Cipla and Cadila amongst
others having failed certain tests etc. This would now gradually come into focus on a
monthly basis similar to our focus on FDA 483 etc. The shift though would be very gradual.
Most pharmacy chains are introducing in-store brands for regular run of the mill drugs e.g.
Ibuprofen, Paracetmol, Metformin etc. These pharmacies can easily present their own in-
store brands for generic drug prescriptions. Long run the mix of emergence of pharmacy
chains and even partial implementation of the new prescribing rules could be
structurally beneficial for organised pharmacies.
Its also not clear how the govt expects companies to genuinely promote new molecules in
the market and updating doctors with the science behind new discoveries.
Whats clear from the move that Healthcare, especially pharma costs are now right at
the Centre of political focus. Govt may well seem popular to masses if it is seen
doing something about healthcare costs.
While these are early thoughts, the move now opens many more possibilities. What clear is that
overall value growth for the industry would continue to suffer with the downtrend seen
since a more activist NPPA set to continue.
Overall the government seems to have placed the cart before the horse. Rather than fix the
lacunae in regulatory system first and then gradually transition the industry to generic model,
authorities seemed to have jumped the gun
May 5, 2017 4
Prime Minister gives clarion call for generic adoption

In a message thats expected to resonate loudly in the Indian healthcare industry, PM Narendra
Modi seems to have made strong comments on making medicine prices more affordable. During
an inauguration of a hospital in Surat, Modi specifically pointed out govt moves to ensure that
doctors prescribe generic medicines rather than the branded ones. A series of changes in laws
have already been made first in October 2016 & then subsequently in April 2017, which
mandates doctors write the generic names alongside brands. However the fact that the PM
choose to mention this along with recent curbs on stent prices highlights the increasing focus of
the govt on bringing overall healthcare costs down/more affordable, something which EMKAY
has been highlighting consistently as an increasing regulatory risk. Not surprisingly the PM
also spoke of significant pushback from the industry to measures being contemplated by
the govt.
The PM also hinted at more measures including a focus on primary healthcare which may
not be good news for service providers like hospitals. Clearly healthcare is emerging as a
space where political parties can play to populist sentiments. We already have a template in the
West Bengal Clinical Establishment Act which reads quite all-encompassing in its scope and
breath of regulating healthcare industry. Overall the regulatory environment is becoming quite
uncertain not only for the Pharma companies but also for the service providers.
May 5, 2017 5
Some Key Salients of the West Bengal Clinical

Establishment Act 2017
As continuation of recent commentary where we have highlighted increasing govt intervention in
the overall healthcare space, we detail below a recent Act passed in West Bengal which has the
potential to change many assumptions about the Indian Healthcare services space.
The proposed Act which we believe has yet to be gazetted would include the entire gamut
of healthcare establishments including
Single doctor clinical establishments
All medical facilities with or without beds
Includes clinical laboratories
Also includes not just allopathy treatments but also naturopathy, Ayurveda,
Homeopathy, Siddha and Unani systems of medicines.
The Act aims to set up The West Bengal Clinical Establishment Regulatory Commission
(WBCERC) which will have powers over regulation, supervision and grievance addressal.
Each clinical establishment would have to be registered with a designated local health
authority.
The WBCERC would have the powers to set prices for all inpatient as well as
outpatient treatments. Thus every clinical establishment shall strictly follow the fixed rates
including rates for investigations, bed charges, operation theatre procedures, intensive
care, ventilation, implants, consultations, tests and procedures. The act also lays that any
additional treatment or procedures not detailed by the regulatory body shall not attract
additional charges over and above the fixed rates.
Every establishment shall provide proper estimates for treatments not covered under fixed
rates and final bills should not exceed estimates by a certain percentage which would be
prescribed by the govt.
Every clinical establishment having more than 100 beds may endeavor setting up
fixed price pharmacies and fair price diagnostic centres. Its not clear whether the may
in the act is compulsory. Moreover even if not compulsory for now, there is a risk that
becomes mandatory in future. Its clearly a risk to the fledgling Indian pathology industry
which is only now emerging as an organized play.
And lastly the act has laid down that clinical establishments which have received
land/facility from the govt shall provide free treatment for 20% of out-patients and 10% of
in-patients. Moreover establishments owned & managed by corporate entities NOT
availing of govt largesse may also endeavor to provide free treatment for 20% of
out-patients and 10% of in-patients. Again holding out the risk that free patient treatment
becoming compulsory CSR for even corporate entities not availing of govt help.
The WBCERC to be headed either by a current or retired high court judge/chief
secretary/additional secretary.
As usual with every new govt initiative, the proof of the pudding is in implementation and
executive capacity. However like liquor prohibition which has caught fancy as a populist move,
we could well see other states as well as Central govt bring healthcare services under some kind
of regulations.
May 5, 2017 6
Govt constitutes committee to oversee a stronger drug

pricing regime
Further to our earlier notes on govt piling on pressure on domestic Pharma, comes the news that
the Department of Pharma (DOP) intends to further tighten the DPCO 2013 (Drug pricing control
order) with a committee constituted for the same.
The key objectives of the committee (discussed below) seem to be singularly focused on the
mandate of the DPCO 2013 regime and ways to ensure that the same is enforced with minimal
bureaucratic and industry resistance.
The DOP constituted a committee comprises of the Joint Secretaries of the DOP, healthcare
ministry, NPPA, DCGI (Drug controller general of India) with representatives of the PSU Pharma
bodies and the National Health system resource center. The objective of the committee is as
follows
Measures to make the market pricing policy more in favor of the poor patients affordability.
Review the DPCO 2013 and to strengthen its regulatory provisions.
Make the collection of the market prices of drugs more robust and streamline the existing
pharmaceutical database mgmt. system.
Re-engineer the NPPA to ensure quicker implementation of government policy regarding
drug pricing as well as suggest ways to reduce litigation by the industry when drug price
control is being implemented.
Draft detailed SOP (Standard Operating procedure) for identified regulatory functions like
pricing, monitoring and enforcement activities against Pharma companies in overpricing
cases.
The committee has also invited comments & suggestions from the Pharma industry as well as
other stakeholders including NGOs and civil society to share their feedback.
Overall a continuation of the broad theme we have been highlighting of tightening govt controls
not only on Pharma but across the healthcare spectrum.
May 5, 2017 7
New gazette notification on drug prescription; Is the

govt slowly turning the pressure on the industry?
Way back in October 2016 we had highlighted govt moves to ensure that prescriptions also carry
generic names along with the brand names. The gazette notification then was seen as merely
academic given the systemic deficiencies to ensure that generics rather than brands are
prescribed (See detailed write up below).
The govt, as a follow up measure has now introduced a fresh gazette notification where it now
requires doctors to not only mention the generic names but these should be more
prominently written and should be at least 2 fonts bigger than the brand names. We believe
that the fresh gazette notification again by itself is unlikely to change things on the ground for the
reasons detailed below.
However it does warrant a concern that the government is serious about healthcare inflation and
is taking measures which over a long term could be detrimental to branding/pricing power. The
following events indicate that govt is slowly but steadily tightening regulations and norms.
The NPPA has been quite aggressive in bringing a larger ambit of drugs under price control.
This indicates that at the highest political levels there is a cognisance of healthcare price
inflation of which drug prices seen as a key component.
The govt has made attempts to take on the availability of irrational combinations. Though
the move has for the time being stayed by courts, our discussion with the industry sources
indicates that clearly the writing is on the wall and the stay has just bought time for the
organised sector players to shift prescriptions.
The recent caps on stent prices completely caught the hospital industry by surprise. Most
corporate hospitals have a significant dependence on Cardiac care where the markups on
the consumables are significant. The NPPA moved to not only cap stent pricing but also
ensure that the margins lost on stents are not recouped by re-pricing other heads under
cardiac care. This was nothing but de-facto backdoor entry to pricing caps in the healthcare
services sector which was a new development in India.
Even on overall healthcare services (hospitalisation, diagnostics etc.) language in the
recently released National health Policy is likely to make the industry quite anxious with
references to the industry being provided a positive economic environment with lower direct
taxes, higher depreciation, Tax exemptions, custom duty exemptions, provision of land at
concessional rates, 100% FDI allowance etc. amongst others. The govt believes that these
measures have created enabling environment for the industry to attract investment and
investor interest. Hence while recognising the revenue and employment generation the
sector provides, the policy paper also highlights need for the govt to ensure that the growth
of the sector is aligned to national health policy goals. The specific section ends with a call
for the industry to fulfil its obligations in lieu of the benefits provided by the
govt.
May 5, 2017 8
New gazette notification on drug prescription: Path

breaking or damp squib?
The GOI has issued a new gazette notification amending certain rules and regulations under the
Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, now
making it compulsory for doctors to write the generic names of drugs in the prescription.
The earlier clause made it optional for doctors to write the generic names in the
prescription. The objective of the move clearly is to ensure that patients/consumers can avail
of cheaper generic drugs than the brands.
However the move certainly has many issues around implementation and monitoring and our
discussion with industry experts indicates mixed views on the development-
Pharmacist becomes the arbitrator Even assuming a scenario where doctors prescribe
only the generic names, the pharmacist then has the power to dispense any brand/generic
which is most remunerative. Thus the institutional mechanism needed to immediately
change prescribing behaviour on the ground is clearly lacking.
Doctors NOT restricted from writing brands Thus while the new act requires doctors to
prescribe generics, there is no restriction on doctors writing the brand names ALSO on the
prescription. This is a clear loophole. We may well see generic names side-by-side with
brand names on the prescription.
Lack of quality standards The biggest constrain on implementing any move to transition
the industry from branded generics is the inconsistent quality across Indian pharma space
which in turn leads to brands being the only benchmark for discerning the good from the
bad. Absence of a US FDA kind of institution virtually makes it impossible to prescribe pure
generics in the medium term.
Pharmacy chains could be clear beneficiaries Most pharmacy chains are introducing in-
store brands for regular run of the mill drugs e.g. Ibuprofen, Paracetmol, Metformin etc.
These pharmacies can easily present their own in-store brands for generic drug
prescriptions. Long run the mix of emergence of pharmacy chains and even partial
implementation of the new prescribing rules could be structurally beneficial for organised
pharmacies.
May 5, 2017 9
Emkay Rating Distribution

BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months.
SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.
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May 5, 2017 10

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India Equity Research | Pharmaceuticals

Refer to important disclosures at the end of this report

Healthcare industry in government

Granules India 6.9 8.9 12.2 9.9 20.3 15.8

Exhibit 1: Growth drivers in IPM from 2013

Volume Growth Price Growth N.I Growth Value Growth (RHS)

MCI mandates doctors write generic drug names

Prime Minister gives clarion call for generic adoption

Some Key Salients of the West Bengal Clinical

Govt constitutes committee to oversee a stronger drug

New gazette notification on drug prescription; Is the

New gazette notification on drug prescription: Path

Emkay Rating Distribution

Emkay Global Financial Services Ltd.

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