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Novartis: Analyst meet extracts
Sep 4, 2006

Novartis held an analyst meet in July 2006 to discuss the performance of the company and the growth prospects going forward. Here are the key takeaways: Overview of the Indian pharma market: The Indian pharma market is predominantly a ‘branded generics’ market with around 25,000 brands. The market has grown at a CAGR of around 9% in the last five years largely driven by new introductions of branded generic drugs by local players. MNCs account for around 21% of the pharma market. The entry barriers are low with more than 5,000 manufacturing units. Also, while the purchasing power is increasing, the willingness to spend on healthcare in India still remains low. That said, the company expects the Indian pharma market to grow at a CAGR of 10% over the next three years.

Product patent law: While India has adopted the product patent law, the debate still continues on certain issues. For instance, one such debate is on the issue of data exclusivity. The law related to the data exclusivity issue has not yet been passed. The industry, especially the MNCs (and now R&D focused domestic companies as well), have taken a stand that data exclusivity has to be provided for a minimum of five years in confirmation with the global industry standards. Novartis India has stated that at present no country has data exclusivity for less than five years.

The other bone of contention is the definition of patentability. Currently, the patent law provides patents only to NCEs and not to incremental innovations. Besides, salts, isomers and polymorphs are not granted patent by the Government. The industry has opposed this provision demanding patents for incremental innovations as well. This is because Indian research is still in its nascent stages and the Indian pharmaceutical industry is more capable of innovative adaptation rather than coming with a path-breaking new molecule.

DPCO and price control: As has been the view of most pharma companies, Novartis has also asserted that if the new DPCO policy in the proposed form gets passed, the same will be detrimental to the entire Indian pharmaceutical industry. Novartis is of the view that drug prices should be ‘monitored’ and not ‘controlled’. It must be noted that a restrictive pricing policy could result in drugs being pulled out of the market leading to a shortage. It could also see an increase in spurious drugs.

Outlook of the pharma business: Novartis plans to drive growth of this business by exploring in-licensing opportunities and focusing on life cycle management of existing products Novartis plans to launch 2 to 3 products on an average every year, which may or may not be patented. That said, the company plans to launch patented products into the country early 2007 onwards. That said, uncertainty about the price control regime, changes in regulatory environment, adverse provisions in the product patent law and the continuing problem of counterfeit or spurious drugs remain the major challenges.

Generics – The spoke in the wheel: Novartis’ generics business continues to face increased challenges. The anti-TB business has witnessed pressure, as the government imposed price reduction on some anti-TB products. The company intends to focus on promotional programmes to keep loyal customers and concentrate on the marketing efforts of products such as ‘Foristal’, which is Novartis’ top ranked product in the generics business having cornered 14% market share.

OTC initiatives: Novartis’ top brands in this segment include ‘Otrivin’ with 30.5% market share and ‘Calcium Sandoz’ with 14% market share. The company plans to drive the growth of this business through new global brands to be introduced in India and new variants in the Calcium range. That said, continued delay in the announcement of a government policy for the OTC segment and sustained investment in brand building are the major challenges. It must be noted that in India, OTC products can be directly advertised to the consumer, which is not the case for prescription products. For the latter, the government does not allow advertising. These products have to be sold to the doctors through sales initiatives.

What to expect?
At the current price of Rs 487, the stock is trading at a price to earnings multiple of 16.2 times its trailing twelve months earnings. Going forward, the pharmaceutical and OTC businesses are expected to be the key growth drivers. The performance of these two segments will largely be driven by new product launches. With the advent of the product patent law in India, Novartis has unveiled plans to launch patented products in India from 2007 onwards. Having said that, we expect the generics business to witness pressure going forward owing to the difficult pricing environment in the anti-TB segment. While we have a positive view on the company from a long-term perspective, Pfizer and Aventis remain our preferred plays in the MNC pharma space.

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