Pharma firms valuations do not factor in threats from acceleration in generics adoption in India

The current implied domestic valuations of pharma companies do not adequately factor in threats from any acceleration in the pace of adoption of unbranded and trade generics in India, as per a report by Kotak Institutional Equities.

In another instance exemplifying the Indian government’s intent to push generics, it has set an imposing timeline to achieve its objective of reaching 25,000 Jan Aushadhi stores. The government targets to increase the store count by 2.5X to 25,000 in less than 2.5 years (end-FY2026), the report said.

Apart from store additions, there is also an effort to improve the geospatial coverage of stores (skewed toward South India currently). On the other hand, the ongoing clamp down on non-compliant manufacturers augurs well for our coverage, it said.

“Factoring in the impact of lower prices in the trade generics and Jan Aushadhi (unbranded generics) channels, we estimate a 70-110 bps annual dent on branded growth at least until FY2028E. With Jan Aushadhi’s rapid expansion, there is a risk of this hit on IPM swelling further,” the report said.

Currently, most domestic businesses are trading at an implied valuation of 30-35X FY2025E EPS for acute-heavy companies and 35-40X FY2025E EPS for chronic-heavy companies.

“We note that current valuations imply the ongoing steady decline in the share of branded generics will continue and do not factor in any further growth deceleration over the next few years,” it said.

The government has been focusing on improving access to affordable drugs through an aggressive roll-out of Jan Aushadhi stores. The number of stores has grown by more than 100X in the past 9 years from only 80 in CY2014.

As of November 30, 2023, 10,006 stores have been opened across 753 out of the total of 785 districts in the country. In August 2023, without providing a timeline, the government had announced its intent to open 25,000 Jan Aushadhi stores across India, the report said.

Recently, the government announced an imposing timeline of achieving this target of 25,000 Jan Aushadhi stores by March 2026. The Jan Aushadhi program (PMBJP) reported sales of Rs 12.4 bn in FY2023 and Rs 7 bn in 1HFY24.

The government is targeting sales of Rs 14 bn for the PMBJP program in FY2024E.

According to the government, the PMBJP program resulted in savings of Rs 74.2 bn (6X PMBJP’s sales) to Indian citizens in FY2023.

Over the past nine years, the government estimates the combined savings from this program to be Rs 230+ bn.

As part of PMBJP, a margin of 20 per cent on the retail price and an incentive of 15 per cent of monthly purchases, subject to a ceiling of Rs 15,000 per month is given to store owners, the report said.