Why Abbott India Outperformed Pharma Peers

The Indian subsidiary of U.S.-based Abbott Laboratories has gained nearly 32 percent so far this year. By comparison, the benchmark Nifty Pharma Index fell nearly 9 percent and most of the drugmaker’s Indian peers declined.

The company’s outperformance can be attributed to its brand strength and the complexity involved in making some of its key products, Sapna Jhawar, pharma analyst at Indianivesh Securities, told BloombergQuint over the phone. Limited competition and a strong brand recall are also why Abbott India’s products are doing well even if some them are under price control, she said. “The number of launches the company does annually is very positive.”

Diverse Portfolio

Abbott is India’s second-largest drugmaker with 6.16 percent share, only behind Sun Pharmaceutical Industries Ltd.’s 8.13 percent, according to the pharmaceutical market researcher AIOCD AWACS. Eight of Abbott India’s brands sell the most in the country, while two registered second-highest sales, a recent report by IDBI Capital said.

Abbott India has yet to respond to emailed queries about strategy. This story will be updated once they respond.

The company’s management said at its annual general meeting that Abbott India has a leadership position in 10 brands and plans to build 10 more to drive growth by entering newer therapy areas like menopause and liver disease to tap “unmet needs”. After launching 16 products in 2018-19, the drugmaker targets 12-14 in the ongoing fiscal.

It’s readying to launch as many as 100 products over the next three-five years, according to a report by Ashika Stock Broking.

Abbott India restructured its portfolio into key business areas like women’s health, gastroenterology, consumer care, central nervous system, metabolics, general care and vaccines to achieve market-beating performance in the past few years, Ranvir Singh, pharma analyst at IDBI Capital, wrote in a recent note. “Products in niche therapy areas like menopause and liver disease should help growth.”

The company’s management also said at the AGM it will slash third-party manufacturing by half to around 30 percent in the next three years by shifting key products to its Goa unit. Streamlining the unit can help the drugmaker accommodate these products without adding capacity, IDBI Capital said, and reduced dependence on these products would aid margin.

Abbott India also distributes Novo Nordisk A/S’ anti-diabetic products in the domestic market, for which it receives a 5 percent margin. Five out of seven distributed products grew faster than the market, according to Ashika Stock Broking. Its entry in the nutrition segment would further diversify its product portfolio, the brokerage said.

Management Optimistic

The healthcare landscape in India is expected to improve in the coming years, driven by rising incomes, greater health awareness and diagnosis through technology, Munir Shaikh, chairman at Abbott India, said in the company’s annual report. Government-led initiatives such as Ayushman Bharat and access to insurance will also help.

Strong presence in India and better research and development aided sales, he said, adding that the merger of Solvay Pharma India provided an expanded range of healthcare products. 2019-20 will be another year of consolidation and acceleration, he said.

Abbot Pharma grew 1.8 times faster than the pharma market in 2018-19, the annual report said citing data from the clinical research firm IQVIA. Ambati Venu, managing director at Abbott India, attributed the drugamaker’s performance to women’s health, gastroenterology, metabolics, pain management, central nervous system and vaccine segments.

Growing Top Line

Abbott India’s revenues grew in double digits for the second straight quarter in the three months through June on the back of growth in its women healthcare segment. Revenue rose at an annualised rate of 15 percent over the past five years. A better product mix aided the company’s operating margin, which grew 22 percent in the same period. Net profit, too, rose 22 percent over the past five years.

No Debt

Abbott India has no debt and cash worth Rs 1,679 crore as of March. The drugmaker has improved its cash conversion cycle—time to convert investments in inventory to cash—to 40 days from 32 days last year, according to its annual report. That resulted in higher cash flow from operations in 2018-19, which jumped nearly fourfold to Rs 499 crore.

The company has a consistent dividend policy, in which it distributes a third of its profit to shareholders—every year since 2008.

Premium Valuations

Shares of the company have surged nearly 150 percent from their 2017 low as investors bet on growth.

Multinational pharma firms trade at a premium compared with their Indian peers on factors like parentage and greater exposure to domestic market. And the valuations of Indian generic drugmakers have fallen recently due to weaker export markets, among other factors.

The company is sitting on a huge cash pile and has one of the best return-on-equity in the industry and better growth outlook supports expensive valuations, Singh of IDBI Capital said. But the stock offers limited upside, he said.

Jhawar, however, said valuation is at a discount to the peak multiple. She isn’t worried about high multiples, saying that Abbott is a compounding story with strong financials that can be sustained.