US$ 69 bn booster dose for Indian pharma

Apr 27, 2010

In this issue:
» Remittance flows to India have been resilient
» Global recovery has been uneven
» Faber's views on gold and Geithner
» US financial companies to have turned a corner
» ...and more!

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Ranbaxy has faced several setbacks in the last couple of years. Not only did the company violate the good manufacturing standards of the US FDA, but it also saw its performance dwindle on account of volatile currency fluctuations. Sun Pharma has also been at the receiving end. As if Caraco's troubles with the US FDA were not enough, the company might have to dole out damages for a blockbuster drug it had launched at risk.

These developments, however, are isolated to certain companies only. Infact, for the entire pharma sector, there are opportunities galore in the US generics market. Fathom this. In less than 24 months, 26 blockbuster drugs worth over US$ 69 bn (thrice the size of the domestic industry) are going off-patent in the US, the world's largest drug market. And the companies which stand to gain the most include the likes of Dr.Reddy's, Cadila, Lupin, Ranbaxy and Sun Pharma amongst others. This is because all of them have a strong presence in the US. Which means that there is considerable scope for revenues to increase from this market.

This is not to say that there are challenges. The dynamics of the US market have changed over the years. Indian pharma players have to compete not only with global generics players but also with each other. This means that the actual addressable market size tends to be a fraction of the total current value of branded drugs that lose patents. Thus, the key to sustain advantage in this market is to step up the pace of new product launches and also focus on niche products having limited competition. Therefore, despite the competition, these 26 blockbuster drugs going off patent is still an opportunity as it provides considerable bandwidth to Indian players to corner a good enough portion of the pie and enhance revenues. Indeed, after the volatility that this sector has faced in the past, the timing could not have been better.

 Chart of the day
The global financial crisis had a huge impact on the flow of capital around the world. So much so that even remittances by migrants were impacted. Having said that, remittances were more resilient last year as compared to private capital flows, which declined steeply. Infact, as today's chart of the day shows, India led the pack in 2009 with remittances totaling US$ 49 bn. What is more, as long as Indians migrate to the US, Middle East and Europe, the likelihood of these inflows waning seems remote.

Data Source: Mint

Rewind back to the period between the year 2003 and 2007. Memories of a synchronous bull market across asset classes and geographies come rushing back. And what more, even the crisis that followed was nearly as synchronous. However, as an article in The Economist points out, the global recovery seems far from synchronous. Emerging markets have recovered faster than developed economies. And the gap is only set to become wider as time goes by. This could lead to a lot of dirty outcomes. Chief among them would be the need for developed nations to keep interest rates at artificially low levels. And that too for an extended period of time.

There is every chance that this cheap money look for higher yields and flows into emerging markets. This could in turn lead to asset bubbles and greater than normal inflation in these nations. Hence, policymakers in emerging markets need to be on their toes. Countries like China and India will have to take some bold steps to curb this menace. Or else, the cheap money will wreak havoc on their shores as well.

Call this as an indicator that suggests how long you can hold on to your gold investments! Marc Faber, the noted author and investor, has told international media that he will hold his gold as long as Geithner and Bernanke are in power. He says, "I own my gold and I will never sell it, especially when I see clowns like Ben Bernanke, Larry Summers, Tim Geithner."

While these are harsh words for these policymakers, Faber has a valid point. And it stems from the inflationary policies of these three guys in charge of the US financial and central banking system. With the US government, as per directions from these guys, busy printing dollars and pumping them into the global economy, gold does seem a good asset to hold But only till the paper currencies like the dollar continue to lose their worth. Well, when will this end is anybody's guess!

It's barely been a year or two since the darkest days of the credit crisis. A time when none could see any light at the end of the tunnel. More so for the financial companies in the US which were at the epicenter of the crisis. But they already seem to have turned a corner. Or atleast that is what they would like everyone to believe. As per a Bloomberg report, Bank of America's chief executive officer is known to have said recently that 'the worst of the credit cycle is clearly behind us' and that economic growth is 'real'.

JPMorgan's CEO said that the US economy may be poised for a 'strong recovery'. Infact, the four biggest banks have since repaid most or all of the US bailout funds. What we remain skeptical of though is that as these companies deleverage, the US government is the one soaking up all these excesses in the system. If the US does not handle its tricky balance sheet prudently in the coming years, any recovery in the short term will turn out to be only illusionary.

Here's a quiz: By 2030, Mumbai's GDP is expected to exceed that of Thailand and Hong Kong. Is that a good thing or bad? Bad, in our view. It indicates that India's economic growth is going to be extremely urban centric. In fact, as per a recent McKinsey report, Indian cities will expand massively. Urban population will surge by 74%. India will have 68 cities with a population of more than 1 m, 13 cities with more than 4 m people and 6 mega cities with populations of 10 m.

Cities will also create 70% of the new jobs. All this will put huge pressure on the infrastructure of cities. And India spends just US$ 17 per head on infrastructure in its cities. That's about 15% of what China spends. The report says we need US$ 2.24 trillion to build the city infrastructure. That's an incredible figure. Our track record at focused and sustained spending on infrastructure is rather weak. Hence, in our view, we must also find ways of spreading economic progress beyond the cities.

Indian markets had a volatile trading session with the indices languishing in the red for the larger part of the day. Although there were brief attempts to push above the dotted line, these proved futile. At the time of writing, the BSE-Sensex was trading lower by about 40 points (0.2%). Barring Japan, most Asian indices were trading in the red. The European indices had also opened in the negative. While losses were largely seen in metals, auto and banking stocks, FMCG and healthcare stocks found favour.

 Today's investing mantra
"The key to making money in stocks is not to get scared out of them." - Peter Lynch

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2 Responses to "US$ 69 bn booster dose for Indian pharma"


May 1, 2010

Yes.It is a good opportunity for Indian pharma majors. Their revenues must go up in the process considerably. I like the coverage you made on this issue.


Anupam Garg

Apr 28, 2010

But one must note the gimmicks of the US had ruined the party will ruin it again..its just a question of when.

The chart fails 2 address 2 compare the figure with the number of NRIs which must have increased @ the same pace.

Point well taken on the golden article

Interesting take on the cities' and poor mantra really

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