Better Times Ahead For Indian Pharma

Aug 10, 2009

In this issue:
» Indian pharma companies allying with MNC counterparts
» Global economy has hit a bottom, believe Krugman, Gartman
» Buffett's favouring bonds over stocks as of now
» India's pressing urban infrastructure problems
» ...and more!!

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There was a time when the world's big pharmaceutical giants (also known as 'Big Pharma') such as Pfizer, GSK Plc, Sanofi-Aventis and the like hated the guts of generics players. And why not? While these biggies invested billions in research to develop path-breaking drugs, generic firms were making cheaper versions of patented products thereby denting revenues and profits of the innovators.

And what is more, the pressure on governments to reduce healthcare costs in a bid to make medicines more affordable has not been of much help to them (Big Pharma) either. In this regard, these innovator companies have also themselves to blame. After all, even though their research budgets have mounted over the years, they do not have much to show for it as the number of drugs approved in recent times is a shadow of the number of approvals in the 1990s.

The landscape now seems to be changing. As per The Economist, a trend is starting to emerge wherein innovators pharma companies are dabbling in 'branded generics' to protect their profits. What it means is that these biggies launch 'branded' but not 'patented' versions of their original drugs for higher prices than unbranded generic equivalents. And to do so, they are embracing their sworn rivals (the generics players) by either acquiring them or entering into partnerships with them.

Notable examples in India include Daiichi Sankyo acquiring a majority stake in Ranbaxy and GSK Plc tying up with Dr. Reddy's. Generic companies are not complaining either. After all, they are getting the opportunity to market their products in association with global brands and earn robust revenues and profits themselves.

The only party at a disadvantage seems to be the consumer who ends up paying a higher price for these drugs. But then healthcare is not akin to FMCG and patients are comfortable sticking to a medicine prescribed by doctors even if it means doling out more money.

Anyways, we believe that this latest trend augurs well for Indian pharma companies since many of them are focusing on generics. Not only will these alliances enhance their performance, but more importantly will bolster their image as they can now bank on the brands of global innovators. This will in many ways also induce countries to stop perceiving generic medicines as 'inferior', thereby giving an added booster dose to the pharma industry.

 Chart of the day
If the spike in crude oil prices in the 1970s was attributed to supply squeeze from the Middle East, the spike in oil prices that reached a crescendo in July 2008 can be attributed to booming demand from China and India. And with good reason! Today's chart of the day shows how China and India are increasingly consuming much more crude oil than they produce. However, the other 2 members of the 'BRIC' club - Russia and Brazil fare much better. While Russia (not featured in the chart) is a major producer of oil & gas (and produces 3.5 times its consumption), Brazil is also almost self sufficient.

Data source: BP Statistical Review, June 2009

The average Chinese and Indian is nowhere close to consuming oil at the rate which the average Westerner does. Given the sheer size of the consuming class that is likely to emerge in these Asian giants in the days to come, oil prices are only set to move upwards in the long term. It also means India should do whatever it can to encourage domestic production of oil & gas. A robust policy framework, that gets its tax incentives correct and provides little scope for feuding brothers, would be a good start.

Economists are in heavy demand these days. At least for their sound bytes if not for anything else. And if one has the distinction of being a Nobel laureate, all the more better. Little wonder, Paul Krugman is grabbing a lot of attention currently. And the latest opinion by him, perhaps, after a lengthy period of time has some positive ring around it.

As per Bloomberg, the Nobel Prize winning economist believes that perhaps the month of August 2009 will go down in history as the month when the US economy bottomed out. "What we're seeing is stabilization. We're seeing that the great freefall and the nosedive seems to be over. It's leveling out but that is very different from returning to normality," is how the bearded economist chose to put it across. His second line perhaps needs a little more emphasizing. It should be borne in mind that he has talked about the US economy creating a new trend-line and not going back to the previous peaks, which effectively means lower returns for shareholders in the future than what was earned in the past.

Krugman's view is shared by Dennis Gartman, the author of the hugely popular daily newsletter, The Gartman Letter. "From here out on the data is going to get better," Gartman said to Bloomberg. And just as Krugman, he also added a caveat stating that it's not going to get dramatically better, but the worst is clearly over. With two people of such stature converging on the same views, it may not be too much of a stretch to believe otherwise. Unless of course, something really unexpected blows up.

A leading newspaper has reported that agitated over prolonged power cuts and low voltage, residents of DLF city in Gurgaon have threatened to pay only 50% of their monthly electricity bill from October. With power cuts ranging from 6 to 8 hours on a daily basis, what do you expect them to do?

And this is just one of the infrastructure woes that residents of this satellite city face. Water is scarce, and roads (despite massive construction all these years) still seem stretched. We faced these issues firsthand in our recent trip to the city for the purpose of meeting some companies located out there. The fact is that these issues validate the urgent need for infrastructure development in India's urban centres that remain choc-a-bloc with problems pertaining to basic needs like water, roads and electricity.

After last week's drubbing, stockmarkets across Asia opened today on a strong note. Major gains were seen across Hong Kong (up 2.4%) and Japan (up 1%). As reported on Bloomberg, these gains were on the back of a slightly positive US employment data released late last week and improvement in machinery orders in Japan.

As for the Indian markets, the week has started on a volatile note. After opening in the positive, the BSE-Sensex drifted deep into the negative during the ensuing hours only to head back into the green again. At the time of writing, the Sensex was trading down by around 90 points (0.6%).

Berkshire Hathaway's announcement of its June quarter results last week revealed an intriguing trend - of late, the company has been aggressively buying corporate debt and securities issued by governments outside the US, exceeding even its purchases of stocks.

As per a Bloomberg report, Berkshire held about US$ 11.1 bn in foreign government bonds as of June 30, compared with US$ 9.6 bn three months earlier. In effect, Warren Buffett owned Berkshire spent about US$ 2.6 bn on buying fixed maturity securities in the June quarter, compared to a measly US$ 350 m on stocks during the same period. His purchase of government securities of countries other than the US are quite understandable, and may be seen as part of his strategy to dodge the evil of inflation which is almost sure to haunt the US over the long term, more so with the Fed's printing presses working in overdrive the way they are right now.

 Today's investing mantra
"As long as we can make an annual 15 percent return on equity, I don't worry about one quarter's results." - Warren Buffett

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3 Responses to "Better Times Ahead For Indian Pharma"


May 24, 2010

I think cipla also in the eyes of MNC


Manoj Barve, Pune

Aug 13, 2009

I wonder why we lack on originality. We are world champions in generic drugs (which is a good thing,) but fail to develop any ground-breaking new drugs on our own. We are experts at making use of and developing systems based on SAP, Oracle, BAAN, Microsoft but cannot develop anything original comparable to those softwares. I think we are a nation of creative imitators rather than of original innovators. Lack of the culture of innovation, upbringing and education, scares funding of basic and applied research, last but not least insufficient enforcement of intellectual property laws make it lucrative to imitate than innovate.


Samir Khurana

Aug 10, 2009

Rather than commenting on this edition, I would like to comment on the 5 Minute Wrapup - I think its a brilliant initiative - some very sensible information, well documented!!! The size is perfect (brief but informative) and Chart Of The Days rocks!! My personal favorite. Thanks Equitymaster!!!

Equitymaster requests your view! Post a comment on "Better Times Ahead For Indian Pharma". Click here!