No more cheap drugs for the world's poor? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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No more cheap drugs for the world's poor? 

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In this issue:
» Buffett says bonds should come with a warning label
» India's IIP growth slows to 1.8%
» No more fuel supply woes for power sector?
» Real estate developers feel investor heat
» ...and more!


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00:00
 
India's US$ 26 bn drug industry has led companies like Cipla, Ranbaxy and Lupin etc to not only become household names but also major players in the global pharma market. The industry has been growing at a rapid rate of around 15-25% a year. But probably the most interesting part of Indian companies versus 'Big Pharma' is that the former's drugs are cheap, significantly so. For years, we have been supplying low-cost yet good quality generic drugs across the world, saving millions of lives. No wonder India is called the pharmacy of the developing world.

Let's look at an example. More than ten years ago, Cipla produced generic drugs for HIV-AIDS treatment that could treat a patient for US$ 300 a year. This was a fraction of the branded product's cost of US$ 10,000-12,000 a patient a year. Today these drugs are even cheaper. India currently produces more than 80% of the world's medicine for HIV, supplying to poor countries in Africa and Asia.

But, will India and the European Union's (EU) latest effort to strengthen trade put an end to the supply of cheap generic drugs for the world's poor?

The EU is India's biggest trading partner. Last year the region accounted for US$ 92 bn in bilateral sales. A trade pact between the two could lift annual sales to US$ 237 bn by 2015. These negotiations between the governments have been going on for four years. However the deal seems to finally be reaching a close. But most campaigners are vehemently protesting the deal. Two provisions on 'intellectual property rights' and 'investor lawsuits' may make it easier for global pharma giants to sue the Indian government, drug producers and distributors.

This move could curtail India's production of a number of lifesaving drugs. Or it could cause prices to skyrocket and reduce affordability. While pharma companies and governments will be able to benefit from higher drug prices, the poor of the world will suffer. Millions of needy patients across the world, including India could be denied treatment at higher costs.

Should billion dollar trade negotiations ignore billions of poor people? Let us know your comments or post them on our Facebook page / Google+ page.

01:40  Chart of the day
 
Forbes' most recent tally of the world's richest people puts Facebook founder Mark Zuckerberg's net worth at US$ 13.5 bn in 2011. This ranks him 52nd in the world. But the highly anticipated initial public offering (IPO) of the company will see him as well as various venture capital firms in the Silicon Valley hit pay dirt. Mark's 28.4% stake in the company could make him worth as much as US$ 28.4 bn. Today's chart of the day shows that Facebook's Mark Zuckerberg is set to become the world's richest man on an age adjusted basis. At 27, this Harvard dropout is the youngest in the billion dollar club by a significant margin. While Bill Gates and Warren Buffet may have more billions than he does, Mark Zuckerberg will have made around US$ 1.1 bn for each year he has been alive. Truly a significant achievement! The technology world has ushered in a number of young, hot shot CEOs. However only time will tell how they live up to public scrutiny.

Data source: The Economist
Notes: * Based on Facebook's IPO valuation of US$ 100 bn
** Includes family

02:10
 
Fixed income securities like bonds are known for their ability to provide returns that are low risk in nature. In fact, Government bonds go a step further and are known to give virtually risk free returns. However, is all of this true in today's environment? We don't think so. Governments across the world are neck deep in debt. Hence, either a debt default or negative real interest rates look like a real possibility. In fact, the latter seems to be already happening in many parts of the world these days.

Little wonder, someone has asked for returns on Government bonds to be called as 'return-free risk' rather than 'risk-free returns'. Warren Buffett, the investor par excellence has echoed pretty much the same sentiment. He has argued in an article that current rates, especially in the US, do not come anywhere close to offsetting the purchasing power risk that investors are assuming. Thus, as per Buffett, bonds should come with a warning label. We fully agree. While stocks may always end up beating returns from bonds over the long term, the gap between the two widens further in the environment that we seem to be living in.

02:52
 
Pre budget anxiety has started building up even as we are about a month away from the Budget day. But players in the power sector have little to worry. True, they have had a terrible year in terms of operating performance. Investors too chose to shed exposure to the sector fearing further downside. But the early indicators of what the budget holds in store are encouraging enough. Power producers had to earlier not just worry about controlling costs and tariffs but also secure coal supplies. This is because they had to bid for new projects based on tariffs. At the same time they were to bid for coal blocks. Doing so simultaneously presented a complex situation to them. Stiff bidding would not just make projects unviable but also hurt execution. To ease their worries the government has now exempted power companies from bidding for coal blocks. Those would be allocated to them directly for captive usage. Given that shareholder returns for the power sector are already capped, protecting margins for such essential infrastructure sector makes sense.

03:20
 
The tepid India's Industrial Production (IIP) numbers for the month of December 2011 may have shocked most industrial experts. Output from India's factories, mines and utilities grew by just 1.8% in the month of December as compared to the same period last year. Together with, the sub-7% GDP growth projection for FY12, this figure indicates that there are still signs of a slowdown. Industry experts believe that the tighter monetary policy by Reserve Bank of India (RBI) has been one of the most important factors for the weaker growth scenario. With inflation figures easing, the RBI paused rate hikes since late last year. We believe that the present scenario of slower growth rates and inflation on downward spiral sets the perfect stage for RBI to take a serious look at rate cuts.

03:45
 
Indian real estate landscape is witnessing a not so favorable trend these days. Most of Private Equity (PEs) firms have either already exited or are planning to shut their doors on real estate. With more and more PEs exiting investments through buy back by the promoters, one may get an impression that realty sector is generating healthy cash flows. However, the facts suggest otherwise. A sizeable chunk of such buy backs are being financed through debts taken at whopping rates of over 22%. To make matters worse, the market conditions are not good enough to assure higher rate of return on equity despite such high costs of funds.

The real estate industry is facing a demand decline and funds to the industry are quickly drying up. In such times, such deals don't seem to make business sense as far as the developers are concerned. However, the exit option is a part of the contract. Further, developers don't have a choice in the matter. If they don't go along with the buy back, chances are that PEs will exercise 'put' option. This will mean a heavy penalty for the developers. All is not negative though. The current trends suggest a rekindled interest of global investors in such assets. This may help facilitate secondary deals. This not only gives exiting PEs an easy exit, but spares the developer as well.

04:30
 
World stock markets exhibited a mixed performance during the week. While Asian stock markets including India were up, stock markets in Europe and US were down on continuing concerns in Europe. The positive news that Greece would cut costs and keep from defaulting on its debt also could not push the stocks up. The earnings season in the US has been mediocre and there was news about S&P downgrading 34 Italian banks.

The Indian stock markets were up by 0.8% during the week. A lower than expected Index of Industrial Productivity (IIP) number at 1.8% in December along with a revised GDP outlook of 6.9% as against 8.4% in the previous year were the reasons of worry during the week. India's trade deficit too has soared to uncomfortable levels of US$ 14.7 bn.

Source: Yahoo Finance

04:50  Weekend Investing Mantra
"In one important respect we have made practically no progress at all, and that is in human nature." - Benjamin Graham
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7 Responses to "No more cheap drugs for the world's poor?"

Mohammed Asgharuddin Ahmed

Feb 18, 2012

This deal should not go through when it is at the cost of unaffordable treatment of its poor citizens, let alone the world's poor.
When Indians and the rest of the developing and underdeveloped nations get benefited, India shall continue producing generic/cheap drugs without getting under the influence of condtional trade pacts.

Like 

N.M.R.Shreeedhar

Feb 12, 2012

Hi, how the India_EU deal will jeopardise the manufacture of life-saving drugs in India or make such drugs more expensive is not clear. If either of these is likely to happen, adequate safeguards need to be built-in. regds

Like 

L.Subramanian

Feb 12, 2012

While it gives satisfaction to know that our Indian companies will be in a position to earn more than the previous years, it is agonizing to note that the poor people will be deprived of cheap medicine. Any way enlightening article.

Like 

dinesh shah

Feb 11, 2012

it must be strongly objected to otherwise,more people will die of unavailability of the treatments. The country can ill afford this.

Like 

manoharkantak

Feb 11, 2012

This situation was expected. The Drug Price Control Committee under the Ministry of Petroleum & Fine chemicals to please the politicians went on bringing drugs under price control and reduced the prices of drugs to such an extent that, it became difficult for Pharma companies to operate profitably. In turn to stay away from the price control the pharma companies launched new drugs that were out of price control. The drugs were expensive but not necessarily superior and the story continued.The time will come when many Pharma companies will shut down and we will either import the medicines or all Indian companies will be taken over by foreigners. This is done by politicians under the influence of foreign lobby and not in the interest of people and nation.

Like (1)

saby chacko

Feb 11, 2012

The european union is trying its best to choke all our means to supply cheaper goods and now presently generic drugs so as to benefit their companies and in this case pharma companies!!!
I only hope our govt does not fall into this trap.This will increase the cost of life saving drugs in the market.

Like (1)

subhasis das

Feb 11, 2012

History always says the wealthy always exploits the poor and never care for poor which is true but excptions will always be there.....to cite examples

Like (1)
  
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