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Pharma: Big guns, big dreams!

Feb 13, 2006

Companies from the pharma sector posted mixed results in the recently concluded December quarter. Barring Ranbaxy, the other large-cap pharma companies showed a relatively better performance. We have included four large-caps for the purpose of analysis of the sector's performance during the December quarter. These include Ranbaxy, Dr. Reddy's, Sun Pharma and Cipla. Glaxo has been excluded as the company has yet to declare its results.

The big guns in the pharma space
(Rs m) Dec-04 Dec-05 Change
Net sales 27,847 31,909 14.6%
Expenditure 23,063 27,497 19.2%
Operating profit (EBIDTA) 4,784 4,412 -7.8%
EBIDTA margin (%) 17.2% 13.8%  
Other income 597 1,665 178.9%
Interest (net) 183 295 61.2%
Depreciation 871 1,233 41.6%
Profit before tax 4,327 4,549 5.1%
Tax 453 252 -44.4%
Extraordinary item - 285  
Minority interest 22 42 90.9%
Profit after tax/(loss) 3,856 4,540 17.7%
Net profit margin (%) 13.8% 14.2%  
* Includes Ranbaxy, Dr. Reddy's, Cipla and Sun Pharma

What does the analysis say?
The consolidated topline grew by a decent 15% YoY driven mainly by the strong growth in exports. While the generics markets of US and Europe continued to face pricing pressure (both Ranbaxy and Dr. Reddy's witnessed a decline in its US generics business), exports to the semi-regulated markets of Russia, CIS, Latin America fuelled the exports growth. These companies also performed well in the domestic market with the lifestyle portfolio chiefly contributing to this growth. Margins for the sector fell by 340 basis points on the back of a rise in R&D expenditure and selling & distribution expenses. All the four companies have stepped up their R&D expenditure both in the generics space (to capitalise on the generics upswing in 2006) and NCE space (as a long-term strategy). However, the R&D spend was relatively much lesser in Dr. Reddy's case due to its partnership deal with ICICI Venture.

Other income bloated by 179% YoY, which was mainly due to compensation received by Cipla against the insurance claim pertaining to damage of the company's inventory during the floods. Extraordinary item includes the consideration received by Ranbaxy for divesting its allied businesses in a bid to focus on its core business of pharmaceuticals. Depreciation witnessed a 42% YoY rise on account of the considerable spurt in Cipla's depreciation charges. This was due to substantial additions made to fixed assets at Goa and Baddi. All these factors put together, resulted in an 18% YoY growth in the bottomline.

What to expect?
While the fundamentals driving the generics market continue to remain strong, the brutal pricing environment is a cause for concern. It must be noted that while competition has tremendously increased, the patent expiries this year slowed down to a trickle, escalating the extent of price erosion. Having said that, while the competition most probably will show no signs of abating, a considerable rise in the patent expiries of blockbuster drugs in the coming years is likely to provide a breather to generic companies and boost revenues. The ability to manufacture drugs at the cheapest cost and leverage one's marketing and distributing network to increase reach will be the key to survival.

We believe that partnerships are likely to play a crucial role in driving growth. This could be in generics (contract manufacturing, authorised generics) or research (R&D collaboration, contract research, out-licensing of molecules) or custom manufacturing for innovator companies. In the domestic markets, with the introduction of the patent law and subsequent slowdown of product launches, albeit at a gradual pace, companies entering into in-licensing agreements with innovator companies will have the upper hand. This will ensure a steady flow of product launches in the domestic market.

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