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Pharma: Where is it headed? - Views on News from Equitymaster
 
 
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  • Feb 27, 2007

    Pharma: Where is it headed?

    The period December 2006-February 2007 has not seen a strong performance by the pharma stocks under our coverage with only 3 stocks (out of 12) managing to beat the Sensex. Having said that, the Sensex declined by 1.5% during the said period. In this article, we shall take a look at the 4 stocks in the pharma sector that have managed to perform better than the BSE Healthcare index during the above mentioned period.

    Pharma: The top gainers from Dec 2006 to Feb 2007
    Company Price on
    Feb 26, 2007 (Rs)
    Price on
    Dec 01, 2006 (Rs)
    %
    Change
    BSE-Sensex 13,650 13,845 -1.5%
    BSE Healthcare 3,622 3,770 -4.2%
    Biocon 460 378 21.7%
    Glenmark 568 555 2.4%
    GSK Pharma 1,181 1,178 0.3%
    Nicholas Piramal 236 240 -1.6%

    Biocon: Biocon was the best performer of the lot notching an impressive 22% gain, leaving its competition far behind. The surge in the stock can be attributed to the robust set of numbers announced by the company for 3QFY07. After a slew of poor quarters, the company bounced back during 3QFY07 mainly led by the 'Pravastatin' and 'Simvastatin' supplies to the US market and a robust growth in its contract research businesses. With the manufacturing facilities in Biocon Park turning operational, this has translated into cost savings for the company resulting in operating margin expansion and growth in profitability. However, the dependence on statins is an area of concern going forward and the contribution from the other biopharmaceutical products to total revenues will be the critical driver in the future.

    Glenmark: Glenmark was the second best performer in the three-month period having recorded gains of 2.4%. The company signed an agreement with Merck for out-licensing the former's anti-diabetic molecule for milestone payments of around 190 m euros and received the first upfront payment of 25 m euros in 3QFY07. Besides this, the company also reported strong numbers for the December 2006 quarter largely driven by strong performances by both the US and Latin American markets. Going forward, while the ramp up in the US and Latin American operations are expected to contribute to the overall performance, any adverse developments on the R&D front could impact the receipt of the milestone payments for the 2 out-licensed drugs.

    GSK Pharma: GSK Pharma recorded a marginal gain of 0.3% but beat both the Sensex and the BSE Healthcare index during the three-month period. While the full year performance of the company was impacted by supply shortages and the sale of its animal healthcare business, the company reported an improvement in operating margins and at present has the best operating margins among its peers in the MNC pharma space. Going forward, GSK Pharma plans to launch 3 new products in the domestic market in CY07 and the company intends to keep its product portfolio fresh by launching products from its parent's folio and also through the in-licensing route. The company also plans to increase its focus on the chronic therapy segment, which is growing at a faster pace than the acute therapy segment.

    Nicholas Piramal: Though Nicholas Piramal lost ground from December 2006 to February 2007 declining by 1.6%, the fall was much lesser than the Healthcare index and that of most of its domestic peers. The increasing contribution from its custom manufacturing business (with global innovator companies) to total revenue has led the company to report strong results for 3QFY07. Nicholas' strategy involves partnering with global pharma majors to drive its custom pharma sales rather than focus on generics and this is expected to be the key growth driver going forward. The company has been active on the acquisition front too acquiring Avecia and Pfizer's Morpeth facility in the UK to further bolster its custom manufacturing revenues.

    To sum up...
    From a long-term perspective, the outlook for the sector is positive with growth in generics expected to play a key role to drive revenues of domestic pharma companies. With pressures on global pharma innovators to reduce costs and spruce up margins, the CRAMS model is also expected to benefit in a big way. For MNC pharma companies, which are heavily focused on the domestic market, introduction of new products will be critical. Concerns remain with the increased competition and pricing pressures in the global generics market. For MNC pharma, 'price negotiation' for patented products will be the key factor to watch out for. More importantly, the announcement of new DPCO policy will play a crucial role in determining the fortunes of the Indian pharma companies (both domestic and MNCs). Having said that, considering all these factors, valuations of companies are important and investors need to adopt a stock-specific strategy while investing in the sector.

     

     

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