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Pharma: Recovering from the lows of 2009

Mar 19, 2011

In the past 2 years, the Healthcare index has outperformed the BSE-Sensex by 8%. The table below shows that that BSE Healthcare Index gave returns of 133%, while the BSE Sensex gave returns of only 125%. Among Indian pharma stocks, the top two in the list were Cadila Healthcare and Dr. Reddy's Laboratories. If one would have invested in any one of the two, the investment would have been worth 4 to 5 times today. Sounds amazing, but who knew this would happen?Obviously the stock returns have been backed by a strong business performance by both these companies. Let us check the few main pointers due to which the companies performed exceptionally.

Dr. Reddy's Laboratories

  1. Last two years have seen strong recovery in the domestic formulations business and the restructuring of this business has also helped.

  2. The company has launched 'Sumatriptan' with an exclusivity window in 2009 which substantially bolstered sales and profits.

  3. Decent profit in 2010 after writing off its goodwill and intangibles for Betapharm acquisitions.

  4. Strategic partnership with GlaxoSmithKline to develop and market select products in emerging markets outside India

  5. Leading pipeline of ANDA & DMF filings globally with a lot of focus on niche products with limited competition.

  6. The global generics business, which accounts for 73% of revenues, witnessed an 8% YoY growth for the third quarter of FY11.

Cadila Healthcare

  1. Cadila has a high exposure to lifestyle segments and has achieved around 20% YoY growth for the last 10 years. This is fastest among its peers.

  2. The US generics business grew at a robust pace during FY09 and FY10 led by growth in its existing business and new product launches.

  3. Consumer business of Cadila which is around 10% of its revenues continued to grow above 25%

  4. Although sales and profits from its JV with Nycomed witnessed some pressure due to generic competition for its drug 'Pantoprazole', the company began to generate revenues from its JV with Hospira. In the last 3 years, Cadila's return ratios and margins have continuously improved due to strong growth in sales and ramping up of its overseas businesses.

  5. Further it has acquired small companies outside India which is helping them to grow.

  6. Domestic business accounts for a large proportion of total sales for Cadila, which reduces currency risk as compared to other companies.

Returns of select pharmaceutical companies
Company NameReturns from 2009 lows
Cadila Healthcare381%
Dr. Reddy's Laboratories317%
Ranbaxy Laboratories 248%
Biocon 223%
Piramal Healthcare145%
Sun Pharmaceutical124%
Glenmark Pharmaceuticals 114%
Glaxosmithkline Pharmaceuticals 72%
Cipla 47%
B S E Healthcare Index133%
*Some of the companies in the above list are not a part of BSE Healthcare

What to expect?
The first nine months of FY11 have been tepid for Dr.Reddy's as Betapharm has continued to face pricing pressure in Germany and also due to poor revenues from its custom manufacturing business. That said, the US generics business has been growing at a strong pace, which is an encouraging sign. This business is expected to be the key growth driver going forward as the company has a slew of niche and limited competition products in its portfolio.

For Cadila Healthcare, too, the key growth drivers will be its US business, the domestic business and its JV with Hospira. Although, pricing pressure in the global generics market and volatile foreign currency movements are the key challenges that Cadila faces.

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