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Pharma: The year that was… - Views on News from Equitymaster
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  • Apr 10, 2008

    Pharma: The year that was…

    FY08 was a mixed year for Indian pharma companies. While the pricing pressure in the global generics market and the sharp appreciation of the rupee kept pharma companies on their toes, most of them barring the MNC pharma companies were able to log decent growth rates as compared to the previous two years both in revenues and profitability. In this article, we shall take a look at some of highlights of the year with respect to the sector and the outlook going forward.

    NCE R&D - Parting ways? Hiving off NCE R&D gathered momentum during the year as Nicholas Piramal, Ranbaxy and Wockhardt announcing their plans with respect to the same on the heels of Dr.Reddy's and Sun Pharma. The rationale behind this move is to mitigate risks from R&D, improve margins, de-risk the overall business model and secure funding for the new R&D company.

    Revenues - A mixed show: While some of the domestic pharma companies reported decent growth in revenues, the performance of the MNC pharma companies left a lot to be desired. Companies such as Ranbaxy, Wockhardt, Glenmark and Nicholas Piramal reported strong growth in revenues due to first-to-file opportunities, acquisitions and out-licensing R&D molecules. These were also instrumental in bolstering profits. That said, if one were to look at Dr.Reddy's, the company was at the receiving end as both sales and profits plummeted led by the high base effect in FY07 when the company had garnered the 180-day exclusivity period for three drugs. On the other hand all the MNC pharma companies fared poorly and were hampered by supply related issues, rising raw material prices and lack of any significant product launches.

    Sharp rupee appreciation: In the last few years, domestic pharma companies have been increasingly focusing on the exports markets of the US and the Europe to capitalise on the generics potential and also to mitigate the long-term impact of the likely slowdown of product launches in the domestic market in the future. Having said that, the sharp appreciation of the rupee against the dollar from US$ 45 levels to US$ 39.30 levels in the past one-year has dented topline performance of most of the domestic pharma companies for whom exports contribute around 50% to 80% to total revenues.

    Raw material worries: Pharma companies were witness to increasing raw material prices during the year. Many of them import intermediates (used for making APIs) from China, which is very strong in the manufacture of the same. However, China having curbed the export incentives for pharma exports amongst others (to control its trade surplus), the import of intermediates became expensive thereby leading to higher raw material costs. That said, had it not been for the rupee appreciation, the raw material expenses would have risen further.

    The top gainers and laggards...
    While the BSE-Sensex gained 26% in FY08, the four stocks (under our research coverage), which managed to beat the index, were Glenmark, Sun Pharma, Ranbaxy and Nicholas Piramal, in that order. Investors flocked to Glenmark, as the company was successful in clinching an out-licensing deal for its third molecule GRC 6211 for pain management with Eli Lilly. Besides this, the company also reported superlative growth in revenues and profits in 9mFY08. Sun Pharma gained favour due to its consistent results despite the uncertainty surrounding the Taro acquisition. Ranbaxy was in the limelight due to the company having settled patent suits for three blockbuster drugs, which has ensured that the company has atleast one first-to-file opportunity every year till 2010. Ramp up in its custom manufacturing business and improvement in the domestic market led to Nicholas Piramal notching strong gains.

    Meanwhile, Aventis was the worst performer of the lot as a slump in exports, lack of product launches and declining margins weighed heavy on the company's performance during CY07. Wockhardt also declined sharply, which could probably be attributed to the concerns surrounding the integration of the two acquisitions made by the company during the year and possible marked to market forex losses.

    Looking ahead...
    Overall we reiterate our positive view on the pharma sector as a whole despite the various challenges that this sector continues to face. We expect partnerships in generics, CRAMS, R&D and in-licensing to be the key growth drivers going forward. Having said that, investors need to adopt a stock specific approach while investing in this sector.



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