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Pharma: The year so far... - Views on News from Equitymaster

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Pharma: The year so far...

Apr 25, 2007

The Indian stock markets have exhibited a volatile trend from the start of the year till the present date influenced by a host of domestic and global factors. This includes global factors such as the likely slowdown in the US market, unwinding of the yen carry trade and domestic factors such as rising inflation and CRR hikes by the Reserve Bank of India (RBI) in a bid to curb liquidity. In this scenario, the Sensex has lost marginal ground (0.1%) during the period January 2007 to April 2007. While the healthcare index lost 2% during the same period, some pharma stocks have managed to outperform both the BSE-Sensex and the BSE Healthcare index by a wide margin. In this article, we shall take a look at some of these stocks.

Pharma: Gainers and losers from Jan 2007 to Apr 2007
Company Price on
Apr 23, 2007 (Rs)
Price on
Jan 02, 2007 (Rs)
% Change
BSE Sensex 13,928 13,942 -0.1%
BSE Healthcare 3,740 3,819 -2.1%
Biocon 487 378 29.0%
Wockhardt 419 353 18.7%
Glenmark 692 604 14.5%
Pfizer 840 769 9.3%
Sun Pharma 1,052 985 6.8%

Biocon: Biocon has been the top performer in this four-month period with gains of 29% largely due to the strong results announced by the company both in the third and the fourth quarter of the fiscal year FY07. The two statins 'Pravastatin' and 'Simvastatin' going off patent in the US markets considerably boosted Biocon's performance for the full year. Revenues from the contract research business also played a significant role in augmenting Biocon's revenues. Biocon's subsidiary Syngene entered into a research partnership with the innovator company Bristol Myers Squibb (BMS) with the new research facility being under development. This is expected to further increase the scope of BMS's existing relationship with Syngene and is also one of the reasons for the interest generated in the stock of Biocon.

Wockhardt: Wockhardt was the second best gainer (up 19%) amongst the stocks under our research coverage due to strong results announced by the company during the fourth quarter of CY06. The company's performance has been bolstered by the acquisition of Dumex (India) with its strong brands 'Farex' and 'Protinex' in the neutraceutical space and the Irish company Pinewood Laboratories, which is expected to enhance its performance in the European region going forward. Ramp up in ANDA filings resulting in new product launches in the US market also boosted Wockhardt's performance. Overall, the company has filed 45 plus ANDAs till date with 25 plus ANDAs awaiting approval. Going forward, the company is aiming to touch the US$ 1 bn mark by FY09 (assuming that it goes in for another acquisition during this period).

Glenmark Pharma: Glenmark also caught the investors' eye during this period registering gains of 15%. 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 third quarter of FY07 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.

Pfizer: Pfizer notched up gains of 9% during this period. The company had reported a decent set of numbers for 4QCY06 with a considerable improvement in operating margins. Having said, the overall performance in the first quarter of CY08 was a tad more subdued. With the global parent Pfizer Inc having hived off its consumer healthcare business to Johnson & Johnson, the impact of the same has yet to be reflected in the Indian operations.

Sun Pharma: Sun Pharma continued to find favour among investors notching gains of 7%. The company for the first time unveiled its innovative R&D programme with focus on both NCE (new chemical entity) and NDDS (new drug delivery system) in the respiratory and CNS field amongst others. The innovative R&D will be hived off into a separate listed company called Sun Pharma Advanced Research Company (SPARC) and the record date for the same has been fixed on April 30, 2007. Sun Pharma's aim behind this move is to focus on the relative more stable business of generics given the fact that innovative R&D is a high risk - high reward business.

Summing up...
From a long-term perspective, the outlook for the sector is positive with growth in generics expected to play a key role in driving 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. The new pharmaceutical policy to be announced will also have an important bearing on both domestic and MNC companies alike. 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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