May 7, 2008|
US economy, Indian rupee and more...
US economy sinkingIs the US economy on thin ice?
While talks about the US economy sinking into a recession have been doing the rounds for quite some while now, latest economic reports released seem to suggest that the economy, though tethering on the edge, is managing to hold on. While the Federal Reserve has cut interest rates to 2%, there is a possibility that there could be a pause in any further cuts given that inflation induced by rising oil and food prices refuses to abate soon. The Economist states that as per the initial GDP estimates, output grew at an annualised rate of 0.6% in the period January to March 2008, which was higher than estimates. The weaker dollar, also, to a certain extent has helped matters. US companies deriving revenues from overseas markets are enjoying the fruits of a rise in profitability. In fact, as per the magazine, excluding oil, America's current account deficit has shrunk to an eight year low of 2.4% of GDP. Besides this, for the first time in the last four months, the non-farm payrolls has shown only 20,000 job cuts as against the forecasted drop of 75,000. All these factors sparked a rally in the dollar, which has received a battering in the past one year.
Indian Rupee depreciatingWhat makes the rupee weak?
The Indian rupee has gradually depreciated to Rs 40.58 per US dollar prompted by the rise in the greenback and the pressure on the currency towards the end of the month when oil importers look to make payments. The other factor, which has been weighing heavy on the rupee, is the burgeoning trade deficit, which widened to US$ 72.5 bn during the period April 2007 to February 2008, reflecting a 47% YoY growth. Sharp rise in the non-oil imports has resulted in India's overall imports growing faster than exports during 2007-08. Having said that, robust 39% YoY growth in invisibles (trade in services, transfers and income from overseas assets) ensured that the current account deficit was capped at US$ 16 bn.
Downside of R&D in Pharma
A leading business daily reported that India's second largest pharma company, Dr. Reddy's has discontinued R&D on its cardiovascular drug. This drug was part of the four compounds that were transferred to Perlecan Pharma, an integrated drug development company formed by Dr. Reddy's in FY06. One other molecule focusing on the therapeutic area of diabetes has also been discontinued, which effectively means that Perlecan now has two molecules as compared to the four that it had started out with. While Dr. Reddy's lead molecule 'Balaglitazone' has been progressing well in clinical trials, it belongs to a class of drugs which have faced safety issues in the past prompting the US FDA to be more stringent while approving these drugs. Case in point is GSK Plc's anti-diabetic drug 'Avandia', which was reported to increase the rate of heart attacks.
These developments highlight the risks and uncertainty associated with R&D, which though when successful can enhance revenues and profits, can also dampen profitability when a particular drug fails to advance further in clinical trials. It may be noted that besides Dr. Reddy's, other domestic companies such as Sun Pharma, Nicholas Piramal, Ranbaxy and Wockhardt have also hived off their R&D units into separate companies. What separates Dr. Reddy's from its peers is the fact that the former has roped in private capital from Citigroup and ICICI Ventures, while the others are planning to list the hived off R&D entities on the Indian bourses. Whether this development will push Dr. Reddy's to mirror the strategy of its peers remains to be seen.
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