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Pharma: Safer havenů

May 14, 2004

The markets have been gyrating to and fro since the beginning of the year when the BSE-Sensex closed at the all time high of 6,194 on 14th Jan 2003. Since then, the benchmark index has gone nowhere. Although the Sensex has fallen considerably at about 9%, the concerning factor is the volatility over this period. What should an investor do at this juncture? Does this volatility mean no place for investors and they should keep away from the market for some time. The answer is, No! There are stocks, which have managed to outperform the benchmark indices amidst this volatility in the recent past. Though three to four months is not a time horizon that should draw comfort from, we believe that this out performance is because of fundamental reasons. We are talking about the pharma sector here.


* Returns are calculated on Rs 100 invested on 1st Jan 2004

To put things in perspective, the BSE Healthcare index is down 4% during the same period as against a 9% decline in the Sensex. If we look closely at the reason for the fall in the healthcare index, the key reason was on account of poor performance by heavyweights like Dr Reddy's, Pfizer and to an extent, Ranbaxy. At the same time, companies like Wockhardt, Aventis, Nicholas Piramal and GSK Pharma have outperformed the market by a fair margin. Apart from these stocks there some mid-cap stocks like Aurbindo pharma, Elder pharma and IPCA Labs have done quiet well.

The gainers...
Company (% gain*)
Cipla 1.5%
Nicholas Piramal 7.1%
Glaxo 15.1%
Aventis 15.8%
Wockhardt 26.4%
*since 1st Jan 2004
Dr. Reddy's, that changed the face of Indian pharma companies, has suffered the most because of the some micro reasons like bad performance in the Indian markets and the adverse ruling of the 'Amolodipine Maleate' case in US. Pfizer has declined in the recent past owing to its poor performance, both on the topline as well as on the operating side, in FY04. However, we believe that the company has also taken additional charge on account of the restructuring exercise, which has set a solid platform for growing its revenues from a long-term perspective.

The losers...
Company (% loss*)
Dr Reddy's -41.7%
Pfizer -16.6%
Ranbaxy -1.5%
*since 1st Jan 2004
Having looked at the gainers and the losers combined with the reasons for the same, what is the way forward? We have listed the key positives and negatives for the pharma sector below.

Key positives...
For MNCs...

  • The patent regime hold a host of opportunities for the MNC pharma companies regarding their product portfolio. They would be able to launch new products which will certainly increase their margins and also boost the topline.

  • Restructuring exercise done by most of the companies will start paying back and will again show up in the improved margins of the companies.

For domestic majors...

  • Looking up foreign markets is the order of the day for the Indian companies. Bulk drugs, contract manufacturing, contract research and outsourcing will be the activities that will drive the growth for the Indian companies. Owing to the low cost and chemistry skills that Indian companies enjoy, gives them competitive advantage to be outsourcing hub for the world.

  • Big marketing network of some of the domestic pharma companies can be a platform for them to go aggressive on the domestic front. The marketing setup give them leverage in the Indian markets.

  • R&D efforts of some of the companies will pay in future but that is a long-term thing because it takes years to develop and launch new drugs.

Investors have to remember that these are long-term fundamental drivers and are intact. However, exercise caution before taking any investment decisions, as not all players are likely to deliver consistent returns over the long-term.


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