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Pharma: The year that was...

May 29, 2007

FY07 was a good year for the Indian pharma companies especially the domestic ones as revenues from exports picked up scale through acquisitions and better opportunity in terms of product launches in the global generics market. The performance of the MNC pharma companies, however, left a lot to be desired. In this article, we shall take a look at the overall performance of the pharma sector for FY07/CY06. We have included the 11 pharma companies under our research coverage for the purpose of the analysis.

FY07: All round improvement
(Rs m) FY06/CY05 FY07/CY06 Change
Sales 195,114 271,922 139.4%
EBDITA 34,318 60,925 177.5%
EBDITA margin (%) 17.6% 22.4%  
Net profit 29,642 44,844 151.3%
Net profit margin (%) 15.2% 16.5%  
* Includes the 11 pharma companies under our research coverage

Both generics and CRAMS did well: FY07/CY06 has been a good year for domestic pharma companies focusing on the generics market. This is because this year represented the largest opportunity in terms of the number and the size of molecules losing patent expiry. Not only that, after a long time, domestic pharma companies were successful in garnering the 180-day exclusivity window for certain molecules allowing them to bolster their overall performance (case in point: Ranbaxy getting the exclusivity for 'Simvastatin 80 mg', Dr.Reddy's being the authorized generic for 'Simvastatin' and 'Finasteride' and also getting the exclusivity for 'Ondansetron' and Sun Pharma for 'Ultracet'). Having said that, the pricing pressure on these molecules, as expected, showed no signs of abating.

FY07 also saw domestic pharma companies making a string of acquisitions in the generics space to expand geographically into Europe and the emerging markets in a bid to reduce dependence on the US market and attain critical scale. These acquisitions also largely contributed to the stellar performance reported by the domestic pharma companies. The year saw a flurry of activity on the CRAMS front as well with the acquisition of Avecia augmenting Nicholas Piramal's performance and the Roche facility in Mexico's lending a fillip to Dr.Reddy's operations.

MNC pharma lagging behind: In comparison to their domestic counterparts, the performance of MNC pharma companies was subdued. MNC companies were slower in launching products from their parent's portfolio with Pfizer being the most aggressive of the lot (3 launches in the domestic market). Also, MNCs have to contend with a higher proportion of the turnover accounting for drugs under the DPCO cover (as compared to their domestic counterparts for whom this proportion is much lesser on account of their emphasis on exports). Going forward, launch of patented products into the country and the pricing of the same will be the key factors that will determine the fortunes of the MNC companies.

Margin picture: Operating margins for the sector (i.e. the 11 companies under our coverage) improved by around 480 basis points. For the domestic companies the margin improvement has come about on account of the 180-day exclusivity period for products enabling them to earn higher margins, efforts to diversify the product mix and increased focus on branded and emerging markets. For MNC companies, margin improvement was largely attributed to the efforts to keep the overheads under control.

Looking ahead...
If one looks at the generics potential year wise, then CY06 did hold the strongest potential in term of patent expiries. Having said that, the global generics market continues to hold potential till CY10. Besides this, consolidation activity is expected to continue in the coming years as well as the pressure to gain scale builds up in wake of the increasing competition. Those companies having a balanced product portfolio and a wider geographical reach will be able to sustain growth in the highly competitive global generics market.

CRAMS will continue to pick up pace as the pressure on global innovator companies to reduce costs continues to mount. In the domestic market, efforts by companies, both domestic and MNC, to keep the product portfolio fresh (largely through in-licensing), will be the key growth drivers. The government's stance on resolving the 'price control' issue will be the key development to watch out for. Thus, from a fundamental view while the domestic market, the global generics market and CRAMS hold strong potential going forward, we advise investors to adopt a stock specific approach while investing in the sector after giving due consideration to valuations.


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