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Pharma: At its high

Jul 1, 2003

June has been a very good month for the domestic pharma sector. After having made a poor start in 2003 due to stagnating domestic demand and the VAT fiasco, the sector is back in the limelight among investors. Infact, many of the pharma stocks are currently trading at their 52-week highs. But are these gains fundamentally driven or is it just another bubble about to be burst?

Gains made in the past one month
CompanyPrice on% Change 52-Week H/L
May 27 '03 (Rs) Jun 30 '03 (Rs)
Kopran Ltd254787.0%63 / 18
Lupin Ltd 17630070.7%306 / 90
Cadila Healthcare 11917648.5%148 / 110
Dr Reddy’s Laboratories 816109534.2%1,076 / 675
Aurobindo Pharma 28937128.5%363 / 191
Nicholas Piramal 27935025.3%334 / 205
Sun Pharma 28935021.1%362 / 258
Ranbaxy 65678519.7%765 / 485
Glenmark Pharma 25229717.9%293 / 186
Cipla 64875316.3%985 / 561
Wockhardt 3563642.3%500 / 306
BSE-SENSEX 3,082 3,607 17.0%3,590 / 2,828
* companies in bold are trading at their 52-week high.

Domestic pharma companies were recording poor growth rates in January-March 2003. Infact, the sector registered negative growth in February 2003. This was mainly on account of stagnancy in the anti-biotic segment. Moreover, in March 2003, confusion in relation to the implementation of VAT further affected the performance of these companies. However, with the government putting VAT on the back burner, the pharma sector has seen a revival of sorts since May. Growth is back in double-digits.

Even on the exports front, the US government brought cheer to the Indian pharma companies. The reduction in the approval time for generics will ease their entry into the US markets. This will benefit generic companies like Ranbaxy and Dr Reddy’s, which have many pending ANDA approvals. Ranbaxy received US-FDA approval for ‘Isotretinoin’ capsules, anti-HIV drug ‘Ganciclovir’ and also a tentative approval for ‘Ofloxacin’. This would provide a fillip to Ranbaxy. This is filtered into the stock trading at its new 52-week high levels.

Further, with the US government now widening the scope of prescription drugs under its health insurance scheme by including generics, demand for these is expected to get a further boost. Apart from Ranbaxy and Dr Reddy’s, companies like Lupin Laboratories and Glenmark are also planning to foray into the US generics market. In June, Lupin Laboratories filed 2 ANDAs raising its total ANDA tally to 5, while Glenmark entered into a marketing agreement with Lannett Company Inc for marketing the ANDAs that the company would file. As can be seen from the table above, Lupin is among the top gainers in the last one month.

The Indian government’s announcement that the healthcare industry is likely to get many fiscal incentives further improved sentiments. On the operations front, Nicholas Piramal and Ranbaxy have restructured their high cost debts with low cost ones, while Lupin has repaid debt including preference shares worth Rs 480 m. Sun Pharma has benefited from its reduction in inventory. These measures will reduce the pressure on bottomline and improve profitability of these companies.

Apart from the above general grounds, the clearing of the amalgamation of Cadila Healthcare with German Remedies by the High Court was the key trigger for the rise in the prices of this stock. Cadila is also at its new 52-week high levels.

Thus, there are adequate reasons to justify the sharp rise in the stock prices of domestic pharma companies. However, an across the sector rise in the prices is not justified. The impact of the above events on individual companies is the determining factor that will differentiate fundamentally driven companies from speculation driven ones. Thus, though the pharma sector has bright prospects going forward, investors will have to exercise caution while choosing companies from within the sector.


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