Jul 3, 2007|
Pharma: The top gainers and losers
The first six months of CY07 have gone by and the BSE healthcare index has failed to enthuse the markets. This can be gauged by the fact that while the BSE-Sensex has gained 5% during this period, the healthcare index has significantly under performed, registering gains of only 1%. In this article, we shall take a look at the stocks that have caught the investors' eye and the ones that have not evinced much interest. For the purpose of this article, we shall be analysing those companies that are under our research coverage.
Pharma: Top gainers and losers from Jan 2007 to June 2007
The top five gainers...
Nicholas Piramal: Given the strong interest generated in companies that have adopted the CRAMS model, Nicholas Piramal being one of them, the stock has generated returns of 21% during the six-month period. The company also reported good results for FY07, with significant traction in its custom manufacturing business, which now contributes around 40% to its consolidated revenues. More importantly, Avecia, which had operating losses of 12.8% at the time of acquisition, turned EBDITA positive during the year.
Biocon: Biocon emerged as the second best gainer during this period notching gains of around 18%. The optimism in the stock has been fuelled by its strong performance in FY07 largely led by the expiry of patents on 'Pravastatin' and 'Simvastatin' in the US market. The company has also been making increasing strides in contract research, which registered an impressive 63% YoY growth in FY07. For instance, 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. Having said that, price erosion in statins in the US market will remain a cause for concern going forward.
Wockhardt: Wockhardt was the third best gainer (up 11%) amongst the stocks under our research coverage due to strong results announced by the company during 1QCY07. 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. Besides this, Wockhardt acquired the French company Negma Laboratories in a bid to foray into the French generics market. While all these acquisitions are expected to enhance its performance in the European region going forward, successful integration of the same will be critical. Ramp up in ANDA filings resulting in new product launches in the US market has also boosted Wockhardt's performance.
Glenmark: Glenmark also caught the investors' eye during this period registering gains of 10.6%. 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 FY07. Besides reporting strong numbers for FY07, the company has also been steadily receiving approvals for ANDAs filed in the US market. 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.
GSK Pharma: While GSK Pharma's performance in 1QCY07 was nothing much to write about, the company has been consistently able to expand its operating margins by improving its product mix. Consequently, the company currently enjoys the best margins among its MNC peers such as Aventis, Pfizer and Novartis. Also, in CY07, GSK Pharma has unveiled plans of launching 3 new products, which include two cardiovascular drugs 'Carvedilol' (will not be patented in India) and 'Arixtra' (not patented in India), and the anti-cancer drug 'Tykerb' (likely to be patented in India).
Dr.Reddy's and Cipla: Both Dr.Reddy's and Cipla emerged as the laggards during the six-month period posting losses of 18% and 17% respectively. Concerns with regards to the increasing pricing pressure in the German generics market and the consequent impact on Betapharm continued to weigh heavy on the stock's performance. As regards Cipla, the stock took a hammering largely due to its dismal performance in 4QFY07, which was below market expectations.
To sum 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, albeit concerns regarding the increased competition and pricing pressure. 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. However, the same is likely to be subject to 'price negotiation'. Considering all these factors and after giving due consideration to valuations, investors need to adopt a stock-specific approach while investing in the sector.
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