Aug 7, 2007|
Pharma: Where does the focus lie?
Pharma stocks have evinced mixed interest from investors in the past one-year and some good results announced by certain companies in this period have not done much in enthusing the investors. In this article, we shall take a look at some of the main business models and whether companies focusing on these models have garnered much buying interest of late.
Generics: Companies focusing on the generics market have not really been on the investors' radar of late. This could largely be attributed to the competitive nature of the global generics market and persistent price erosion witnessed on generic products. Hence to counter the same, domestic companies such as Ranbaxy, Dr.Reddy's, Sun Pharma and the like have been focusing on niche generic products having lesser competition, challenging patents to garner the 180-day exclusivity period and acquiring companies in the global market to attain scale.
While there are definite upsides from the same, challenges abound as well in the form of regulatory changes and pricing pressure in the country in which the acquired company is located, mounting legal costs, pressure posed by authorised generics and scramble by pharma companies to look for niche areas (which after a while are no longer likely to be niche when competition intensifies).
Despite this, some of the positive moves undertaken by companies such as Ranbaxy and Dr.Reddy's have been to either enter into authorised generics deals themselves or settle the patent challenges with innovators. The latter move not only obviates the need for further legal costs but also lends some semblance of certainty to the outcome of these legal suits. Hence, for generic companies besides valuations, strategies undertaken to counter this pressure and maximise revenues and profitability will be critical going forward.
CRAMS: Increasing R&D costs, low R&D productivity, impending patent expirations and at the same time, pressure to reduce healthcare costs have propelled global pharma majors to cut costs and improve overall profitability. This is expected to translate into a strong outsourcing potential for low cost manufacturing destinations like India. Also, considering the fact that contract manufacturing agreements are long term in nature i.e. around 5 years or more, there is stability at the topline level as compared to companies competing directly in the generics market. However, challenges abound in the form of stronger customer relationships required and a likely shortage of clients.
Having said that, CRAMS will be an important exports strategy for domestic companies who do not have the required scale to compete directly in the global generics market or for those who do not want to compete in the generics market. Also, consolidation in this area is expected to pick up pace globally as innovator companies look for CMOs that are present across the value chain. With domestic pharma companies looking at different business strategies to fuel their growth trajectory, CRAMS could be instrumental in further augmenting revenue streams and hence explains why investors have lapped up stocks such as Dishman, Divi's amongst others recently.
MNC Pharma: MNC pharma stocks have taken a backseat since the steep correction in May 2006 and have failed to enthuse investors since then. For instance, in the domestic market where the MNC pharma companies are largely focused on, they have not really been able to outperform their domestic counterparts. For instance, on an average, while the domestic companies under our coverage have grown their topline by around 12% to 16% in FY07/CY06, MNC companies have been able to clock topline growth in the range of only 9% to 10%. Various factors contributing to the lower growth have been increasing competition, low number of new product launches, trade related issues, divestment of certain businesses and the like.
New product launches from the parent's product stable will be critical for MNC pharma companies going forward, as this is one factor that gives then an edge over their domestic counterparts. Besides this, MNC majors are looking at in-licensing products from other global companies given their strong reach in the domestic market. Having said that, launch of patented products in the country are unlikely to take place before late CY07 or CY08.
We believe that it is more prudent for investors not to invest in the sector based on 'themes' but to adopt a stock specific approach while investing in pharma stocks. This means that besides CRAMS, there are good investment opportunities in generics focused companies and MNC pharma companies having sound business fundamentals and cheap valuations. The trick of course lies in identifying the same!
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 24, 2017
How a fourteenth century Mughal story holds one of the key essences of safe stock investing.
Aug 24, 2017
With Lord Ganesha's attributes and teachings, awaken your inner-self and inculcate these financial habits for a sound future.
Aug 24, 2017
Online shopping if done sensibly can help you save money and carries many other advantages.
Aug 24, 2017
Kelly, Mattis, McMaster, Cohn, and Mnuchin are in charge. But these Pentagon bureaucrats and Wall Street hustlers may be worse than a loose-cannon president.
More Views on News
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Aug 16, 2017
The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?
Aug 22, 2017
Post demonetisation, a cut in bank savings deposits rates was in the offing.
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407