X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Pharma : Is the price upswing justified? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Sep 11, 2003

    Pharma : Is the price upswing justified?

    2003 has been a very good year for India per se and the stock markets in particular. The Sensex, which was hovering around the 3,300 levels during the beginning of the year, has now crossed the 4,400 mark. Unlike other bull runs that the market had experienced in the past which were sector specific (like software in 2000), the current upswing has been across all sectors. Pharma stocks were one of the key gainers during this period. This is evident from the following graph.

    As can be seen from the above graph, Rs 100 invested in the CNX Nifty 100 would have yielded Rs 127, while a similar amount invested in the BSE Healthcare Index would have grown to Rs 152. Moreover, if we consider the run up in the two indices from April 2003 onwards (the time since the current rally started), the CNX Nifty 100 has gone up by 43% while the BSE Healthcare index has gained 65%! Even among the pharma stocks, it was the mid-cap stocks that really stole the show as can be seen from the following table.

    Mid-cap pharma stocks upswing...
    COMPANY PRICE ON % CHANGE
    Sep 2, 2002 (Rs) Sep 3, 2003 (Rs)
    BSE-SENSEX 3,187.3 4,261.9 33.7%
    CADILA HEALTHCARE 130.2 292.0 124.4%
    FULFORD (I) 112.6 243.0 115.9%
    AUROBINDO PH 225.8 460.5 104.0%
    GERMAN REMEDIES 284.0 472.3 66.3%
    GLENMARK PHARMA 240.0 377.9 57.5%
    KOPRAN LTD. 40.8 60.4 47.9%

    As can be seen from the above table, midcap pharma stocks grew at a much higher rate than the BSE Sensex. So to what extent is this upsurge in pharma and midcap stocks price justified? Lets find out.

    Absence of product patents has helped Indian companies specialize in the manufacture of generic drugs. The generic market in the US was US$ 40 bn in 2001 and is estimated to rise to US$ 90-95 bn by 2012. Moreover, drugs worth US$ 55-65 bn are expected to go off patent in the next 5 years. Further, with pressure to reduce health care costs, the US government has passed regulations to speed up approval procedure for generic drugs and also include generics in its Medicare policy. In view of India's expertise in the generics market, this could translate into strong growth for the Indian pharma companies. Ranbaxy and Dr. Reddy's have recognized this growth potential for generic drugs in the US and other regulated markets and are focusing on the same.

    Another avenue of revenue for Indian companies is outsourcing. Indian companies can enter into contract manufacture of bulk drugs as well as formulations. Indian companies with their expertise in drugs manufacture and large number of US FDA approved manufacturing facilities (India has the maximum number of US FDA approved plants outside the US) are the key positives working in India's favour. Nicholas Piramal, Wockhardt and Cipla have taken major initiatives on this front. Many smaller pharma companies such as Matrix Laboratories and Divi's Laboratories have also shown strong growth on the back of drug manufacturing contracts. Indian pharma companies can also capitalize on low cost of operations and availability of highly skilled scientists. Over that, the presence of a large number of patients with ethnic diversity at a much lower cost will help India become an ideal destination for clinical trial and research.

    Adding to the above positives, the growing domestic health insurance market is expected to drive domestic demand post-2005. Moreover, the fact that most of the WTO members have agreed to a draft agreement for the supply of essential drugs to the least developed countries has opened another avenue of growth for the medium-sized Indian pharma companies. Thus, while few will question the strong growth potential that beholds the Indian pharma companies, not many will be able to justify such a steep rise in stock price.

    Potential of discovery research, contract manufacturing, contract research and the WTO agreement were listed as the reason for this upswing in pharma stock prices. However, the fact that Indian companies had outsourcing opportunities going forward was known for a long time. So why has the realization about the same drawn up only now? Another concerning factor was that even if one company received a US-FDA approval, all the stocks in the sector saw a sharp rise in price. Thus, an approval for Ranbaxy resulted in a stock rise across all the stocks in the sector. Even the mid-cap stocks that had little or no prospects of even filing an ANDA registered a rise in their prices.

    Although some of mid-cap pharma stocks hold good potential going forward, investors need to understand that considering their size, there is an inherent risk involved in buying these stocks. Investors, thus, need to exercise caution while investing in these stocks. The key to successful stock picking is investing in fundamentally strong companies with a good track record. Finally, a few words of advice, 'Behind every stock is a company - research it'.

     

     

    Equitymaster requests your view! Post a comment on "Pharma : Is the price upswing justified?". Click here!

      
     

    More Views on News

    Sun Pharma: Bottomline Slips into the Red Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Aug 14, 2017

    A challenging environment and one-time expense pushes Sun Pharma into a loss in the first quarter.

    Lupin: Bigger Challenges or Bigger Margin of Safety? (Quarterly Results Update - Detailed)

    Aug 14, 2017

    GST impact coupled with price erosion in US leads to lower profits for the quarter.

    Dr Reddy's: US Pressure Continues to Haunt (Quarterly Results Update - Detailed)

    Aug 8, 2017

    Profits plunge due to higher raw material costs.

    The Power of 5 Minutes (The 5 Minute Wrapup)

    Jun 16, 2017

    Here's what you can expect from The 5 Minute Wrapup in the coming months and years.

    Biocon: Lower Licensing Income Leads to Muted Growth for the Quarter (Quarterly Results Update - Detailed)

    Jun 23, 2017

    Net Profit lower due to exceptional items in the previous year.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE HEALTHCARE


    Aug 18, 2017 12:35 PM

    S&P BSE HEALTHCARE 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS