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Pharma: A bitter pill?

Sep 18, 2007

In the past three months, the pharma sector once again failed to enthuse the investors, which can be gauged from the fact that while the Sensex notched gains of around 6% between July and September 2007, the Healthcare index lost around 5%. In fact, among the 12 companies under our coverage, only 2 managed to outperform both the BSE Healthcare Index and the Sensex. The two broad factors that could be attributed to the dismal performance was the impact of the rupee appreciation and the rise in raw material costs due to the higher costs of intermediates imported from China. In this article, we shall take a look at some of the top gainers and losers during this period and the outlook for the industry going forward.

Pharma: Top gainers and losers from July 2007 to Sept 2007
CompanyPrice on
Sept 17, 2007 (Rs)
Price on
Jul 02, 2007 (Rs)
% Change
BSE Sensex15,504 14,664 5.7%
BSE Healthcare3,669 3,850 -4.7%
Top gainers  
Glenmark382 334 14.3%
Ranbaxy410 366 12.2%
Top losers   
Novartis294 379 -22.5%
Cipla172 210 -18.2%

Glenmark: Not surprisingly, Glenmark continued to reward shareholders and emerged as the top gainer amongst the pharma companies under our coverage gaining 14%. The company once again reported robust numbers for 1QFY08 with the topline and bottomline growing by 92% YoY and 206% YoY respectively backed by a strong performance in the exports markets of the US and Latin America. The out-licensing deals entered into by the company with Forest Labs and Merck KgaA continued to generate interest in the stock and the company is on the lookout for a partner for its third molecule GRC 6211 for osteoarthritis and dental pain. 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.

Ranbaxy: After the lukewarm response accorded to Ranbaxy in the past one year, the stock was on the investors' radar in the last two and a half months notching gains of 12%. While the company has been aggressive on the Para IV front, Ranbaxy of late has started to bring some balance to its product portfolio by settling the patent challenges with the innovators. This will not only mitigate further legal costs but will also provide some sort of certainty to the company in terms of generating revenues from these drugs. Case in point is the settlement of its suit with the global innovator GSK Plc for the latter's blockbuster drug 'Valtrex'. Thus challenging patents and settling some of them has ensured that Ranbaxy gets the 180-day exclusivity every year till FY10 ('Pravastatin 80 mg' in FY08, 'Valtrex' in FY09 and possibly 'Lipitor' in FY10).

The laggards were...
Novartis: Novartis emerged as the top loser during this period falling by 22.5%. Novartis reported poor set of numbers for 1QFY08 with the topline declining by 1% YoY. The pharma division (around 70% of revenues) was at the receiving end due to price control being imposed on one of its key products 'Tegrital' leading to the overall decline in revenues. Underperformance of the MNC pharma sector in general and no patent being granted for its anti-cancer drug 'Glivec' also further added to the woes.

Cipla: Cipla also received a battering during this period losing by as much as 18%. The company reported a lackluster performance in the last two quarters due to a plethora of issues plaguing the company. These were considerable slowdown in its exports (API exports in particular), appreciation of the rupee and rising raw material costs to name a few. While the ramping up of ANDA approvals for its partners will enable Cipla to generate higher revenues on the back of higher API exports, these medium term pressures are expected to continue.

To conclude...
In the past few months, the Indian pharma industry has been plagued by two problems. First has been the sharp appreciation of the rupee against the dollar, which has impacted revenues, as most of the pharma companies are dependent on exports. That said, the impact has not been that strong at the profitability level due to the natural hedge available in the form of imports and the fact that many of them have taken FCCBs on their books. The second problem has been on the raw material front. Many of the domestic pharma companies import intermediates (used for making APIs) from China, which is very strong in the manufacture of the same. However, China has curbed the export incentives for pharma products amongst others (to control its trade surplus) and as a result, the import of intermediates has become expensive thereby leading to a rise in raw material costs.

While these issues are expected to weigh heavy on the performance of pharma companies in the medium term, 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, 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. 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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