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Indian pharma: Back with a bang

Oct 30, 2000

Indian pharmaceutical companies seem to have found favour with Dalal Street last week. Buoyed by good results and a desire, on the part of operators, to diversify their risk Indian pharma companies seem to have emerged as an oasis amidst a weak sentiment, across sectors. We take a relook at the current favourites. Dr. Reddy’s Laboratories (CMP: Rs 1326): The one stock, which nobody wants to sell is DRL. This is partly due to the fact that the company boasts of arguably one of the best research pipelines in the sector. The second reason is the company’s ability to surprise analysts and investors alike by beating market expectations. Despite a sluggish domestic outlook, DRL has again managed to report a 25% growth in topline in the first half, almost double the growth of the industry. And this, when the company reported a 20% growth in the first five months which implies a breathtaking 50% growth in the month of September 2000. This could be due to the fact that the company has diversified its export basket in the current year moving away from its dependence on Russia in the current year. However, there are straws in the wind. For one the stock has been removed from the model portfolio of Morgan Stanley Dean Witter. This could impact sentiment in the short term. Second, despite the impending merger with Cheminor Laboratories and American Remedies, the fact remains that the current valuation implies an earnings multiple of almost 40 times FY2001 earnings even assuming a doubling of net profits post merger.

Ranbaxy (CMP: Rs 701): The big daddy of the Indian pharmaceutical industry gave a pleasant surprise to the market with better than expected results last week, if one were to exclude the milestone payment the company received last year. However, Ranbaxy President, Dr, Brian Tempest said, over the weekend, that the company did not expect to get US approval for the launch of its drug cefuroxime axetil this year. Glaxo–Wellcome is the original patent holder for this cephalosporin and has launched a court case against Ranbaxy alleging patent infringements. This could delay the launch of the drug till next year. The current stock valuation implies an earning multiple of 40 times even including an US $ 5 m milestone payment in the last quarter of the current year.

Sun Pharma (CMP: Rs 534): With the markets overcoming fears regarding the its US affliate Caraco’s losses, this seems to be one of the best investment bets currently, among the Indian pharma sector. Apart from the fact that it’s second quarter results were impressive (net profits up 41% on the back of 35% growth in the topline), the company has been able to fine–tune its export strategy as well (overall formulation exports in the second quarter have risen by almost 50% in the second quarter vis-à-vis a 39% growth in the full first half). At the current valuation the stock rules at 19.4 times FY2001 earnings. Besides, the management has already stated its intention to amalgamate Sun Pharma Exports, the company’s 99.38% subsidiary into Sun Pharma. This would add roughly another Rs 130 m to the company’s expected profits of Rs 1265 m in FY2001. The per share earnings work out to around Rs 29.85 and this implies an earning multiple of 18X at current valuations. Even if one were to deduct the entire losses accrued by Caraco so far (i.e. Rs 437 m) the earnings work out Rs 20.50 and the current stock price implies an earnings multiple of 26 times.

Cipla (CMP: Rs 895). It’s different. Currently ranked next to Ranbaxy in the domestic pharma sweepstakes, Cipla is the most nimble in terms of adjusting to the changing market scenario. The company managed to grow its topline by 20% last year despite a tough year for antibiotic companies, as the segment faced a slowdown. The company responded by aggressively venturing into unbranded generics to maintain market share. (In the current quarter the company has managed to grow sales by an impressive 35% with the net profit has jumped 44%.) Last year Cipla became the first Indian company to manufacture non–CFC based inhalers under the brand name Asthalin HFA. With CFC based inhalers to be compulsorily phased out by 2010, this segment should see a good growth in the future. At present, Cipla has a presence in all the molecules in the asthma segment. The anti–asthma products are expected account for almost 22% of the company’s turnover in the coming year. Even in R & D, Cipla has consciously chosen a different route and that is to develop better processes for the manufacture of difficult to synthesise molecules. It is offering these intermediates and bulks to innovators and major generic companies. For this purpose it has filed 33 Drug Master Files in areas such as asthma, cardiology and oncology. The current valuation implies an earnings multiple of 30 times first half annualised earnings. If one takes into account only the second quarter results, the earnings multiple works out to 26 times. With the management expecting to sustain second quarter earnings, the stock valuation too, is expected to sustain.

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