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: Angst ridden year? - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Nov 27, 2007

    Pharma: Angst ridden year?

    As has been the case in CY05 and CY06, the stocks in the pharma sector continued to lag the Sensex in CY07 as well. This has been amply demonstrated by the graph below, which shows the BSE Healthcare index under performing the BSE-Sensex by a wide margin. While concerns over pricing pressure spilled over to CY07 as well, the year was also plagued by other issues. At the same time, there were some strategies adopted by the pharma companies, which received the thumbs up from the investing community. In this article, we shall take a look at factors that have dampened investor sentiments and those that have been received well by investors at large.

    What has dampened sentiments?
    Rupee appreciation: In the last few years, domestic pharma companies have been increasingly focusing on the exports markets of the US and the Europe to capitalise on the generics potential and also to mitigate the long-term impact of the likely slowdown of product launches in the domestic market in the future. As a result, the sharp appreciation of the rupee against the dollar has seemingly dampened investors' sentiments towards pharma stocks. The rupee has appreciated from US$ 45 levels to US$ 39.3 levels in the past one year and has dented topline performance of most of the domestic pharma companies for whom exports contribute around 50% to 80% to total revenues.

    Rise in raw material costs: Of late, pharma companies have been witness to increasing raw material prices. Many of them 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 exports amongst others (to control its trade surplus) and as a result, the import of intermediates has become expensive thereby leading to higher raw material costs. That said, had it not been for the rupee appreciation, the raw material expenses would have risen further.

    Concerns over pricing pressure persist: Concerns over pricing pressure in the global generics market continued to persist in the last one year. While increasing number of molecules going off patent coupled with rising competition exerted downward pressure on prices in the US, the European markets especially Germany were not spared either. In Germany, which was initially a branded generics market, regulatory changes forced companies to slash prices by a considerable amount leading to uncertainty prevailing in the overall pricing scenario in that country as well.

    Events that have generated interest...
    CY07 so far has witnessed some strategies being adopted by a host of domestic pharma companies, which have been enumerated below:

    Out-licensing deals: There was a flurry of out-licensing deals concluded this year, the majority of them being bagged by Glenmark and Nicholas Piramal. While Glenmark was successful in out-licensing its molecules GRC 8200 and GRC 6211 to Merck KgaA and Eli Lilly respectively, Nicholas Piramal clinched deals with Eli Lilly and Merck. Out-licensing is beneficial in the same that it helps in generating revenues at a relatively earlier stage of the entire R&D process, besides leveraging on the skill and expertise of the innovator company.

    Settling patent suits: This strategy has gained further momentum in the past one year with Ranbaxy and Dr.Reddy's being at the forefront given that both these companies have been more active than their peers in challenging patents of global innovator companies. The biggest positive that accrues by settling the patent suit outside the court is the certainty with respect to the exclusivity period. Both Ranbaxy (for 'Valtrex' and 'Fosamox') and Dr.Reddy's (for 'Imitrex') will get the opportunity to launch its generic version a few months before the scheduled patent expiry with no other generic company present. This will enable them to generate substantial revenues and profits with an element of certainty attached to it.

    Hiving off R&D: Hiving off the R&D division into a separate company has been another strategy being followed by domestic companies to mitigate risks from R&D, improve margins, de-risk the overall business model and secure funding for the newly R&D company. This model was initially adopted by Dr.Reddy's (read Perlecan) and since then Sun Pharma, Nicholas Piramal and Ranbaxy have followed suit.

    Looking ahead...
    Overall we reiterate our positive view on the pharma sector as a whole despite the various challenges that this sector continues to face. We expect partnerships in generics, CRAMS, R&D and in-licensing to be the key growth drivers going forward. Having said that, investors need to adopt a stock specific approach while investing in this sector.

     

     

    Equitymaster requests your view! Post a comment on "Pharma: Angst ridden year?". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    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.

    Were You Lured By Mr Market's Bait? (The 5 Minute Wrapup)

    Aug 23, 2017

    Mr Market lured investors into believing they'd bitten into a crash. Did you take the bait?

    Deep State First (Vivek Kaul's Diary)

    Aug 23, 2017

    Nowhere was the darkness deeper than in the nation's capital. There, no light shone. No flicker of awareness...observation...learning...or reflection appeared.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    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.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    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 SENSEX


    Aug 23, 2017 01:53 PM

    MARKET STATS