Dec 9, 2005|
Pharma: In the pink of health?
The BSE-Sensex in the past year has scaled new peaks and touched the coveted 9,000 mark. The BSE Healthcare index, in the meanwhile, has failed to set the pulse racing. Nothing highlights this fact more clearly than the following statistic: in the past one year, while the Sensex zoomed and notched up 42% gains, the healthcare index has significantly under-performed the benchmark, managing to garner a mere 11% gains!
Why the poor show?
2005 has been a year full of upheavals for the domestic pharma industry. While the year began with the introduction of the product patent law in the country, things took a turn for the worse, as VAT-related concerns plagued almost all the companies in the January-to-March quarter. As if that was not enough, excise duty was slapped on the maximum retail price (MRP) as against the ex-factory price, further squeezing margins of the sector. This saw companies ending the fiscal year (i.e. FY05) or beginning the calendar year (i.e. CY05) on a poor note.
On a global scale, intense competition and price erosion, especially in the US, weighed heavily on domestic pharma behemoths such as Ranbaxy and Dr. Reddy's. Having said that, exports outpaced domestic sales in the year so far. This is because, while the US played spoilsport, exports to semi-regulated markets showed healthy growth. As far as margins are concerned, Ranbaxy, Dr. Reddy's and Biocon continued to step up their R&D expenditure in line with their vision of being discovery-led companies despite the declining revenues. Though beneficial in the long term, the R&D spends exerted considerable pressure on margins.
In a way, CY05 could be regarded as a transition year for the pharma sector. Players like Ranbaxy, Dr. Reddy's and Wockhardt are looking to increase their geographical reach in a bid to de-risk their business profile through the organic as well as the inorganic route. These companies are also looking to capitalise on the generics potential in the next two years. Nicholas Piramal has identified contract manufacturing as the means to propel its growth engine and is in the process of building relationships with innovator companies, a requisite for this business. Biocon has been scaling up its capacities to cater to the statins opportunity next year. It is also looking to strengthen its contract research business.
The scenario looking ahead...
The continuous pricing pressure in the global generics market will continue to remain a cause for concern. When this pressure will ease is anybody's guess. Having said that, while the competition most probably will show no signs of abating, a considerable rise in the patent expiries of blockbuster drugs in the coming years is likely to provide a breather to generics companies and boost revenues. The ability to manufacture drugs at the cheapest cost and leverage one's marketing and distribution network to increase reach will be the key to survival.
As far as the domestic markets are concerned, the real test for domestic pharma majors will be when the number of new product launches slow down with the introduction of the product patent law. One strategy to arrest this decline would be to enter into in-licensing arrangements with global innovator companies to launch the latter's products. Companies like Glaxo, Ranbaxy and Nicholas Piramal have already initiated steps in this regard. The product patent law also provides an opportunity to MNC pharma companies to leverage on their parents' portfolio and move ahead of their domestic peers.
Since the pharmaceutical industry stresses on R&D initiatives, intellectual property (protecting or challenging patents as the case may be) and the cyclical nature of the generics business, benefits from the same will accordingly take a longer time to accrue. We therefore believe one must maintain a long-term investment horizon for investing in pharmaceutical stocks.
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 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Aug 16, 2017
And what it has in common with beating the stock market too.
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Aug 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
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