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Pharma: Knocking at global doors

Dec 24, 2003

The year 2003 was a very special year for India. Good monsoons, outsourcing opportunities and higher GDP growth projections contributed towards building a 'feel good factor' towards India Inc. The stock markets too caught up with this sentiment. After languishing around the 3,000 levels, markets made gains of more than 2,000 points during the year. The most significant aspect of the current bull run was that it was broad based rather than being sector specific. Thus, we had many sectoral indices like the BSE-Healthcare index outperforming the BSE-Sensex during the year. To get a better perspective, take a look at the following graph.

As can be seen from the above graph, Rs 100 invested in BSE-Sensex and BSE-Healthcare index on 1st January '03 would have been worth Rs 156 and Rs 187 respectively on December 10, 2003. Thus we see that the pharma industry has managed to outperform the Sensex. The reason for the same could be an excellent performance by the pharma companies and an improvement in the prospects of the industry going forward.

The domestic pharma industry started the year on a very weak note. The VAT fiasco and the truckers strike affected sales in the domestic market during the first quarter of the calendar year. This was followed by a general slump in anti-infectives (largest therapeutic segment), which even recorded negative growth in one month. Consequently, growth in the domestic pharmaceutical markets stagnated during the first half of 2003. Subsequently however, with good monsoons and a revival in the anti-infectives segment, the domestic pharmaceutical industry came back on track once again recording double-digit growth.

While growth in the domestic markets suffered, revenues form the international markets continued to record strong growth. Indian pharma companies registered impressive growth not only from the regulated markets from sale of generics drugs but also from unregulated markets. However, outsourcing is turning out to be the next big story for domestic pharma companies. The extent of optimism towards outsourcing opportunities awaiting the domestic pharma companies is evident from the fact the top two companies (on the basis of stock price appreciation - See table below) - Divis Laboratories and Matrix Laboratories, both are actively pursuing outsourcing opportunities in contract manufacturing. Lupin, on the other hand made it to the winners list following the initiatives taken by its promoters to settle the inter-group loans. However, investors need to note her that Lupin was one of the stocks that were heavily speculated during the 2000 stock market scam. In general, the upswing in mid-cap stocks in general and mid-cap pharma stocks in particular, resulted in companies like Lupin, Fulford (India) and Aurobindo Pharma to make it into the winners list.

The winners…
(Rs) 1st Jan '03 10th Dec '03 Change
Divis Laboratories 176* 1,292 633%
Matrix Laboratories 195 1,303 569%
Lupin Ltd 145 765 427%
Fulford (I) 97 380 292%
Aurobindo Pharma 106 379 259%
*Price as on 12th March '03

The dream run on the bourses that pharma companies have had in 2003 has ensured that there were no major losers in this sector. However, there were some laggards that under performed not only the BSE-Healthcare index, but also the Sensex. In view of the strong performance shown by midcap pharma stocks, it is not surprising to see that the companies that made it to the laggards list are all big companies.

The laggards…
(Rs) 1st Jan '03 10th Dec '03 Change
Cipla 902 1,219 35%
Novartis 277 381 37%
Pfizer India 383 527 38%
Dr Reddy's 922 1,388 51%
Wockhardt 450 715 59%

Among the laggards, all the five companies gave disappointing quarterly results. Cipla was the worst performer in the pharma sector. In case of Cipla, while topline recorded impressive growth, margin pressure ensured that the company's bottomline remained stagnant. Novartis, on the other hand, in view of intense competition from generics players, reported not only stagnancy in net sales but also declining margins. Pfizer's performance was affected due to the delay in its merger with Park-Davis and negative growth registered by its top brands. In case of Dr Reddy's Laboratories, the stock suffered in view of the uncertainty regarding the launch of 'Amlodipine Maleate' and consequent absence of any major launch in the near term. Finally, Wockhardt was plagued with a host of problems, first its dispute with FMRAI followed by the VAT fiasco, which significantly affected its performance.

What to expect?

Although 2003 started on a rather timid note, it has certainly ended on a very strong note. However, will this upswing continue in the next year? As far as the domestic markets are concerned, good monsoons signal a revival in the domestic markets, which are once again recording double-digit growth. Recently the Indian Patent Office granted exclusive marketing rights (EMR) to two pharma companies. This coupled with the fact that the cabinet has approved a third amendment to The Patent Act, providing for product patents, removes doubts regarding government's commitment towards accepting the TRIPS agreement. This is a big positive for the MNC pharma companies as they will be able to launch products from their parent's portfolio under patent protection. Resultantly, the performance of these MNC pharma companies will get a fillip.

On the exports front, the US government has taken various policy decisions like inclusion of generics drugs in its Mediclaim policy and has also eased the process of introduction of generics in the market. Given the fact that larger domestic pharmaceutical companies like Ranbaxy and Dr Reddy's Laboratories already have a presence in the US markets and their strong re-engineering skills and manufacturing capabilities, they are in a very good position to generate revenues from the US generics market. Meanwhile, in view of India's expertise in manufacturing and given the fact that India has the highest number of US-FDA approved plants outside the US, outsourcing opportunities will continue to drive growth for Indian companies. However, here India will face competition from other countries like China.

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