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 stocks: Running ahead of times - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Dec 24, 2004

    Pharma stocks: Running ahead of times

    The markets have risen to their all time highs, and pharma is one of the sectors that have outperformed this broad rally, although marginally. In light of the structural changes taking place within the sector, both on the international and domestic fronts, increasing investor interest has been witnessed over the past few months.

    The global pharma market is becoming increasingly competitive. Although, there is a lot of differentiation that companies can undertake in the pharma sector through launch of new products through R&D, we have witnessed the R&D cost increasing at a rapid pace in recent times. Currently, it costs 4 times more to come up with drug than what it used to cost 20 years back. This rapid rise on the cost front has led the global pharma companies to look at low cost countries for manufacturing as well as R&D services. Also, generic drugs have become order of the day in western countries. This segment of the pharma market is extremely competitive as there is room for many players in the segment. This has led to generic companies moving towards India, which provides them with the cost competitiveness advantage and also adequate technical capabilities to produce drugs at half the cost it is done in the western countries.

    In the Indian context, we are moving into an era of product patent, where patents will be granted on the products itself rather than the processes to make those products, that was the case earlier. This necessarily means that companies that have new patented products will be able to launch new drugs in the market and those that do not have patented products will have to either go along with their old products or spend towards R&D activities to introduce new products.

    In the tables below, we take a look at eleven pharma companies that form part of our research coverage and try to figure out where these companies stand based on financial certain parameters. Let us look at the MNCs first:

    MNC Companies Price P/E NPM OPM ROA ROE
    Abbott 735 18.7 15.9% 19.0% 18.0% 21.7%
    Aventis 1,303 28.0 16.0% 24.1% 20.2% 26.9%
    Glaxo 764 20.2 18.0% 25.1% 20.3% 28.8%
    Novartis 677 16.9 20.0% 25.0% 26.5% 37.1%
    Pfizer 669 41.3 16.0% 20.0% 16.0% 23.3%

    As seen from the table above, MNC companies are trading at premium to the overall market as well as the average valuation of the pharma sector. However, if we compare these companies on financial parameters we find that Glaxo and Aventis come out to be the best picks in the sector, while others like Abbott and Pfizer are the laggards. The premium valuations accorded to these companies are owing to the fact that the new patent regime that will come into force from 2005 will be significant for these MNC pharma companies. Most of the foreign companies have restructured themselves, be it Glaxo, Pfizer or Novartis, to take advantage of the new patent regime. In the long run, these MNC companies will certainly gain market share in high value patented products, which means a growth path that may justify their current valuations.

    Let us now look at some domestic pharma companies.

    Domestic Companies Price P/E NPM OPM ROA ROE
    Biocon 502 26.2 23.1% 30.2% 26.7% 30.0%
    Cipla 305 24.5 17.1% 21.5% 15.2% 24.8%
    Dr Reddy's 854 33.1 14.5% 19.0% 13.6% 17.4%
    Nicholas 1,362 22.5 15.9% 21.5% 22.5% 30.4%
    Ranbaxy 1,239 27.6 16.6% 23.5% 22.5% 36.5%
    Wockhardt 366 23.3 15.0% 22.4% 16.5% 27.5%

    Amongst domestic companies, we see that Ranbaxy outperforms the rest on different financial parameters while Biocon comes a close second. However, one must keep in mind the fact that Biocon is at the peak of capacity utilization of its existing business and the return ratios are likely to come down once it enters into the investment phase. The opportunity that Indian companies have is of outsourcing, and Cipla and Nicholas Piramal can be said to be the biggest beneficiaries of the same. While Cipla will help generic companies in the US with its low cost manufacturing and R&D facilities, Nicholas Piramal has adopted custom manufacturing as its major growth driver.

    Considering the fact that most of the pharma stocks are trading at the higher end of their respective valuations, investors need to practice utmost caution. Although, while there is no denying the fact that the growth opportunity for Indian companies is huge, paying more than the value is not reasonable both for short as well as the long run.

     

     

    Equitymaster requests your view! Post a comment on "Pharma stocks: Running ahead of times". Click here!

      
     

    More Views on News

    Sun Pharma: Bottomline Slips into the Red Amidst Challenging Environment (Quarterly Results Update - Detailed)

    Aug 14, 2017

    A challenging environment and one-time expense pushes Sun Pharma into a loss in the first quarter.

    Lupin: Bigger Challenges or Bigger Margin of Safety? (Quarterly Results Update - Detailed)

    Aug 14, 2017

    GST impact coupled with price erosion in US leads to lower profits for the quarter.

    Dr Reddy's: US Pressure Continues to Haunt (Quarterly Results Update - Detailed)

    Aug 8, 2017

    Profits plunge due to higher raw material costs.

    The Power of 5 Minutes (The 5 Minute Wrapup)

    Jun 16, 2017

    Here's what you can expect from The 5 Minute Wrapup in the coming months and years.

    Biocon: Lower Licensing Income Leads to Muted Growth for the Quarter (Quarterly Results Update - Detailed)

    Jun 23, 2017

    Net Profit lower due to exceptional items in the previous year.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    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 HEALTHCARE


    Aug 16, 2017 (Close)

    S&P BSE HEALTHCARE 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS