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Stellar performance of pharma in 2009

Dec 30, 2009

After the dismal performance of pharma in 2007 and 2008, pharma stocks did well in 2009. While a broader stock market rally certainly helped matters, an improved performance in businesses did its job as well. Plus the defensive nature of healthcare stocks meant that in times of uncertainty investors chose to lap up stocks from this sector. In this article, we shall take a look at the star performers and the laggards and the outlook for the sector going forward.

Pharma: Winners and losers in 2009
 Jan 01, 2009Dec 30, 2009% Change
Dr.Reddy's468 1,136 142.6%
Lupin620 1,462 135.8%
Cadila279 651 133.6%
Biocon123 279 127.1%
Novartis271 562 107.2%
Ranbaxy250 517 106.9%
Pfizer512 953 86.0%
Cipla193 340 76.4%
BSE Sensex9,90317,34475.1%
Aventis967 1,645 70.1%
BSE Heathcare2,9915,02668.0%
Piramal Healthcare245 381 55.8%
Sun Pharma1,054 1,522 44.4%
GSK Pharma1,151 1,613 40.1%
Glenmark296 272 -8.1%
Source: Trend

The winners

Dr.Reddy's: Dr.Reddy's gained an impressive 143% since the start of this year and has easily emerged as the top performer amongst pharma stocks. The company did well during the first half of the year. The key contributors to growth have been the US, India and Russia and these will continue to enhance the company's performance in the future as well. Having said that, Betapharm in the German market has been under a lot of pressure due to changes in the regulatory landscape in that country and performance of this market in the near term looks uncertain. Dr.Reddy's custom manufacturing business which grew at a subdued pace during the first half is poised to do much better in the second half of this fiscal. Not just that, in the US generics market, Dr.Reddy's also stands to benefit from some product launches that have limited competition.

Lupin and Cadila: Lupin and Cadila were next in line with gains of 136% and 134% respectively. In Lupin's case, a strong performance during the first half of the year and the strengthening of its branded portfolio in the US were the key drivers. Given that the US generics market is highly competitive, Lupin's strategy of focusing on branded generics is expected to augur well due to limited competition and higher margins. Cadila's gains were also prompted by a healthy performance in 1HFY10 and robust growth in its domestic and export businesses.

The losers

Glenmark: Glenmark was at the receiving end during the year losing around 8%. The global economic slowdown had an adverse impact on its business especially during the last two quarters of FY09, although the scenario has improved since then. Setbacks in its R&D programme also did not help matters. Discontinuation of research on one molecule out-licensed to Eli Lilly and negative results with respect to its lead compound 'Oglemilast' out-licensed to Forest Laboratories were the setbacks that Glenmark had to contend with. Having said that, the company still has a strong R&D pipeline as compared to its peers and prospects seem to be improving as the financials for the last two quarters have shown.

Looking ahead...

2008 was a difficult year for the Indian pharma sector as many companies suffered due to the sharp depreciation of the rupee against the dollar resulting in them having to report huge forex losses. Plus the sagging business environment in both the developed and the semi regulated markets also played spoilsport. This scenario certainly improved in 2009 which witnessed a relatively stable forex exchange market. While the performance in the first two quarters was not much to write about, most of the managements were confident of a better second half. The prospects are certainly expected to be brighter in the coming year.

The fundamentals driving the pharma sector from a long term perspective have not changed. Pressure to reduce healthcare costs will keep up the demand for generics, a strategy now the global innovators are also adopting. Outsourcing will also gain momentum as global innovators look to prune costs meaning that those companies focusing on custom manufacturing will stand to benefit. Thus, from a long term perspective the prospects of the pharma sector are strong. However, many of the stocks have run up considerably this year. Thus, it would be prudent for investors to give due consideration to valuations and adopt a stock specific approach while investing in the sector.

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