So, another year (FY10) has come to the close and all companies will now start releasing their full year results including pharma. For Indian pharma companies, FY10 has been a good year compared to the agonies they had faced in FY09.
What happened in FY09?
The global financial crisis had a huge impact on companies across the globe and Indian pharma companies were not spared either. The scenario in that year especially worsened in the second half post the demise of Lehman Brothers and a severe credit crunch thereafter. Given that many of the domestic pharma companies have a presence across the globe, the adverse credit conditions in various overseas markets had an impact on their businesses too. As a result in certain regions such as Russia and the CIS, Indian pharma companies took the decision to focus more on receivables rather than sales. The CRAMS business especially took a big hit since many global innovator companies chose to rationalize their inventories and cut costs overall.
Not just that, volatile currency fluctuations has a huge impact on profits. Especially those companies which had taken loads of foreign currency debt on their books had to account for losses that emanated from the sharp depreciation of the rupee against the dollar. There were other problems too. Notably, delay in product approvals from the US FDA and many companies coming under the scanner of the US regulator for not complying with quality manufacturing standards.
How was it in FY10?
The scenario took a turn for the better in FY10. On the forex front, there were no surprises led by the stability of the rupee as compared to the volatility in the previous two years. Business conditions improved too and most of the Indian pharma companies reported an improved performance as compared to the previous fiscal. ANDA approvals have also started picking up pace although the problem of the US FDA being understaffed continues to pose a problem. Although there was not a significant pickup yet evident in the CRAMS business, the outlook still remains favourable going forward as the case for outsourcing remains strong in the longer term.
What lies ahead?
There are huge opportunities in the global generics market over the next couple of years as many drugs are scheduled to lose their patents. Having said that, as has been the case in the generics business, competition and pricing pressure will continue to be dominant factors going forward as well. Given that the domestic market has also been doing well, the outlook for Indian pharma over the next couple of years is expected to be much more robust as compared to what we witnessed in FY09 and FY10.
Concerns remain on the debt side given that many Indian pharma companies issued FCCBs to fund their expansion plans in the bull run before the crisis erupted. Since the conversion price is still way above the current price levels, redemption of these bonds seem inevitable and they will have to ensure that sufficient funds are available to redeem these bonds.
Thus, while the outlook on the pharma sector is positive, valuations of some companies have run ahead of fundamentals. As such investors should adopt a stock specific approach while investing in the sector.