The BSE Healthcare index has outperformed the Sensex in the past one year. While the same has been due to the overall buoyancy in the Indian stockmarkets, ramp up in performance has also led to investors flocking to pharma stocks.
Data Source: Prowess
For starters, there was a sharp reversal in fortunes of Indian pharma companies in the past one year as compared to FY09. In FY09 for instance, there were a host of problems plaguing pharma companies. First of all, they had to deal with higher receivables in semi-regulated markets as a result of which sales were hampered. Not just that weaker environment in the US and Europe and fewer approvals meant that sales from these regions also took a beating. Since then, however, there has been growth in sales on the back of more approvals and a consequent increase in product launches in the global generics market.
That said, while the generics business has seen good growth, the same cannot be said for custom manufacturing (for global innovators). With the US and Europe still mired in a slump, many of these global innovators were wary of outsourcing. But the pressure to cut costs means that the case for outsourcing in the longer run remains strong. Operating margins saw an improvement on the back of an improved product mix. Absence of forex volatility (of the kind seen in FY09) meant that Indian companies did not have to report massive forex losses.
The outlook for the pharma sector remains healthy. Drugs worth billions of dollars are scheduled to lose patents till 2013. Hence the opportunity is immense despite intense competition and price erosion. Those focusing on niche products with limited completion will have the edge. The prospects in the domestic market also look good. Although the landscape has been changing on account of a spate of acquisitions made by global innovators in India. At the end of the day, while the outlook for the overall sector is strong, the strategies adopted by various companies to maximize revenues and profits will determine which company will come out on the top.
As far as valuations are concerned, prices of many pharma stocks have run up. And so, quite a few stocks appear expensive. But we urge investors not to get carried away by the overall euphoria that has surrounded the pharma sector. Instead they should take a stock specific approach while investing in the sector.