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MP Guru
Cost pressures ease, fundamentals improve
Opportunities arising out of USD 33 billion worth of drugs coming off patent in CY06 and CY07, easing of pricing pressures in developed markets, consolidation in the pharma sector, and improving fundamentals are some of the factors that may help the Indian pharma sector emerge a winner feel analysts.
This is despite the poor performance of the BSE Healthcare index sine May 11. Against the Sensex loss of 14.64%, the latter has dropped by 22.03% over the last forty odd days.
An ICICI Securities research report notes that the Pharma industry is headed for a stable pricing environment for CY06 and CY07 as most of the new drug launches in the US markets has seen prices erode by almost 95-97%. What this means is most of the companies would end up with substantial losses if they continue with the pricing game to garner volumes and market share. This fear, believe analysts, will ease pricing pressure in the next two years.
"Indian pharma companies are definitely well suited to take advantage from drugs coming off patent due to their inherent cost advantage. But they will have to position themselves differently from what they have done earlier because the pie is shrinking in this space with a large number of players crowding in in this space. This will lead to shrinkage in their share of this pie but yes they will definitely be beneficiaries of the patent expiry theme," reasons Sarabjit Kour Nangra of Angel Stock Broking.
With drugs worth USD 33 billion coming off patent in CY06 and CY07, the pricing environment can only stabilize if not improve, with more companies launching generic versions of branded products, the I-Sec report claims.
Apart from this, factors like fiscal incentives for setting up manufacturing plants in certain states, their inherent cost advantages compared to global peers, and their command over process engineering will help them beat the competition. Add to this the recent appetite of Indian giants like Dr Reddy's and Ranbaxy's for overseas acquisitions and one could see Indian companies expanding their footprints in the difficult developed markets.
"Dr Reddy's and Ranbaxy are well geared to take advantage of an off patent regime that has started recently. Cipla is growing through tie-ups with global pharma companies," observes Rahul Sharma of Karvy Stock Broking. However, he cautions that the Indian pharma sector emerging as a winner will depend on factors like global consolidation and how they cope with price erosion for their products in developed markets.
However, analysts see a clear visibility in the earnings of Dr Reddy’s and Ranbaxy from the sale of Zocor and Proscar, two patented products that have come off patent in June this year.
While the competitiveness of Indian pharma companies is now an established fact, tier two and tier three companies are furiously expanding in the field of outsourcing and contract manufacturing. “In the outsourcing segment we like Nicholas Piramal, Jubilant Organosys, Shasun Chemicals, and Cadila Healthcare. We are also looking at some niche stories like Marksans Pharma and Hikal Chemicals,” Nangra says about her picks in this segment.
“The second and third tier companies are establishing themselves as a force to reckon with in the CRAMS and outsourcing business. India's expected revenues are likely to increase to USD 1.5 billion by 2010, an increase of 4.5 times its current outsourcing revenues,” qualifies the I-Sec report.
This is not to say there are no concerns for this sector and whoever invests will end up outperforming the markets. “Though their past performances have been good there are a few areas where they need to improve,” warns Nangra. To maintain past performances, these companies will have to increase their R&D spends as they have already reaped the benefits of past investments.
It is because of these factors, says Sharma, we like Dr Reddy’s in the short-term and Ranbaxy and GSK Pharma for the long-term as they are good value buys.
The bottom line, of course, is the whole wheel needs to be reinvented if these pharma companies have to emulate their past performances on the capital markets.
By Prasanna Zore
:SugarwareZ-098: