Pharmaceuticals is among the most difficult industries to decipher. It’s global, which means an understanding of the complexities of patent law is necessary.
It’s technical and intellectual-property driven, so an understanding of the research and trial processes is also required. Many nations have specific drug-pricing restrictions and the respective laws must also be taken into account.
Given all these, an understanding of the pharma industry’s revenue streams, and an ability to distinguish long-term or perennial performers in the drug portfolio from short-term opportunities is not easy.
However, the industry is usually among the more highly-valued sectors, and it is an overseas revenue earner.
What’s more, unlike other exporters, drug demand isn’t very cyclical, nor is it very dependent on the overall macroeconomic situation.
More From This Section
The Indian pharma industry, which is mostly generic drugs, is trading at a valuation premium to the overall market, with most stocks at price/earnings of between 17 and 22 times.
This is well below normal bull market valuations, which are usually in the 30 or higher PE zone. However, the industry has maintained its defensive reputation by outperforming the market. It is also at a valuation premium to its global peers.
Does the current situation make Indian pharma worth buying for the long-term? Nomura Securities thinks so, at least selectively.
In a recent advisory, the financial institution said Indian generics had several factors in their favour.
One was that the US patent expiries over the next two years would open up a new $56-billion product-specific market, and create new opportunities for Indian generic companies, which already have about 20 per cent market share in the US generics market. A weaker rupee would also help.
Second, India itself could see rising pharma penetration. However, as Nomura points out, there is a danger that more drugs would come under price control with the proposed National Pharma Pricing Policy 2011. Also, multi-national competition in the Indian generics market would probably increase, so the domestic opportunity might not be as high as it seems at first glance.
Nomura recommends ‘buy’ in Dr Reddy’s, Lupin, Glenmark, Cadila Healthcare and Jubiliant Organosys. It is neutral on Sun Pharma and Cipla and recommends ‘reduce’ (that is, sell) on Ranbaxy. All eight stocks have seen substantial corrections, even as they have beaten the market.
The historical record shows the sector’s consistent pattern of outperformance. In technical terms, pharma stocks do appear relatively safe. It is very likely that, given the overall situation, these stocks would not offer fabulous returns in the short-term. But, these could offer some safety as well as an upside over an 18-month period.
The author is a technical and equity analyst