Pharma stocks surge on growth prospects

Strong fundamentals have brought back the sheen in pharmaceutical stocks. Buoyant sales, a healthy product pipeline, international alliances and a huge cash pile are some of the positives that have emerged for the sector.

The Bombay Stock Exchange Healthcare index, has surged almost 14 per cent in the last one month and 12 per cent in the last six months, underlying the bullishness in the sector.

The surge in the last one month indicates the market's re-rating of the sector, brokers said. "Besides, the mid-cap pharma rally was in line with the overall market," said the head of a domestic brokerage house.

An analyst with a foreign brokerage house said, "The growth in the sector will primarily be driven by a continuing US generics momentum, competencies in pharma outsourcing, generic biologic initiatives, product patent transition and basic research progress."

Market sources said the basic Indian pharma story is strong since India has the largest number of US-FDA approved plants outside the US and is poised to become a global outsourcing hub for pharmaceutical products.

"The Indian pharma industry has already demonstrated its excellent skills in basic chemistry and process reengineering. "At the same time, India has emerged as one of the lowest cost producers of drugs in the world," said a research analyst. He added that the cost of production in the country is over 50-60 per cent lower compared with costs in the rest of the world.

"This throws up a big opportunity specially at a time when drugs worth $25-30 billion are going off patent in Europe and in the US between 2005 and 2009."

Many research-driven companies such as Ranbaxy, Dr Reddy's, Cipla, Wockhardt Sun Pharmaceuticals, Glenmark Pharmaceuticals, Lupin and Orchid Chemicals are gearing up to cash in on this generic opportunity, added another analyst.

The product patent regime, which comes into force from January 2005, will provide an edge to MNC companies in India. With patent protection guaranteed, MNC drug makers are expected to launch blockbuster drugs from their parent's portfolio in India. The actual impact of the product patent regime will, however, only be visible in the long run.

"The fact that the penetration of medicine is merely 25-30 per cent in a country with a population of over a billion highlights the growth potential," said an industry source.

According to analysts, the per capita expenditure on healthcare in India at around $93, which is among the lowest in the world. India accounts for around 16 per cent of the world population, while it accounts for barely 1 per cent of the global pharmaceuticals industry.

The growth in middle-class income will push the life style segments such as cardiovascular, anti-diabetes, anti-ulcer and anti-depressants which is forte of companies such as Nicholas Piramal.

A major consolidation is being predicted specially with competition heating up, industry sources said. There is a flip side to the story though.

"The threat of price regulation looms large over the industry. Also, uncertainty regarding the implementation of VAT is likely to have a negative impact in the short-term," according to analysts.