Pharmaceuticals sector midcaps sizzle

Good outsourcing orders, low price-earnings draw investors

Mid-sized pharma stocks are buzzing on the stock markets, with many hitting new highs in recent weeks.

Sameer Narayan, analyst with Enam Securities says "The business momenteum of these companies is strong as they have been able to get outsourcing manufacturing orders from a number of countries."

He also added that these stocks have been a good value-pay as most of them are traded at a very low price-earnings.

Adds Chetan Shah, head of research at Quantum Stocks, "These stocks were earlier ignored by the market, but they are now in the limelight on good fundamentals and attractive valuations."

In fact, mid-cap pharma companies have added close to Rs 10,000 crore in market capitalisation in the last two weeks.

The stock price of Astrazen Pharma has almost doubled in the last one month. The stock which was traded at Rs 628 on November 10, closed at Rs 1,173.25 on December 10, up 86.82 per cent in the last one month. Hyderabad-based Divi's Laboratories scrip has surged 47.36 per cent in the last one month.

The stock has moved up from Rs 877.00 on November 10 to Rs 1,292.35 on December 10. The Ind-Swift stock has gained 50.03 per cent, from Rs 92.55 on November 10 to Rs 138.85 on December 10. Wockhardt Life Science has added 47.92 per cent, with the stock moving from Rs 28.80 on November 10 to Rs 42.60 on Wednesday.

Suven Life Sciences has added 33.50 per cent, with the stock moving from Rs 357.70 on November 10 to Rs 491.85.

Meanwhile, the Unichem Labs scrip has edged up 21.01 per cent, with the stock moving up from Rs 318.40 on November 10 to Rs 385.30 this Wednesday.

Analysts also added that there are also pressures on the big MNC pharma companies to reduce their manufacturing and research costs.

Going forward, small and mid-cap pharma companies are likely to tap opportunities like custom synthesis, contract manufacturing and R&D while the medium to big pharma companies are likely to adopt the strategy of launching the plain generics/exclusive drugs in the short term.

This in turn would fund their long-term growth initiatives like new drug delivery systems and new chemical entity search.

Sanjay Dongre, fund manager at UTI Mutual Fund adds "The outlook for the pharma sector has improved with various growth opportunities emerging."

Drugs worth $50 billion are estimated to go off-patent in the next 4-5 years. There is pressure on the governments in the developed countries to reduce healthcare costs.

The regulatory environment is therefore becoming conducive for launching generics in the developed countries. The markets of France, Italy, Spain, which have the least share of generics are slowly opening up the generics markets.

Analysts also add that the next decade is likely to see a complete transformation in the pharma industry.

The advent of the IPR regime in India after 2005 will lead to a more conducive climate for global MNC pharma companies to enter into collaborative research with Indian companies.

The larger role of IT in R&D will also help tilt the balance in India's favour. India is also well positioned to exploit the emerging opportunities in pre-clinical discovery research, which is expected to increasingly shift towards employing extensive IT skills (bio-informatics).

The cost competitiveness of Indian exports comes from its low cost, strong manufacturing and process re-engineering capabilities.