Tuesday, October 26, 2010

Pharma Sector - Robust Growth Prospects buy on declines


Pharma companies may put up a strong set of numbers due to robust domestic growth and the global generics opportunity.

The BSE Healthcare index has underperformed the Sensex by about nine percentage points in the September quarter, which is not surprising. As the risk appetite increases among investors, the pharma sector, which is a defensive play, will not do as well as the broader market. However, since March 2009, when the markets were at a low, the pharma index has outperformed the Sensex by 14 percentage points.

According to analysts at Angel Broking, Sun Pharma may post muted sales growth of 2.4 per cent due to lower sales of Protonix, which is now under litigation. On the other hand, Dr Reddy's may surprise positively, as the September 2009 quarter was marred by inventory and goodwill amortisation issues.

Domestic formulations are likely to boost Cipla's top line by 5.5 per cent, but higher wage costs may drag operating profits. Ranbaxy, although struggling with US Food and Drug Administration issues, may see its top line rise two per cent, as Valtrex generics continue driving revenues despite the end of the exclusivity period and competition getting stronger.

Analysts expect Lupin to post 12 per cent growth with strong domestic and US revenues, while Ipca should grow at 14 per cent aided by the anti-malarial segment sales both in India and abroad.

The September quarter saw Sun Pharma completing the Taro acquisition, Ranbaxy getting exclusivity in Aricept and Aurobindo entering into a supply agreement with AstraZeneca. Approvals for generic launches, too, fell in around the same time, with Aurobindo receiving four approvals and Sun winning three.

Going forward, the pharma sector is in good shape. The domestic market is expected to witness 12-15 per cent year-on-year growth, while the global market will grow at five per cent. Being strong contenders in the global generics space, there are tremendous opportunities for Indian pharma companies, as a large number of key drugs will go off-patent over the next five years. Once again, the market has started factoring in the future growth. The healthcare index has gained 5.7 per cent in the past eight trading sessions, while the Sensex has risen just 0.7 per cent.


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