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Sun Pharma In The News

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Injecting growth the global way

 

Better capacity utilisation, global experience and diversification are bringing in more clients and long-term revenue visibility for the industry. But forex issues may spoil the show this year
 
WITH just half of the top 40 India-listed pharma companies managing to beat Sensex's 11 per cent gain in the last three months, earnings during the July-September quarter show that the growth pill for pharma investors lies in select pockets. With valuations for leading com'panies at rich levels, it is important to scan the prospect of listed companies in this sector, which accounts for investor wealth amounting to Rs 3 lakh crore.
 
With annual revenues of Rs 72,000 crore, the listed Indian pharma sector is divided into four broad segments: gener-ics, bulk drug makers, biotech and pharma outsourcers. Firms focussed on generics such as Sun Pharma, Dr Reddy's or Lupin sell copies of innovator drugs abroad and make profits.
 
Bulk drug manufacturers such as Aurobindo Pharma and Shasun supply raw active pharmaceutical ingredients to generics as well as foreign innovator companies. Biotech companies like Biocon use technology, while pharma outsourcers such as Divi's, Dishman or Jubilant use low-cost strengths to supply drugs to clients (mostly abroad) or do research on molecules (that may later become drugs).
 
Generics segment
While generic and biotech businesses are high-margin ones, bulk drug and pharma outsourcing are high-volume businesses. However, very few listed companies are pure-play generic or pharma outsourcing companies with most of them having started as bulk drug makers who later moved up the value chain. The generic nature of busi'ness abroad (especially in the US) is built on selling drugs during six-month windows before competition cannibalis'es the markets.
 
With the exception of Dr Reddy's and Ranbaxy, generic firms like Sun Pharma, Lupin and Glenmark have posted more than 20 per cent year-on-year growth in sales for the quarter ended September 30 with reported prof'its rising by 10-40 per cent. Dr Reddy's revenue growth was around 2 per cent with the US business showing marginal growth. A break-up of profits for Ranbaxy shows that incomes from other sources, including Rs 260 crore of forex gain and lower tax-rate, helped to record a 168 per cent growth in bottom line.
 
"If forex issues do not play havoc, limited-period opportunities give gener'ic pharma companies fat profits," said Alex Mathews, research head of Geojit BNP Paribas Financial Services. On occasions, generic companies settle patent cases with innovator companies, leading to assured revenues, absence of court cases and better revenue visibility. The problem areas in generic business for Indian companies having exposure to Europe lie in the commoditised nature of markets. The government-controlled drug procurement system does not leave much room to make huge profits as tenders assure volumes but not fat margins.
 
Global partnerships
The business of Indian bulk drug manu'facturers in a sense resembled the European businesses sometime back. At the mercy of powerful generic companies, plain vanilla pure-play bulk drug makers had to compete with Chinese companies to keep costs low. However, the advent of partner'ships with global pharma majors like Pfizer and AstraZeneca has changed the game for players like Aurobindo Pharma and Torrent Pharma who inked long-term drug supply deals. The positives are: better capacity utilisation, diversification from supplying to generic companies, global experience bringing in more clients and long-term revenue visibility.
 
Take for instance the second quarter results of Aurobindo Pharma. The results marked a complete turnaround compared with the disappointing performance during the first quarter.
 
The company's adjusted net profit of Rs 140 crore for Q2 of FY11 was well above analysts' estimates. Net sales at Rs 1,110 crore were also higher than expecta'tions. According to Hitesh Kuvelkar of First Global, the company expects a ramp up in sales from the Pfizer deal ($47-48 million in FY10) with higher EU supplies beginning from the second quarter and the rest of the world supplies commencing by the end of the present financial year.
 
Revenue visibility
Long-term agreements provide opportuni'ties to earn milestone income. In March 2010, AstraZeneca announced an agree'ment with Torrent Pharmaceuticals by which Torrent would supply to AstraZeneca a portfolio of generic medicines for which Torrent already has licences in various countries. Working in partnership with Torrent, AstraZeneca intends to brand and market these products in many emerging markets where it already has a strong com'mercial footprint.
 
Ravi Agrawal of Edelweiss feels that while Torrent's second quarter results were mixed, the higher sales growth and milestone income offset lower margins in core business. "Net sales (including other operating income) at Rs 580 crore grew 21 per cent Y-o-Y and was higher than our estimate of Rs 540 crore. It was largely driven by a $2 million milestone income from the AstraZeneca deal not built in our estimate," he said.
 
Cadila also has tie-ups with Hospira to supply drugs and has generally stayed away from risks associated with patent challenge. Cadila's future growth will be led by increased traction in its internation'al businesses, ramp-up in supplies to Hospira and recovery in the domestic for'mulations business, said Nimish Desai, an analyst with Motilal Oswal.
 
Indian market
Now, let us focus on the domestic formulations business of Indian pharma compa'nies. Pegged between Rs 45,000 crore and Rs 55,000 crore, the annual domestic pharma market is highly fragmented with Cipla, Ranbaxy, Sun Pharma, GSK Pharma and Abbott (after acquiring Piramal's domestic business) being major players. A large captive population and government controls on drug prices make the domestic market a volume game.
 
But niche business gives a slight edge to arms of foreign pharma majors like GSK, Pfizer and Aventis. Glaxo in the September quarter reported net sales of Rs 582 crore, up 14 per cent, driven by the mass market, mass specialities and specialities businesses. The high-margin vac'cine segment grew 34 per cent during the quarter and contributed 10 per cent to sales, according to Sarabjit Kour Nangra of Angel Broking. The India business as a percentage of global revenue has stayed stagnant or fallen for most of the firms, as companies have tried to capture growth overseas.
 
Pharma outsourcing
Pharma outsourcing is another useful tactic to ride on foreign drug demand, and companies like Dishman, Jubilant, Divi's and Piramal Healthcare have built up capacities as well as capabilities to service the fast-growing pharma outsourcing market. Like IT, pharma outsourcing helps foreign drug makers cut costs at manufac'turing and research levels.
 
It is estimated that part or whole man'ufacturing of drugs can lead to almost 30-40 per cent reduction in comparable costs elsewhere.
 
In Q2, Divi's and Jubilant saw their pharma outsourcing segments report 15-20 per cent growth. The only risk in this business is destocking by global innovator drug firms. The contracts usually begin with small amounts of drug to be supplied and are later expanded into bigger con'tracts, assuring high-volume offtake, said experts tracking the field.
 
Stock performance
Among pharma stocks, the last three months have seen counters like Wockhardt, Orchid Chemicals, Unichem, Sun Pharma, Aurobindo, Dr Reddy's, Lupin, Ranbaxy and Glenmark give more than 30 per cent returns.
 
Among the laggards, stocks such as Piramal Health, Pfizer, Divi's, Plethico, Jubilant, Fresenius Kabi and Dishman Pharma have given negative returns (3-19 per cent) in the same period.
 
Though most stocks are near their 52-week highs mirroring Sensex moves, Dishman, Jubilant, Cipla, Wyeth and Plethico are close to 52-week lows, indi'cating the absence of any price euphoria as the investor sentiment in these compa'nies continues to be pessimistic.