Thursday, April 22, 2010


The BSE Healthcare Index has increased 5.7% during Q4FY10 compared to the BSE Sensex which remained flat during the quarter. The outperformance has been mainly due to new ANDA approvals, niche opportunities in the US market and domestic formulations showing healthy growth leading to margin expansion and higher profitability.

US continues to remain the mainstay
The large cap space will continue to witness benefits from niche/recurring/one-off opportunities in the US eg. SUN-Pantoprazole, Dr.Reddy's Labs - Omeprazole OTC and Ranbaxy-Valtrex. Other opportunities that may come in during Q1FY11 are SUN-Effexor XR and Dr.Reddy's - Allegra D24. Lupin which has taken the branded formulations route for the US market is expected to lay greater thrust on Antara and launch Allernaze during Q2FY11 in the US market. Cadila Healthcare will see the Hospira venture gaining greater traction going forward.
US remains the mainstay of large cap companies and we believe will continue to remain a formidable market in the near future. The German market will continue to see declining price realisations on account of higher component of market migrating to tender business.

Increasing number of dossier licensing and supply deals eg. Aurobindo-Pfizer, Torrent-Astra Zeneca, IPCAAstra Zeneca, Indoco- Watson, Aspen lends greater credence to the chemistry and formulations sills of Indian companies in the mid-cap and small-cap space. MNC's are actively looking for outsourcing their R&D activities so as to make it variable in nature. Indian CRAM's space namely Divis, Dishman and Jubilant will benefit owing to completion of destocking by MNC's and increased outsourcing by MNC’s.

The Healthcare Bill in the US lays greater emphasis on lowering healthcare costs will result in higher generic penetration and benefit all the companies in our coverage as they have a sizeable presence in the US market. We believe Lupin and Dr.Reddy who have garnered a reasonable share of the US generic market will witness positive revenue traction in their US business.

Domestic formulations business showing healthy growth

Companies with significant exposure to the domestic formulations business mainly in mid-cap and small-cap space will continue to benefit from the higher growth rates especially in the chronic segments. The Indian pharmaceutical market was worth Rs.400 bn in Dec 2009, had growth rates of 12-13%. The strong growth rates will continue on the back increased penetration of healthcare and insurance amongst the Indian populace.

MNC pharma companies namely GSK and Aventis Pharma have been showing interest in the branded generic space in India and have been expanding their field force and also launched products in the branded generics space in India. With increasing emphasis on semi urban market, foray into the branded generic market, we believe MNC’s should also see better revenue traction in the forseeable future. We have rolled over our price target to FY12E. In the large cap space we continue to like Lupin and Sun Pharma. In the midcap space we like Aurobindo Pharma, Ipca Labs, Unichem Labs and Torrent Pharma. Indoco Remedies remains our pick in the smallcap space.

To read the full report: PHARMA SECTOR