Source: economictimes.indiatimes.com

The pharmaceutical sector has been one of the most beleaguered sectors on the bourses since ’06. In the past one year, the sector has underperformed the Sensex by 15%. Erratic cash flows due to riskier business models and lack of innovation took a toll on the performance of the sector. Meanwhile as economic growth accelerated in the country, investment-driven sectors started performing well, leading to dwindling investor interest in defensive sectors including pharmaceuticals.

A comparison of the financials of the top 20 companies based on their net sales (for year ending December ’07) reveals that revenues have been stagnant over the past one year. However, the effect of pricing pressure, if any, has not been visible as the industry has been able to increase its operating profit margin from a low of 17% in December ’05 to 22% of net sales by the end of last calendar year.

The domestic market for pharmaceutical products is growing at a rate of 13-14% annually. But most of the Indian pharma companies are growing at a much faster pace by exporting generics in the international markets. Ageing population in the developed countries, higher incidence of lifestyle-related diseases and numerous drugs going off patent have created a ready overseas market for Indian companies.

Take, for instance, Ranbaxy and Dr Reddy’s Laboratories (DRL) — the two largest pharma companies by total revenues. More than 70% of their turnover is contributed by export sales. Cipla, the largest player in the domestic market, also derives half of its revenues from exports. Cardiovascular, oncology, diabetes and nutraceuticals are key therapeutic areas being explored by Indian companies. Besides selling branded and unbranded generics in regulated and semi-regulated markets, companies are also ramping up manufacturing facilities to undertake contract manufacturing.

Companies like Glenmark earn milestone payments by out-licensing molecules after the completion of initial phases of research. Contract research and manufacturing services (CRAMS) is yet another big business opportunity being explored by many small- and medium-sized pharma companies. Low-cost outsourcing in areas of clinical research, clinical trials and contract manufacturing present a new source of growth for the industry.

Read More