US slowdown, Re fluctuations may hit pharma stks

CNBC-TV18's Research Analyst, Haresh Soneji : In our continued series of India Inc. on a downturn, the fourth sector that would most likely see an earnings revision is the pharma sector.

Story so far

Mixed Industry - one leg may do well, the other might hurt

Business divided into Generics and CRAMS business

Generics is becoming a commodity play

CRAMS segment providing impetus, but for how long?

Concerns over US recession, rupee appreciation

Stocks underperformed over previous 2 years

Business Model: Generics

Co files for exclusivity

May or may not get exclusivity

Exclusivity usually for 3-6 months

Nos look good during the period

Post exclusivity, topline, bottomline shrinks significantly

Major players - Dr Reddys , Ranbaxy , Aurobindo

Business Model: CRAMS

Contractual obligations with US Cos for research and manufacture

Contracts on the basis of research facility and price negotiations

Competitive dynamics at play

Major players - Divis Laboratories , Jubilant Organosys , Dishman

Companies considered: Aurobindo, Dr Reddys, Cipla, Sun Pharma, Nicholas Piramal

Sales growth

Sep 06      41%

Dc 06       46%

Mar 07     34%

Jun 07      5%

Sep 07    18%

Dec 07   -3%

APAT Growth

YoY

Sep 06    87%

Dc 06     NA%

Mar 07   134%

Jun 07   -19%

Sep 07   -20%

Dec 07   -63%

Source: CNBC TV18 estimates

Concerns from here

• Historically considered defensive bets, but volatility in earnings on the rise
• Slowdown in US may lead to price negotiations
• Rupee fluctuations to hit those dependant on exports
• Increased competition in generics business
• Pricing on base generic products stable while for new launches it is challenging
• Price Regulations in Western European markets
• Integration still in progress with acquisition targets
• Problems like DRL take Rs 236 crore write off in Q3 FY08 due to Betapharm
• Number of drugs going off patent is lower in CY08 vs CY07
• Govt pressure to reduce prices in India