Pharmaceutical scrips are steadily losing their value in Mumbai stock market, despite the strong fundamentals and export performances by pharmaceutical companies during 2006-07 and also in the first quarter of 2007-08. Share prices of most pharmaceutical companies have either declined or remained unchanged during the first eight months of 2007.
The 23 companies BSE Healthcare (BSEHC) index under performed, as compared to BSE Sensex (Sensex) of 30 major companies from all segments of the economy. The BSEHC declined by 5.8 per cent on August 31, 2007 to 3,573 points from 3,792 points as of December 31, 2006. However, the Sensex moved up by 11.1 per cent to 15,319 points from 13,787 points during the same period.
The BSEHC index touched its 52-weeks peak level at 3991.40 on January 18, 2007 but later on experienced volatile movements. It touched its 52-weeks lowest level at 3306.09 on March 7, 2007. Upward movement of pharma share prices was under pressure on account of cautious attitude of investors. Uncertainty about government drug pricing policy and lack of clarity regarding implementation of patent law are stated to be two main reasons for this. The legal conflict with Novartis in respect of Glivic also impacted the price movements.
The trading remained very volatile during January-August 2007 with foreign financial institutional investors playing a major role. Signals of slowdown in US economy, appreciation of major currencies in terms of US dollar, overall pressure of Iraq war and fear of terrorist attack, failure at GATT regarding agricultural subsidiaries, significant ups and downs in oil prices and interest rates impacted share price movements. The Indian stock market moved in line with global markets. But the Indian macro-economic indicators remain strong and the long term outlook seems to be positive.
The Sensex touched its highest level at 15,868.85 on July 24, 2007 with good financial working, higher dividend payments, mergers and acquisitions, higher projection of GDP, relatively stable political atmosphere, strong growth in forex reserves, better than expected agricultural production, higher investments in infrastructure projects and changing life style with higher purchasing power. Further, easy availability of credit assisted the overall investor sentiment during January-August 2007. The improved sentiment brought several new companies in the capital market with initial public offers. These IPOs received solid investor support and were oversubscribed.
Impacts of rupee appreciation
The rupee appreciation as against US dollar is likely to put pressure on export earnings in 2007-08. Several export oriented pharmaceutical companies like Ranbaxy Laboratories, Dr Reddy's Laboratories, Cipla, Aurobindo, Glenmark, Lupin, Orchid, Sun Pharmaceutical and Wockhardt may suffer on export front in the current year. The foreign exchange rate between Indian Rupee and US dollar was at Rs 44.12 per dollar in the beginning of 2007. The same was at its highest at Rs 44.61 on June 3, 2007. However, rupee started appreciating afterwards and currently moving around 41-41.25 per dollar.
This significant appreciation of rupee will impact Indian companies export earnings in the current year. This factor put pressure on price movement of pharmaceutical sector. A Pharmabiz study of the export performances of 25 top Indian pharmaceutical companies shows that their exports grew by 36.2 per cent in 2006-07 to Rs.15,574 crore from Rs.11,436 crore in the previous year. The figures also indicate that exports of these companies accounted for almost 49 per cent of their net sales during the year as against 44.6 per cent in the previous year. With their thrust towards developing new markets through focused product development, export growth of these companies could be much faster if the exchange rates will not change drastically.
Interest burden to affect earnings
Similarly, interest rates are going up, which will likely to put pressure on earnings as almost all Indian pharmaceutical players are on expansion mode. The interest burden of 75 companies increased by 14.8 per cent in 2006-07 to Rs 746 crore from Rs 650 crore in the previous year. With significant investment in expansion, the interest burden will move up in the current year.
Earnings soar in 2006-07
The standalone net profit of listed 75 companies, with net sales of above Rs 75 crore, moved up sharply by 44.5 per cent in 2006-07, while their net sales increased smartly by 23.5 per cent. This growth is significantly higher as compared to the 10.5 per cent growth in sales for the 15 leading multinational companies in the regulated markets like US and Europe. However, the investors and foreign financial institutions have neglected the pharma segment during the first eight months of 2007. Though rupee appreciation and higher interest burden may put pressure, the CRAMS activities, clinical trials, focus on biotechnology, cost effective products, strong manufacturing base and huge domestic market will give necessary boost to Indian pharma segment in the long term.
R&D investment shoots up
The aggregate R&D expenditure of 20 leading pharma companies increased by 6.8 per cent to Rs 2207 crore during 2006-07 from Rs 2067 crore in the previous year. The R&D expenditure as percentage of net sales during 2006-07 worked out to 8.15 as compared to 9.49 in the last year, basically due to reduced expenditure by the few companies.
Price movements
During the first eight months ended August 2007, the BSEHC index declined by 219.23 points to 3,572.82, though BSE Sensex moved up smartly by 1,532 points to 15,319. Out of 23 pharma companies included in the BSEHC, 12 companies scrips declined on August 31, 2007, as compared to end of 2006. The major companies like Ranbaxy Laboratories, Cipla and Dr Reddy's Laboratories assigned weightage of 14.91 per cent, 12.34 per cent and 11.78 per cent, respectively in BSEHC and change in market prices is impacting the index movements. Cipla and DRL scrips declined sharply by 33.2 per cent and 21 per cent, respectively as compared to the price as of December 31, 2006. Cipla is currently moving around Rs 165-170 as against Rs 250 at end of 2006. Also, DRL scrip is currently quoted at Rs 640, down from Rs 811. Further, Aurobindo, Cadila Healthcare, Novartis India, Sterling Biotec recorded double digit fall in percentage during first eight months of 2007.
However, Biocon, Glenmark, Matrix Laboratories and Opto Circuit achieved remarkable gains and moved up by 22.3 per cent, 14.9 per cent, 14.6 per cent and 58.9 per cent, respectively. But except Glenmark, all these scrips are having relatively lower weightage in the BSEHC. Due to share split, Divi's share was quoted at Rs 1174 on August 31, 2007, down from Rs 3056 at the end of 2006. Fortis Healthcare entered in the index for the first time and is currently moving around at Rs 85.
Though the current price movements of pharma scrips are not showing any special interest to investors, the long-term outlook is positive. Indian companies are spreading their markets presence with mergers and acquisitions and also launching new products in regulated and emerging markets. During the first few months of 2007, Ranbaxy, Sun, Wockhardt, Jubilant, Glenmark and Zydus acquired companies like Be-Tabs Pharma (South Africa) Taro Pharmaceutical (Israel), Negma Labs (France), Holister-Steir (USA), Medicamenta (Czech Republic) and Nippon Universal Pharma (Tokyo). This M&A trend is likely to improve business operations of Indian companies.