The year 2011 ended with southward trend and several pharmaceutical scrips closed near to their yearly low level on last trading day of the year. The downward trend in share price is likely to continue in the near future with uncertainty regarding European debt crisis, weak domestic economic indicators, a lack of momentum on policy reforms, interest burden, rising deficit, rupee depreciation and FIIs negative approach. At the start of 2011 most of the brokerage firms were bullish on stock market rally and earnings growth, but their forecasts went wrong impacting investors sentiment and confidence. The primary market as well as secondary market lost momentum and moving ahead with great uncertainty.
The BSE Healthcare (BSE HC) index of 18 leading pharmaceutical companies declined by over 12.8 per cent during the year to 5870.52 points from 6734.19 points on the last trading day of 2010. The BSE HC touched to its yearly peak level at 6871.32 on January 2011 and same touched to its yearly low at 5683.12 on February 24, 2011. However, the BSE Sensitive index (Sensex) of 30 companies declined sharply by around 24.6 per cent to 15454.92 points from 20509.09 points as at the end of 2010. Sensex touched to its highest level at 20664.8 points as compared to recently lowest level of 15135.86 points on December 20, 2011
The Foreign Institutional Investors (FIIs) remained net seller during 2011 as against net buyer in 2010. FIIs sold shares worth Rs.6,00,235 crore during 2011 and buy shares worth Rs.6,26,931 crore, making a net selling of shares of Rs.26,694 crore in 2011. During 2010, FIIs purchased shares of Rs.7,19,696 crore from market and sold shares worth Rs.6,57,324 crore. This pull out from the market by FIIs impacted the growth of market indicies significantly.
Ranbaxy Laboratorie scrip closed at the year ended 2011 at Rs.405.25 as against its yearly high of Rs.611.75 and lowest of Rs.366.50. Dr Reddy's Laboratories share closed at Rs.1,589 as against its peak level of Rs.1,728 and lowest of Rs.1,378. Out of 40 companies selected by the Pharmabiz, very few companies like Abbott India, Aventis Pharma, Divi's Laboratories, Novartis India, Sun Pharma and Wyeth reported positive growth in share price over the previous year ended December 31, 2010. Aurobindo Pharma, Lupin, and Surya Pharma split face value of share during the year.
The slowdown in economic activities may impact the mergers and acquisition activities in India. During last couple of years few Indian companies sold their business to multinational. Ranbaxy Laboratories went in the hand of Daiichi Sankyo of Japan, Matrix Laboratories taken over by Mylan Inc, Abbott acquired formulation business of Piramal Healthcare and J B Chemicals sold its Russian business to Johnson & Johnson. Sanofi-aventis acquired Shanta Biotech. Reckitt Benckiser takeover Paras Pharmaceuticals, Danone purchased Wockhardt's nutrition business. Further, multinational pharma companies have entered several marketing and R&D tie-ups with Indian companies.
Meanwhile, the government has decided to allow FDI without any limit under the automatic route for greenfield investments in the pharma sector. This will facilitate addition of manufacturing capacities, technology acquisition and development. In case of brownfield investments in the pharma sector, FDI will be allowed through the FIPB approval route for a period of upto six months. During this period, necessary enabling regulations will be put in place by the CCI for effective oversight on mergers and acquisitions to ensure that there is a balance between public health concerns and attracting FDI in the pharma sector. This decisions may push merger and acquisition activity in India in near future.
The continuous depreciation of Rupee as against US Dollar and Euro also impacted the sentiment. As at the end of 2010, the exchange rate of Indian Rupee verses US Dollar was Rs.45.32 per dollar and that with Euro was Rs.60.06. The same was at Rs.54.52 and Rs.70.45 was at the end of December 2011. This adverse exchange rate may impact the foreign currency loans including FCCBs taken by pharmaceutical companies in the current year. However, considering the huge exports by pharma segment will offset the adverse impact.
The earning growth of pharmaceutical companies during the quarter and half year ended September 2011 was not upto the mark. The aggregate net profit of 75 leading pharma companies dropped by 22.4 per cent during the quarter ended September 2011 due to higher foreign exchange losses. The net profit declined to Rs.2,551 crore from Rs.3,286 crore in the corresponding period of last year. The working of these companies during the first half was also under pressure and not showing any promising trend at net level. However, the net sales of Pharmabiz sample of 75 companies registered strong growth of 18.6 per cent to Rs.27,927 crore from Rs.23,546 crore in the quarter ended September 2010. This shows that the profitability in the 2011-12 will be under pressure which will impact the price movements adversely.
Research & Development (R&D) expenditures of Indian pharmaceutical companies are showing a substantial growth rate in recent years although none of them could bring out a new molecule into the market. What they have been successful so far is to file increasing number of ANDAs and Drug Master Files (DMFs) in the US, Japan and some European countries.
The slower returns from investment in R&D is also giving tough time to pharma companies, but these companies are getting higher number of ANDAs approvals from highly regulated markets. The R&D expenditure of 30 leading Indian pharmaceutical companies increased by 18.7 per cent to Rs.3,770 crore during the year ended March 2011 from Rs.3,177 crore in the previous year with significant higher product filings in US, Europe, Japan and emerging markets. During 2011, 28 Indian companies and their subsidiaries or joint ventures have grabbed 144 ANDA approvals from US FDA and 49 tentative approvals. The US FDA approved a total 431 ANDAs and 117 tentative approvals during 2011. Thus Indian companies obtained over 33 per cent of US FDA approvals in 2011.
To overcome the competition and meet enhance demand, the pharmaceutical companies are making investments in expansion and upgradation of facilities with the help of huge borrowings. Bank interest rates have hardened by RBI to reduce inflationary pressure during last one year. This will have adverse impact on overall bottom line in the current year.
The government projected lower economic growth of 7.5 per cent from original expectation of 9 per cent. The recessionary trends in US and uncertainty regarding European crisis restricting the investments Foreign Institutional Investors (FIIs) in a big way. With the current domestic and world economic conditions, the FIIs investment strategy is not likely change in the first half of 2012. Further, a lack of momentum on policy reforms may also hamper growth in FIIs investments.
Abbot buyout of Piramal domestic formulation business, Reckitt Benckiser’s purchase of Paras Pharmaceuticals and the acquisition of the nutrition business of Wockhardt by Danone. Prior to that it was Daichi’s acquisition of Ranbaxy, sanofi and Shanta Biotechnics, Hospira and Orchid, Mylan and Matrix Labs.
Share price movements during 2011