Pharmaceutical scrips are steadily losing their values 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 the year 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 at the end of 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 and then 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 investors' cautious attitude. Uncertainty about government drug pricing policy and lack of clarity regarding implementation of patent law are stated to be two main reasons. The legal conflict with Novartis in respect of Glivec also impacted the price movements.

The trading remained very volatile during January-August 2007 with major role of foreign financial institutional investors. Signals of slowdown in US economy, appreciation of major currencies in terms of US Dollar, overall pressure of Iraq war and fear of terrorist problem, failure at GATT regarding agricultural subsidiaries, significant ups and down in oil prices and interest rates impacted share price movements. In line with global markets, Indian stock market also moved accordingly. But the Indian macro-economic indicators remain strong and the long term outlook seems to be positive.

The Sensex touched to 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 investors' sentiment during the January-August 2007. The improved sentiment brought several new companies in the capital market with initial public offers. These IPOs received solid investors support and were oversubscribed.

Rupee appreciation may adversely impact exports
The rupee appreciation as against US dollar is likely to put pressure on export earning in the 2007-08. Several export oriented pharmaceutical companies like Ranbaxy Laboratories, Dr Reddy's Laboratories, Cipla, Aurobindo, Glenmark, Lupin, Orchid, Sun Pharmaceutical, Wockhardt, etc., 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 at the beginning of the year 2007 and the same was at its highest level 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 as against Rs.11,436 crore achieved 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 percent 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 may put pressure on earnings
Similarly, interest rates are going up which will likely to put pressure on earnings as almost all Indian pharmaceutical players are implementing expansion programmes The interest burden of 75 companies during the year 2006-07 increased by 14.8 per cent 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.

Strong earning growth in 2006-07
The standalone net profit of listed 75 companies, with net sales above Rs 75 crore, moved up sharply by 44.5 per cent in 2006-07 and their net sales increased smartly by 23.5 per cent. This growth is significantly higher as compared to the growth 10.5 per cent 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 long term.

R&D investment up by 7 per cent
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. The investment in R&D is a long term phenomena and final output is risky as well as uncertain. However, to overcome the competition in the international markets, the Indian pharma segment is going ahead with investments in R&D. This will give them upper hand in the long term. With higher investment in R&D, Indian companies' filing of DMFs and ANDAs are increasing in US and other highly regulated markets.

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Price movements
During the first eight months ended August 2007, the BSEHC index declined by 219.23 points to 3,572.82 as against 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 small change in market prices is impacting the index movements. The Cipla and DRL scrips declined sharply by 33.2 per cent and 21 per cent respectively as compared to the price as on the end of December 2006. Cipla is currently moving around Rs 165-170 as against Rs 250 as at the end of 2006. Similarly, DRL scrip is currently quoted at Rs 640 a against Rs 811. Further, Aurobindo, Cadila Healthcare, Novartis India, Sterling Biotec recorded double digit fall in percentage during first eight months of 2007.

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. However, except Glenmark, all these scrips are having relatively lower weightage in the BSEHC. Due to share split, Divi's share quoted at Rs 1174 on August 31, 2007 from Rs 3056 as at the end of December 2006. Fortis Healthcare entered in the index for the first time and currently moving around Rs 85.

Though the current price movements of Pharma scrips are not showing any special interest to investors, the long term outlook is positive one. Indian companies are spreading their markets presence with mergers and acquisitions and also launching new products in regulated as well as 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 push business operations of Indian companies.