Sector picks for 2011 - (1) : Pharma

Pharma :

Continued benefits from an increased generic incursion in global markets and a robust domestic market are likely to translating in to steady growth in core businesses and exports for the drug companies. Generic drug making companies are those who mass manufacture off-patent drugs. Ususally generic drugs are cheaper since they donot have any patent loyalty payments and they are produced in a mass scale.

Following are the Growth triggers

Patent cliff: The next few years promise to be among the most action-packed for generic drug makers as global pharma majors stare at significant drug patent expiries. In 2011 alone as per IMS Health, products having sales of more than $30 billion are estimated to go off-patent.

Limiting growing healthcare budgets in developed countries like USA and UK would spur the demand for generics. These in turn are expected to fuel the growth prospects of the Indian pharmaceutical sector, which boasts of a growing product pipeline, regulatory-compliant manufacturing facilities and cost advantages.

For instance, the expiry of Pfizer's cholesterol-lowering drug Lipitor in November 2011 (had generated $8.1 billion in sales in the first nine months) opens up a significant money-making opportunity for India's Ranbaxy, which being the first-filer would have a six-month period of market exclusivity starting November 2011. It's another matter than Ranbaxy would need to necessarily resolve its pending issue with the US FDA over its manufacturing facilities before then.

Strong domestic market: A robust domestic market too is expected to provide a growth thrust, with both Indian and MNCs drug makers increasingly focusing on the domestic market (esp. tier II and III cities). Companies such as Ranbaxy, IPCA Labs, AstraZeneca India and Cadila Healthcare have also aggressively added on to their field force. Industry estimates peg the domestic market growth at about 16 per cent.

Revival in CRAMs: CRAMs stands for Contract Research and Managerment Services. With abundance of trained manpower, capacity and cost factors, these companies do contract research for various pharma companies worldwide.

CRAMs companies have had a forgettable year so far following destocking by global pharma, rationalising of R&D pipelines and M&As.

The coming year however promises to be much better with industry trends now pointing towards a pick up in this demand towards the second half of the calendar year. While the revival would benefit all companies in this space, Jubilant Life Sciences and Divi's Laboratories may be the leading beneficiaries. Sun Pharma alone has a more than 363 products filed in the US, of which 146 await FDA approval.

Among other significant stock-specific growth triggers are — Allegra D 24 and Arixtra for Dr Reddys Laboratories, Docetaxel for Sun Pharma, AllerNaze and oral-contraceptive products for Lupin.

If 2010 saw Indian drug makers forge global alliances and deals, 2011 promises to be the year when these companies would begin reaping the benefits therefrom. Companies such as Aurobindo Pharma (Pfizer and AstraZeneca), Dr Reddys (GSK) and Biocon (Pfizer) will begin monetising their licensing deals with the big pharma in the next few years, thus providing support to valuations. Similar deals that are struck by other companies (Cipla rumoured to be next) therefore may bear a watch.