The effects of the economic downturn seem to be wearing off on the Indian pharmaceutical industry. Most Indian drug maj-ors have posted encouraging res-ults for the first quarter of the financial year 2010. If one ignores the performances of Ranbaxy Laboratories and Sun Pharma-ceuticals, the others have posted growth, beating market expectations. Ranbaxy and Sun Pharma were weighed down by US re-gulatory action against them.

Strong demand in the domestic market, a good global environment for generics and a favourable rupee-dollar ratio have helped Indian drug makers improve their numbers on an annual basis.

Overseas performance

With branded and generic companies coming together, analysts believe there will be a spurt in the number of authorised ge-neric agreements in both the US and Eur-opean markets.

Among sector bigwigs, Hyderabad-based Dr Reddy’s was successful in meeting analysts’ expectations due to robust perf-ormance of its anti-migraine drug Sum-atriptan and good growth in the US and Ind-ian markets. A series of cost-cutting mea-sures saw the Hyderabad-based firm more than double its profit from last year’s.

However, analysts are skeptical about the company’s prospects in German and Russian markets. “Though we are positive on the company’s North America business and the strategic GlaxoSmithKline alliance, we believe the stress in the company’s German and Russian businesses would act as a dampener,” Sarabjit Kour Nangra, an analyst with Angel Broking, said.

Ranbaxy, too, suffered a 21 per cent drop in US revenues following a ban on 30 drugs made at the company's plants at Dewas and Paonta Sahib. The firm has since sent a corrective plan about the Paonta Sahib facility to the US Food and Drug Admin-istration (FDA). Improvements have also been undertaken at the Dewas facility.

Not everyone is satisfied, though. “There has been positive development with respect to solving this issue. However, the scenario still looks hazy,” said Tushar Manudhane of Prabhudas Lilladhar.

Another Indian drug maker that suffered at the hands of the US regulatory authorities was Sun Pharmaceuticals. The company’s profits dropped by 80 per cent as US sales fell following FDA’s actions against the company’s subsidiary.

Such incidents as well as comments by US President Barack Obama have raised fears that protectionist strategies being implemented by the US government could seriously dent the prospects of Indian pha-rma companies, which get a large chunk of their earnings from the region.

However Manoj Garg, an analyst with Emkay Research, disagreed with this view. “India has more than 100 FDA-approved plants, out of which only three have received warning letters. Therefore, one should not correlate the recent warning letters from the FDA as an attempt at protectionism by US administrators,” he said.

Market watchers are of the opinion that the industry has performed in line or a notch above market expectations. What was surprising was the progress that some of the export-oriented firms have made in the domestic market, they added.

Over the years, the Indian market has never been very high on the priority list of domestic pharma companies. But, with traditional markets in Europe and North America having been bogged down by the global financial crisis, these companies have been forced to look at the local market with renewed interest. Some of them have even been successful in making some headway.

Cipla, for one, posted domestic revenue of Rs 651.90 crore, a jump of 11 per cent over the year-ago period. Sales in the Indian market now make up almost half of the company’s turnover.

Even the relatively small Ipca Labs made gains in the Indian market. The company’s domestic formulation business grew by a quarter, boosting its overall revenue by 22 per cent.

Lupin’s, probably, is the most remarkable example. The company’s India business exceeded its earnings from the US market in the last quarter. Domestic finished dosage sales went up 22 per cent over last year’s to Rs 340 crore. It expects to sustain this growth rate for the remainder of this financial year. Piramal Healthcare and GSK Pharma, too, have done well, given their large exposure to the Indian market. “India and other emerging markets have helped some of the companies spruce up their figures even as Europe and North America have stagnated,” a Mumbai-based analyst told FC Invest.

Steady growth

The Indian pharma market grew at the rate of 14.8 per cent last year to reach $12 billion. It is expected to touch $20 billion by 2015. At present, smaller urban centres and rural areas make up about 40 per cent of the total market.

India’s share in the global generics market stands at 11-12 per cent. The figure is expected to go up to 50 per cent by 2015.

Half of the active pharmaceutical ingredients and one-third of all generic drugs available in the US market originate from India. Indian pharma companies file about 50 per cent of the drug master files for supplying active drug ingredients to the US. Moreover, Indian companies are entering into agreements with global pharma majors in a bid to reach newer geographies.

Last month, Dr Reddy’s aligned with GlaxoSmithKline to develop and market some its products in emerging markets other than India.

The deal will give the Hyderabad-based company increased earnings visibility and allow it to leverage the marketing strategy of the international giant.

Another Hyderabad-based drug maker, Aurobindo Pharma, has struck a licensing and supply deal with Pfizer to provide solid dosages and sterile products. Pfizer has also bought rights from the company to sell 75 drugs as pills and 12 as injectables in the US and European markets. Bhawana Verma of K R Choksey said that the agreement would give Aurobindo steady revenue flow and resource utilisation in addition to licensing income and royalties. Many similar deals between local companies and global drug makers are likely to fructify in the near future, she added.

Stock performance

The BSE healthcare index has given a modest 22.16 per cent return year-to-date compared with 57.14 per cent rise on the BSE Sensex. Among the stocks, Auro-bindo Pharma skyrocketed 259.48 per cent followed by Matrix Labs, Biocon and Opto Circuits , which spurted 129.14 per cent, 96.91 per cent and 93.83 per cent, respectively.

Dr Reddy’s Laboratories, IPCA Labs also gained 68.76 per cent and 64.52 per cent to outperform the benchmark BSE Sensex. On the other side, Lupin, Pfizer Cipla, Wockhardt and GlaxoSmithKline returned a bit lower. The stocks gained 57.68 per cent, 54.40 per cent, 46.07 per cent, 34.60 per cent and 19.70 per cent, respectively. Sun Pharma and Ranbaxy managed modest gains while Glenmark, Sterling Biotech and Divis Labs slipped into the red.

Experts say the upside from product patents would create ‘option value’ in the stocks over the longer term. The impact of inventory corrections will reverse from the second half of this financial year.

Emerging markets will be key earnings drivers for Indian generic players in the short-to-medium term while the US busi-ness is likely to be hit in the near term, given the stringent steps taken by the FDA to ensure compliance with good manu-facturing practices.

(With inputs from Amit Mudgill)