Pharma sector to enjoy good health in New Year

Pharma sector to enjoy good health in New Year
We expect the pha­rma sector to remain in focus on account of diversified, matured business models and earning visibility. Most of the players witnessed superficial profits in CY12. This may not repeat in 2013. However, we expect most of the players to clock 18 per cent to 20 per cent sales growth and similar earnings growth going ahead. We expect BSE healthcare index to continue outperforming the broader market.

However, the magnitude of the outperformance may shrink on account of better-than-expected earnings from ex-pharma sector companies backed by their focus on reforms and stretched valuations of some of the BSE HC index constituents.

Following are the some of the structural strongholds of the pharma sector:-

1. With Obama back in power, benefits of Patient Protection and Affordable Care Act (Obama Care) will be a reality without any hassle, the benefits of which will directly flow down to leading generic players. Obama Care advocates saving in the spiraling healthcare cost by way of covering uninsured Americans to curtail deficit.

2. The national pharma pricing policy in its current format will not cause much harm to the diversified players like Lupin and Sun.

3. Chopping of healthcare budgets globally will affect the branded players, creating scope for volumes for generic and CRAMS (Contract Research and Manufacturing Services) players.

4. Focus on emerging markets will create more volumes for industry with less stringent requirements

5. Incremental R&D spend over the past 5-6 quarters will start yielding benefits. At the same time we also foresee certain limiting factors, such as:-

1. Indian generic players are trading at a premium to their global peers. Any adverse domestic policy impact (Supreme Court ruling pending) or cGMP issues may shift investor focus to ex-Indian generic players. Many of these global players, which faced the CGMP issues over the past 18-24 months, have more or less addressed these issues.

2. The waning ‘patent cliff’ impact of CY11 and CY12 saw brands worth $25 billion and $35 billion going off-patent, respectively. This cushion will be squeezed in CY13 as the value of off-patent brands will be between $15 billion and $18 billion.

3. Competition in domestic formulations players termed as marginal players 2-3 years back are entering the top 10 slots from top 20 slots with aggressive pricing.

4. The benefit of rupee depreciation will also be adjusted from Q3 onwards.

We advocate a focus on select geographically diversified players. Cadila Healthcare, Lupin and Ipca are our top picks from the sector.zz

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