As with most sectors, Indian pharmaceutical companies have had a tough year. Rising raw material and energy costs squeezed margins for everyone but  this was accentuated in the pharmaceutical sector as China halted production of intermediate drugs in the run up to the Olympics. The depreciation of the Rupee also hit many of the bigger players who booked large mark-to-market losses on FX hedges and saw their interest outgoings on foreign currency loans rocket.

The net outcome of these factors was an aggregate 7% reduction in PBT for domestic pharma companies, despite a respectable 24% increase in top line revenue, resulting unsurprisingly in significant market sell-offs. The BSE Healthcare Index is 29% down over the last 12 months with some of the larger pharma stocks such as Ranbaxy and Dr Reddy’s Laboratories being heavily sold (50% and 35% respective YTD fall in share price). However, despite this backdrop the future outlook gives some cause for optimism.

The shift from an overheating global economy to a faltering one in 2008 has for most sectors given with one hand while taking away with the other; pressure on input costs has eased only to be replaced by concerns about the sustainability of top line growth, particularly in sectors with significant export focus. In this respect pharmaceuticals companies may be the best placed in India. Their focus on generic formulations leaves them far less exposed to a global recession and may even result in an upturn in demand as people increasingly turn to low cost alternatives.

The other scenario the sector is well placed to benefit from is the trend for MNCs to outsource clinical trials to low cost locations to minimise R&D costs, of which clinical trials can constitute up to two thirds. The primary destinations are the BRIC economies and India is increasingly winning the battle to become the destination of choice, due in part to the high number of English speaking scientists and the large and genetically diverse population.

With their top line sales far less exposed than other sectors, Indian pharma companies are well placed to take advantage of falling input costs and would benefit from any appreciation of the Rupee. The industry as a whole should outperform the market over the coming year and although this in itself does not guarantee significant gains, those companies which can exploit the new economic realities can expect to make significant advances.

This entry was posted on Monday, December 8th, 2008 at 1:23 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.