Pharma sector sluggish as companies fail to innovate

NetScribes/Janaki Krishnan

The Indian pharma sector could well do with an effective growth prescription. With pharma companies continuing to focus on low-end, mass-based products and refusing to tap high-growth areas, the sector has been showing increasing signs of sluggishness in recent times.

Says Sameer Narayan, a pharma analyst at Motilal Oswal Securities, "The growth trajectory in the sector is nothing to write home about." During the year, the sector has managed only a 10 per cent growth, which is hardly a progress from last year's performance.

Even during the monsoon - traditionally a good season for pharma companies given the outbreak of diseases - there has been little achieved in terms of volume expansions (apart from antibiotics).

According to analysts tracking the sector, most of the action is happening in the already saturated antibiotics segment. In terms of volumes, the $21.6-billion segment (globally) is still growing at the rate of 12-13 per cent annually. The reason why antibiotics are so popular in India is that the kind of diseases prevalent in the country favour the use of antibiotics. "They don't have to be sold, they sell themselves," says an analyst at Kotak Securities.

There isn't much to look forward to either, for pharma companies have little to offer by way of new products. Analysts say that despite the hue and cry over new molecules, nearly 80 per cent of these 'discoveries' flop in the market. Besides, most of the products that manage to find their way to the market are just variants or product extensions. "Greenfield research is just not happening," says the analyst at Kotak.

Industry experts say the sector can hope for any kind of growth only when the larger companies move up the value chain and get into high-end products. A view that is shared by the stock markets as well.

Despite the seemingly overall good performance of pharma stocks, a closer look will reveal that even the markets tend to bet on stocks of companies that have a semblance of focus. The market favourites are leading companies like Pfizer, Hoechst, Cipla and Novartis.

Pfizer is seen as a company which leverages its marketing strengths and releases its products in the market when the premiums are high. "It has a novel way of getting the market," says the Kotak analyst. With profit margins of around 19 per cent, the company's new launches have earned it Rs 150 million in eight months (January to August 2000). During the next financial year, these products are expected to bring in an additional Rs 250 million.

Analysts predict the company will post a net profit of Rs 440 million in FY2001. On an equity base of Rs 234 million, this works out to an earnings per share of Rs 19. At the current market price of Rs 606 per share, its valuation is around 32 times its earnings per share.

Hoechst, with its strong research and development base, is another market favourite. The ongoing restructuring exercise will see the company growing 30-35 per cent in the current year. Sales of Allegra (which was launched around a year back) alone is expected to yield Rs 100 million this year.

New product launches are seen contributing to 15 per cent of Novartis' revenues in the current year. The company, which outsources most of its products, has reduced costs by 5 per cent this year. Analysts say Novartis, which has Rs 1000 million in free cash reserves, will also be acquiring new brands in the days to come.

While Dr Reddy's and Sun Pharma also figure in the list of market favourites, analysts feel there is a lot of speculative activity in both counters.

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