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Industrial Products India, Industrial Manufacturers & Suppliers


Pharma\'s defensive tag comes under

Pharma's defensive tag comes under threat; regulatory & patent tiffs up sector’s risk profile

The recent regulatory lapses surroundingIndian pharmaceutical companies have raised concerns regarding thedefensiveness of the sector when pitted against other defensive industries like thefast moving consumer goods (FMCG).

Defensiveness is the ability to generate constant returns and earnings irrespective of the overall sentiment of the stock market. For instance, FMCG companies have been able to turn in a fairly impressive performance even when the overall markets have slowed down and other companies have faltered.

The Indian pharmaceutical sector, once touted as a sunshine evergreen industry, has undergone many changes in the recent years. From an investment perspective, a prominent change has been the sector's risk profile.

For an investor, the pharma sector, which was traditionally a defensive play typically characterised by a cash-rich business with low risk given the steady and inelastic demand, has no longer remained a classic defensive bet. Overseas expansion, bringing in its wake increased regulatory compliance, intense competition, and disputes relating to violation of patents have increased the risk profile of the sector.

Volatility in performance has become a norm for most drug companies, an aspect that goes against the idea of defensiveness. Ranbaxy's current market cap of Rs 16,500 crore, the largest pharma company by revenue, is still lower than the company's average market cap in 2004, thanks to regulatory issues with USFDA.

Sun Pharma, the most valuable pharma company on the bourses today, did badly in FY10, resulting in a 6% drop in net sales and a 28% drop in net profit following suspension of manufacturing at Caraco by USFDA, before it began posting over 40% growth in revenues.

Dr Reddy's Labs
, while logging over 30% growth in net sales in FY13, had posted a marginal increase of 5% and 2% revenue growth, respectively, in the preceding two fiscals.Cipla, while reporting an 18% increase in net profit in FY13, had reported a 10% drop in the year before on account of fluctuating fortunes in the export market.

Cadila Healthcare
 reported a 39% growth in net profit in FY12 but failed to sustain it in FY13, as its net profit dropped 7% this year - thanks to under performance in the US market
.Wockhardt, which had reported a 16% drop in revenues in FY12, managed to turn around and register a growth of 22% in net sales and almost quadrupled its net profit to Rs 341 crore. However, an import ban by USFDA is going to set it back this year.Lupin, with its strong and growing presence in the US and Japan - the two largest drug markets in the world - has been one of the few pharma cos to have posted fairly consistent revenue growth over the past several years.These instances prove that pharma companies no longer perform consistently and share a high percentage of uncertainty, largely because of the way the industry is growing and the regulatory risks that companies are taking.Nevertheless, despite rising uncertainty, overall the pharma sector has been able to provide better returns to investors than the broader market indices.
The BSE Healthcare has outperformed the Sensex in each of the past four years, retaining the sector's attractiveness for investors during slowdown. But having said that, it still can't match up with the BSE FMCG Index


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