Local pharma cos beat MNC peers

MUMBAI: Domestic pharmaceutical shares have outperformed their multinational (MNC) counterparts in the last month, even as the MNCs have done some catching up this week.

Though analysts believe that both domestic and MNC pharma shares are fully priced at these levels, the exciting growth opportunities for domestic companies place them above the MNCs. Most frontline pharma shares are valued at 18-24 times 2006-07 estimated earnings, they said. “MNC pharma shares are overvalued by 15-20% in comparison with its domestic peers,” said Vasudeo Joshi, head-institutional research, Man Financial.

In addition to stretched stock valuations, the situation is not too conducive for MNC pharma companies, as the proposed new drug policy will likely undermine the positives from improved operational efficiencies such as de-emphasising products under price control.

“There is no proper revenue growth model for MNC pharma companies at the moment and they are dependent on the domestic market, which is hardly exciting right now,” said Surajit Pal, analyst, UTI Securities, while referring to the government’s proposed new drug policy The proposed policy intends to bring an additional 354 drugs under price control, in addition to the existing 74. MNCs are likely to be more affected by this policy than their domestic peers mainly due to their larger domestic presence and premium pricing strategy.

“Despite the proposed increase in MAPE (maximum allowable post-manufacturing expenses) from 100% to 150%, we believe that the gross margins for products under price control will be capped at 60%. This is likely to force the pharmaceutical industry to take significant price cuts of 20-25%,” said Nimish Desai of Motilal Oswal Securities.
, in a recent note.

However, export-focussed domestic pharma companies are not free of problems either. Increasing competition in the US generics market and a resultant squeeze in margins is forcing domestic generics manufacturers to explore growth through acquisitions, which is only growing expensive.

“High acquisition prices have resulted in pay-back periods being extended to over 10 years and leaving the acquirers susceptible to any adverse changes in market and regulatory environment,” a recent CLSA Securities note said.
Analysts believe domestic generic companies are looking at growth through the inorganic route at the cost of organic development.

“Strong organic growth provides the company managements the luxury of waiting for the right opportunities at the right price as they are not under pressure to meet growth targets through acquisitions,” CLSA stated, adding that organic growth of Ranbaxy and Dr. Reddy’s are below 10% over the past three years.