Sharply polarised FY11, Investment theme gets dumped

Index return in FY11

The table shows the returns various indices made in FY11 (1 Apr 2010 to 31 March 2011). Note the humongous difference between Nifty and NSE Midcap – a mind boggling 16%.

In sectors, clearly sectors related to investments got dumped, while consumption and export themes did well. The UPA government is hellbent on driving consumption thru large fiscal deficits, while capex goes nowhere. This isnt good. No wonder we have no control on inflation.

Realty is one amazing sector – real estate companies raised equity early in FY11, promptly rigged product prices, saw demand plunge, and underperformed.

Biocon data

Some interesting nos from a Biocon PPT. It says it is among world’s top 20 biotech companies by revenue.

And 7th largest employer in biotech..

Of course, all this helps if only if something comes out of its discovery pipeline.

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Pharma wins over FMCG in battle of laggards

FMCG and pharma have both been major laggards in this rally. Over last 12 months endign Jan 31, 2007, the FMCG sector is up 8%, while pharma sector is up 16%. Both have vastly underperformed the Sensex, which is up 42%.

So, these sectors which are basically items of everyday use, arent exciting investors so much. Markets are clearly hooked to growth stories, and at the moment, neither of these are growth stories.

However, it is interesting to note that within the two, pharma has still outperformed. This is despite the fact that pharma companies operate in a far more competitive environment than FMCG. What explains this?

The reason for pharma’s outperformance may lie in the way leading companies are conducting their business. Leading companies, mostly Indian, are strongly focussed on R&D now. They have also been very aggressive lately in adding new skills to their portfolio. Example: CRAMs, a new area which are come along in last 2 years or so, where many companies have built aggressively. Nicholas Piramal for example has done atleast 2 significant acquisitions to build capabilities and scale for CRAMs.

Pharma companies have also been very aggressive in market entry strategies, whether by acquiring abroad, or by tying with MNCs to enable them access in local markets.

In other words, pharma companies seem to be far more nimble, aggressive, and risk taking at this point. Pharma business is more risky too, compared to FMCG. But dont risk and reward go together? so long as management is atleast trying the right moves. In FMCG, managements seem to be far more risk averse, in particular in HLL, where they seems to be suffering a serious loss of entreprenerial drive.

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For Generic Pharma. RoW does not matter

For generic pharma companies, the big trip is to build an exports business. Many generic companies are tryign to target Africa and Latam. Russia and erstwhile CIS countries have always been a favorite. So companies claim they sell to 50 countries or even more.
However, much of that may be bunkum. When it comes to generic pharma, US and EU may be the only areas to make money from. Atleast leading generic companies arent particularly bothered about Rest of the World (RoW).
A fast growing generics company which has recently targeted US and EU markets, is no more looking at expanding operations in RoW. Its not very profitable, according to the ceo of this company,

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Ranbaxy’s Para IVs

As of Dec’05, Ranbaxy had 32 Para IVs, cumulatively. Of these, there were 19 FTFs with a cumulative market opportunity of $22 bn. Of these 19, it had been sued on 7 molecules, these had total sales of over $12 bn. One of these was Pfizer’s Lipitor or Atorvastatin, which is a $8bn product. The other molecules were atleast $400 mn or above in annual sales. There may be a critical of annual sales below which litigation may be worth the while. It was not sued on 12 other molecules which had total sales of $10 bn.

This year, it expects to launch 7 FTF Para IVs. This is worth a check on how much its already done. It seems to have missed out on Simvastatin, where Teva is got an exclusivity going.

Ranbaxy’s pipeline may not be bad compared to its size. It appaers to have a little less than half of Teva, tho Teva is 7-8 times Ranbaxy in size. As of Aug’06, Teva had 79 Para IV filings, with 46 FTFs (compared to 32 and 19 for Ranbaxy). The cumulative sales of FTF moleculs is around $35 mn.

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Sun and Glivec – getting aggressive?

Sun Pharma, in Apr-Jun’06 quarter, filed DMFs for 6 APIs. One of these was for Glivec. This could be a para-IV.

Sun appears to have 6 Para-IVs currently in progress. Most of them for small drugs with sales less than $200 mn. Glivec on the other hand is big. Its sales for 1H’06 was $1199 mn, up 16% yoy. So this is about $2.5bn per annum drug. Glivec appears to be 11% of Novartis’ sales and almost 40% of the sales of its Oncology business.

Sun has so far not done any major Para-IV, unlike say a Ranbaxy which is fighting a very costly battle with Pfizer for Lipitor. Sun and Cipla are the two most profitable companies in Indian pharma, and seem to have gotten that way by adopting a conservative approach compared to other majors. Sun though is more aggressive than Cipla, which is not try to develop discovery research of any kind.

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