High flying pharma sector may be in need of a health check

1. High-flying Pharma Sector may
Be in Need of a Health Check
Many investors ignoring warning bells amid heavy interest in pharma

2. Contd..
ET Intelligence Group: Times couldn't have been better for the Indian
pharma sector, or so the stock market believes.Anything that is remotely
pharma has appreciated in value in the past few years. About 45% of listed
pharma stocks have more than doubled in the past one year. Stocks of mid-
cap pharma companies like Strides Arcolab, Natco Pharma, Wockhardt,
Indoco Remedies and Sun Pharma Advanced Research have risen
manifold.The 25-member ET Pharma Index has appreciated 77% as against
28% return recorded by the Sensex in the past one year.The re-rating has
been fuelled by doubledigit revenue growth and average operating margin of
18-20% by the industry at a time when companies from most other sectors
are struggling to drive growth amidst poor demand or debt woes.
Depreciated rupee and volume pick-up in the domestic market have also
favoured the industry.

3. Contd..
From local buyouts and cross border acquisitions to private
equity investment the sector has witnessed it all.
In the past one decade, the sector has seen several big
ticket M&A and PE deals driving growth and valuations.
According to Grant Thornton data, pharma, healthcare and
biotech sectors altogether formed nearly one-fifth of the
total domestic M&A deals in 2014 valued at $3.7 billion. This
further reinforced the case for re-rating of the export-
oriented sector.
From re-rating, the pharma growth story has now moved to
being one that smacks of irrational exuberance. The
unprecedented interest in the sector has had the effect of
shirking off negatives like regulatory clamps by US FDA,
price control, currency fluctuations in the emerging markets
and delay in drug approvals in the US.

4. Contd..
Consequently, most pharma stocks (see the chart) are trad ing at or near
their peak valuations of the past four years as the Street has been busy
discounting the earnings of FY16 and FY17, predominantly based on the
pipeline of drugs pending for approval in the US.
The level of optimism has been such hat the Street has ignored the
possibility of muted growth logged by pharma companies. Incidentally, there
have been early signs of sanity that are rationalis ng the bullish sentiment.
Foreign brokerages Bank of America Merrill Lynch and CLSA have flagged
concerns about valuations in pharma priced to perfection leaving little room
for error. According to data from Bloomberg, since last week, `buy'
recommendations by analysts have dropped in stocks like Sun Pharma, Lupin,
Cipla, Ipca Labs, Cadila Healthcare, Aurobindo Pharma and Torrent Pharma.

5. Contd..
Despite upgrading the estimated future earnings, premium valuations of
stocks have compelled analysts to either downgrade or review
recommendations for the short term. The subdued performance of pharma
companies during the March quarter could serve as a trigger for correcting
valuations to reasonable levels in the short term.
High base of the previous year and absence of major drug approvals in the
US markets is likely to yield moderate growth for most companies. The
quarter is expected to be the third consecutive quarter to have the adjusted
year-on-year net profit growth to be lower than the sales growth.
The quarterly performance is likely to be modest for Cipla, Sun Pharma
(including Ranbaxy), Lupin, Dr Reddy's, Torrent Pharma and Ipca Labs.

6. For details and bookings contact:-
Parveen Kumar Chadha… THINK TANK
(Founder and C.E.O of Saxbee Consultants & Other-Mother
marketingandcommunicationconsultants.com)
Email :-saxbeeconsultants@gmail.com
Mobile No. +91-9818308353
Address:-First Floor G-20(A), Kirti Nagar, New Delhi India Postal Code-110015