Pharma Sector – FY14 Outlook

In the turbulent markets of last fiscal, only defensives have shown a robust performance. While Sensex was up only 6%, BSE Healthcare index gained more than 21%, showing that the defensive sector has created wealth for investors. Few stocks in the sector also touched a new high and trading in the shares of leading players has remained in the positive territory.

Higher growth in the US generics, entry in the new markets has given the sector a bigger pie of the international markets. Most companies having a presence in the USA are reporting growth of more than 25% in their revenues. Companies like Glenmark and Wockhardt have reported even better numbers.

The domestic pharma market is however going through a rough phase due to the uncertainty over the new pharma pricing policy. The government is now considering capping the drug prices at the time of launch and companies are therefore concerned of the revenues from their new launches.

The last fiscal saw Indian drug authorities as well as legal authorities ruling against the patents of the international drug majors such as Novartis and Bayer. The Indian companies will benefit from these rulings as these drugs can be manufactured by Indian companies.

Though the domestic environment remains somewhat uncertain, the new fiscal (FY14) will see companies further reaping the benefits of worldwide generic opportunities. The operating leverage will also be giving higher margins and thereby high net profit too.

We believe that the outlook of the pharma sector in the fiscal FY14 remains very robust. In fact, the market in the last two months has shown a high volatility and there is absence of pro-growth policies by the government. Pharma sector again remains an investable sector.

Our top picks in the sector are Glenmark Pharma, Lupin and Aurobindo Pharma.