BUY PHARMA STOCKS

Pharma companies, once the darlings of the stock markets are badly beaten down, so much so, that it is almost as if the bull run of 2003-2007 did not happen as far as investors in stocks of pharma companies are concerned. But recent events seem to suggest that pharma stocks are about to make a comeback. Various pharma companies in India follow different business models as follows:

1. CRAMS (Contract Research And Manufacturing Services)
   

   This model relies on the fact that India is considered a low cost manufacturing base at the same time having the necessary infrastructure and technical skills to ensure quality. CRAMS is a $ 35 billion global business and with close to $ 80 billion worth of drugs expected to go off patent over the next two years, this model represents a huge opportunity for Indian pharma companies. Prominent among these are Jubilant Organosys, Divis Labs, Shasun Drugs and Nicholas Piramal.
   

2. Generics
   

   Generics are drugs which are already on market in developed nations. An Indian company has to file an ANDA (Abbreviated New Drug Application) and prove bioequivalence of its drug with the drug already approved in the markets. This process takes 12-18 months but is a lot quicker and easier than launching a new drug molecule. A variation to this is an ANDA filing under Para IV of Hatch-Waxman Act of the US. Here a drug currently under patent is challenged and if the challenger wins, it gets a 180 days exclusivity period to sell that drug in the US market. Some companies following this model are Ranbaxy, Dr.Reddy, Glenmark.
   

3. New Chemical Entity
   

   A new drug molecule costs $ 300 million to $ 500 million to develop and takes around 15 years. Due to large upfront investments only the few top companies can enter this line of business. But, if successful in discovering such a drug, the pay offs can be huge, both in terms of share price and market profile. Clinical trials, which is an important cost and time consuming stage in the launch of a new drug is said to be cost effective in India due to large availability of volunteers, diverse and varied gene pool in the Indian population and low cost of technical skills. Ranbaxy, Dr.Reddy and Glenmark are some companies that follow this model.
   

4. MNC'
   

   Once considered the bluest of blue chips and commanding high PE ratios, these companies are now value picks due to their rock bottom valuations and high dividend yields. They are mostly active in the Indian local markets and are stifled due to price controls by the Government. But some of these companies have a huge pipeline of new drugs under development in their parent countries and new patent regulations in India would enable them to launch their drugs here. Some companies in this sector are GlaxoSmithKline Pharma, Novartis and Pfizer.
   

The Indian pharma market is projected to grow at 12% per year reaching $ 20 billion by 2015 according a McKinsey and Co report. This excludes opportunities for exports and outsourcing. India is projected to overtake Brazil, Mexico and Turkey to rank among the 10 largest pharma markets by 2015. Taking into account the huge potential held out by this sector, investors should consider investing in stocks of pharmaceutical companies, particularly since valuations are still reasonable for this sector. An interesting alternative would be to invest in sector specific schemes of mutual funds investing in pharma. This way an investor can get exposure to all the above options through diversification and since picking individual stocks in this sector could be tough, a fund manager might be able to generate better returns.