Pharma in good health, but shift to cyclicals will hurt

The BSE healthcare index outperformed the broader market indices in 2013, as was the case in 2010, 2011 and 2012.

This was on the back of issues such as subdued domestic growth on the back of implementation of NLEM 2011 and the tussle between distributors and retailers over trade margins coupled with an increased scrutiny and scores of warning letters from the USFDA which undid the robust growth on the back of stronger US traction.

On the domestic front, the current sluggish trend is likely to accelerate to 8-10 per cent growth in CY14 (on a lower base) driven by mid-teens growth in chronic therapies such as anti-dietetic, cardiology, neurology, etc. On the flip side, we expect some of the acute therapies like anti-infectives, gastro-intestinal and respiratory to continue to post flat to marginal growth.

On the exports front, we expect 15-20 per cent growth in dollar terms, as most players have developed a rich product pipelines over the past three or four years. Despite the passage of generic GDUFA, the pace of product approvals has not improved in CY13. Issues such as delay in approvals are likely to improve in CY14. We expect incremental approvals from the USFDA, going ahead

In CY13, product approvals from key emerging markets like Brazil, Russia, South Africa, Mexico and Turkey also witnessed delays due to events such as strikes at some of the regulatory offices (Brazilian ANVISA) and changes in registration process by some counties. We expect product approvals to normalise from these countries in CY14

To conclude, we expect buying interest to sustain as most players are likely to maintain the growth tempo based on manufacturing fungibility, geographical diversification, product appro­vals/pipeline and, hence, clear visibility. We do not envisage the US tapering having any impact on sector preference. However, we expect some impact depending on the election outcome as the new government is likely to put reforms on the fast track, hence, shifting buying preference towards cyclicals

Among key risks are FDA hurdles, pricing pressure in the US as well as various emerging markets.

Of late, the USFDA has adopted a zero-tolerance policy for adherence to GMP practices with more randomised scrutiny, which does not necessarily follow a set pattern. A recent flurry of import alerts and warning letters to domestic companies is a result of that.

 Consolidation of generic sourcing agencies (pharmacy chains) in the US is likely to put pressure on pricing in the US, especially for players that do not have a direct presence in the US (recent JV- CVS Caremark and Cardinal Health) Pricing pressure imposed by other emerging economies to arrest the spiralling healthcare cost is also likely to be the limiting factor Out top picks in the space include Lupin, Sun Pharma, Ipca Lab and Glenmark Pharmaceuticals.

http://www.mydigitalfc.com/sectoral-watch/pharma-good-health-shift-cyclicals-will-hurt-024