Good medicines

Sanjiv Shankaran

Recommendation

Dr Reddy's Laboratories: Hold

Ranbaxy Labs: Hold

Cipla: Hold

Aventis Pharma: Buy

INDIAN pharmaceutical companies have been rated upwards over the last six months, the most notable being Dr Reddy's Laboratories. In the case of multinationals, there has been a marked lack of interest, and the recent results seem to justify the weakening price trend there.

Of the top-rung Indian pharmaceutical companies, Dr Reddy's is arguably the most difficult to assess. The company announced its first half results earlier in the week, and the numbers were spectacular. Thanks to the sales of Fluoxetine generic in the US, Dr Reddy's profitability has improved significantly. In the US generic market alone, the company's operating profit is about 88 per cent of its revenue.

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The performance begs questions about sustainability. Once the six-month exclusivity for Fluoxetine runs out, the company's profitability in generics may drop. But then again, in another popular anti-ulcer drug, Omeprazole, Dr Reddy's hopes to get a six-month monopoly as one of the successful challengers to the patent holder.

If the Omeprazole application too works for Dr Reddy's, the profit flowing in through generic operations can be huge. On the flip side, with so much expectation built-in to the stock, even a minor setback can knock the bottom out it.

It is unlikely that the generics results that have come in thus far for Dr Reddy's are indicative of the future. Given the grey areas in evaluating the potential of the US generics market, it may be better to avoid any fresh exposure to Dr Reddy's for the moment.

Talking of generics, Ranbaxy Labs is another company that banks on it. Ranbaxy Labs is not likely to produce such a surprise as Dr Reddy's did. But Ranbaxy is perhaps the best placed to achieve sustained success in the generics market.

Ranbaxy was among the earliest to work towards tapping opportunities in the generics market. The company has its own distribution arm in the US and has worked on building its basket of drugs. A bird's eye view suggests that Ranbaxy has everything in place to increase the profitability of US operations in the near future.

With exports as engine of growth, and the US operations likely to produce higher returns, Ranbaxy seems set to witness higher overall profitability in the near future.

The flip side in Ranbaxy's case is that the current price earnings ratio (PER) of about 32 seems to have built-in most of the likely gains. Upside potential appears limited from the current level. Another company where it may be wise to take a conservative view and avoid further exposure.

Cipla is in the same league as Ranbaxy and Dr Reddy's in terms of capability and equity market interest. Unlike the other two, Cipla has opted for a low-risk strategy of supplying bulk drugs to generic formulators in the US. Of the three, Cipla seems the best equipped to handle the intense price-driven competition in the domestic market.

Cipla is another company that trades at a level that leaves little scope for a significant price rise. The next trigger for Cipla has to be a breakthrough in the Omeprazole patent case in the US. That may take a few months. Therefore, for the moment, it may be prudent to await the next development before taking a decision.

Aventis Pharma has gone through a long restructuring. The company has received considerable backing from its parent and is in a position to make better use of the research pipeline once the patent laws change in 2005.

With clear focus and support where it counts, Aventis appears a good long-term investment bet for investors looking for a stock that presents little risk and can produce stable returns.