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"Indian companies have strong competitive advantages in pharma"

Relinace Pharma fund manager feels Indian companies are among the most competitive manufacturers of pharmaceuticals and fully integrated for a large number of products

If you go to our web site valueresearchonline.com's home page and use the Fund Selector tool to hunt for the best-performing fund over the one-year horizon, you will find Reliance Pharma at the very top with a rolling return of 87.37 per cent. The one-year category average return of 67.02 per cent for pharma funds is also not a number to be sneezed at. We spoke to Sailesh Raj Bhan, fund manager, Reliance Pharma Fund, to find out what accounts for the current buzz in the pharma sector. Excerpts from an interview with Sanjay Kumar Singh:

What are the opportunities available to Indian pharmaceutical companies in the global generics market? And what are their strengths in this domain?
Indian companies are well positioned due to their regulatory and chemistry-related skills which will help them gain disproportionate market share in the global generics markets. India has the second-largest number of US FDA-approved facilities. This reflects its strong regulatory skills, which is a pre-requisite for growth in the generics business. Moreover, strong process reengineering capabilities that lead to cost-effective integrated manufacturing will enable Indian companies to garner large market shares in the global generics market.

What are some of the challenges that they face, especially in the more stringently regulated global markets?
Apart from meeting stringent regulatory norms of international manufacturing processes, Indian companies have to fight legal battles with Global Big Pharma companies to enter the markets faster by preventing evergreening of patents. The litigation costs are very high and the hit rate can be variable. That adds to uncertainty. Hence only a handful of Indian companies are focusing on that route. Getting market share in the case of speciality products requires huge investment in sales force, etc. Until they have a comprehensive basket of products, the cost would be prohibitive.

What are some of the factors that are causing global pharma companies to outsource manufacturing to India?
Big Pharma companies are passing through a phase of declining growth rates in developed markets. They also have fewer new products in the pipeline. To counter these pressures on revenues and products, and also to reorient their business models towards investing more in R&D, outsourcing is happening in a big way. Indian companies are cost effective and reliable suppliers to global companies.

What are some of the strengths of Indian companies in the area of contract research and manufacturing services (CRAMS)?
Indian companies are among the most competitive manufacturers of pharmaceuticals and fully integrated for a large number of products. In CRAMS, the fast turnaround time in delivering clinical phase materials and developing scalable processes makes the case for Indian companies stronger. In 2012 and 2013 a large number of patents will expire. Hence, the pressure to get better returns from their investments will increase even more for Big Pharma. This will drive the demand for CRAMS work from Indian companies. Even today a very small portion of manufacturing for patented products of Innovators happens in India. That too can scale up.

Why have there been a spate of acquisitions by global pharma companies of Indian players' businesses in recent times?
Growth in developed markets is negligible due to patents expiring. Hence Big Pharma has become interested in buying out companies from emerging markets that are in the branded generics space. Industry estimates suggest that over 30-40 per cent of growth of Big Pharma companies is likely to come from emerging markets including India, China, Brazil, and Russia, where populations are large and affordability is growing. Hence to grow their global sales an emerging market growth strategy is necessary. This can come only from branded generics. Hence the interest in acquiring these assets. We will see more activity on this front as Big Pharma wants a greater market share in emerging markets.

What are the factors driving growth in the domestic pharma market?
Rising disposable income and adverse disease profile are two important factors driving growth. India has a large number of diabetes, hypertensive, and cancer patients. This is leading to strong growth in spending on chronic treatments. Moreover, Indian companies, which had limited distribution and marketing presence in rural areas, are now expanding their field forces in large numbers to expand reach.

Of the three segments - global, domestic, and CRAMS - which one are you most bullish about?
All the three markets offer different type of opportunities. Strongly positioned players in each of these segments will benefit. The global generics story will see benefit from the next phase of patent expiries. The domestic market will benefit from investments in distribution locally. And CRAMS will benefit from global cost pressures and strong positioning of Indian companies in this segment.

What are some of the positives that you look for when investing in a pharma company?
The robustness of the business model and management's track record in scaling up its business operations without diluting shareholder returns are two important criteria for us. We also look for initiatives towards developing differentiated product pipelines, brand building capabilities, and investments in emerging opportunities such as biopharmaceuticals.

And what, in your view, are some of the negatives that an investor should avoid while investing in this sector?

Avoid companies where you see disproportionate dilution of capital and lack of deployment of resources to create a pipeline of products for the future.

The category average return of Equity:Pharma funds was 95.91 per cent and your fund's return was 118.60 per cent in 2009. What were some of the strategies that helped you post such a robust performance?
The focus has been on owning companies with strong business models and having a diversified portfolio across all sub-segments of the pharma sector.

Will the pharma sector continue to perform in future as well?
The pharma sector has good long-term potential given the strong advantages India has in this field. Indian companies are well positioned compared to their global peers. And hence they should do well over the medium term.