Over the last couple of days I have been getting a feeling that Pharma stocks are being completely overlooked by the market during the latest bull run. Pharma stocks are generally considered as a defensive sector and considering the fact that the world equity markets are going through turbulence, I think the time has come for Pharma to get a re-rating.
Few points going in favour of pharma companies are:
1. In the US, the biggest drug market, in 2008 alone, some USD20 Billion worth of stocks are going to go off-patent. What it means is that it provides opportunity for Indian drug companies to launch their generic versions of the branded medicines. Indian companies have done that successfully in the past and I believe that they would do it better in the years to come.
2. Large acquisitions by all major Indian pharma companies has helped them to have global presence. By introducing newer products from their portfolio and the management techniques(!) in the acquired companys' home markets, they may be able to increase the Operating Margins of the acquired companies.
3. Increasing cost of medical treatment in western countries forcing the Governments and Insurance companies to favour generic drug makers (read Indian drug companies) compared to branded drugs sold by MNC pharma companies like Novartis, Pfizer etc.,
4. Lifestyle changes taking place in India and across the globe would result in more dependence on medicines in the days to come.
5. Pharma stocks are quoting at a PE ratio of around 10-12 compared to Sensex PE of 25.
I have just started looking at the pharma space to identify stocks which I can buy. I dont think I am an expert in understanding various pharmaceutical molecules, drug lifecycles etc., But I guess I can make some sense of the reported numbers. So I am going to look at Sept 2007 quarter results of Pharma companies in the coming days.
I am also looking at mutual funds focusing on Pharma sector.
With the Indian stock markets at a all time high, pharma would provide you with a good defensive bet.