IMPACT - PHARMACEUTICALS

INTERIM BUDGET

MEASURES

• Reduction of peak duty on bulk drugs, intermediates and formulations from 25 per cent to 20 per cent.
• Reduction of customs duty on many life saving drugs from 25 per cent to five per cent and on sulpha drugs and alkaloids (which are used as drugs) from 19 per cent to 14 per cent.
• Abolition of special additional duty

IMPACT
Lowering of customs duty won't have much of an impact as drug prices in India are already among the lowest in the world.

As many as 24 medical devices, including X-ray goniometer and teletherapy stimulator machines have been brought under the 5 per cent customs duty umbrella.

The duty cuts relating to the pharma and healthcare industry will bring tariffs in the domestic pharma industry closer to global tariff rates. The peak duty cut is expected to benefit companies which import bulk drugs and intermediates.

OUTLOOK
The Indian pharma industry has been on high growth path for the last few years. 2003 was no different with the pharma industry registering a growth rate of 5.1 per cent in value terms and 5.8 per cent in volume terms during the year 2003.

The year also saw a 0.7 per cent fall in prices of pharma products. Increased generic penetration, heavy competition and the fragmentation of the industry has dulled the growth momentum.

However, increased opportunities in terms of outsourcing and the introduction of product patents beginning 2005 is expected to add the impetus to future growth.

According to one estimate, revenues and profits of the sector are expected to grow at 13 per cent and 17 per cent respectively over the next 5 years.

The US market is likely to be the most lucrative market for the Indian companies, due to its market size and the number of blockbuster drugs going off patent.

Outsourcing in the fields of R&D and manufacturing will also have a major bearing on the future performance of the Indian pharma industry.

Increasing costs, expiring patents, low R&D cost and market dynamics are forcing the MNCs to outsource both manufacturing and research activities to India.

The valuations of several topline as well as mid-cap companies are still attractive, say analysts even after the recent run-up in prices of pharma scrips.

Impact - Positive

RANBAXY
One of the leaders of the pharma pack, Ranbaxy Laboratories is expected to benefit from the peak duty cut. The company is likely to run up a lower import bill following the cut as the company imports 53 per cent of its raw material requirements.

Analysts expect the company to deliver robust a 19 per cent y-o-y EPS growth in 2004. The upturn is likely to be powered by top products like Augmentin, Cytovene and Sotret, new branded products and R&D income of $20 million-25 million.

The acquisition of France-based RPG Aventis is also likely to fuel growth. The company is expected to clock an earnings growth of 4.10 per cent for 2004.

DR REDDY'S LABS
Dr Reddy's, imports 43 per cent of its raw material requirements and hence stands to benefit from the peak duty cut on bulk drugs and formulations.

Dr. Reddy's Labs currently has 27 ANDAs including 20 patent challenges. Analysts believe this pipeline has the potential to deliver supernormal growth in the medium term. Dr. Reddy's is expected to win some of the many patent challenges in the next 2-3 years and deliver growth which is backed by a robust core business.

The company's generic sales is also expected to be boosted by US government plans to introduce legislation to increase the use of generics rather than branded drugs so as to reduce health care costs.

APOLLO HOSPITALS
The company is expected to gain from reduced excise duty from 16 per cent to 8 per cent for medical, surgical, dental and veterinary furniture.

The introduction of several new medical equipment under the 5 per cent customs duty umbrella is also likely to benefit the company.

Apollo Hospitals Enterprise, Asia's largest private healthcare providers, registered a turnover of Rs 126 crore for the third quarter ended December 31, representing a growth of 13 per cent over the corresponding quarter last year.

For the nine months ended December 31, turnover went up by 11 per cent, while profits grew by 39 per cent, over the previous nine months. The stock is presently at Rs 171 levels at a P/E of 19x.