EQUITY RESEARCH IN PHARMACEUTICAL INDUSTRY

INTRODUCTION
PHL was one of the leading players in the domestic formulations business. However, in May 2010 the company sold this business to Abbott Diagnostics. The companys other businesses include pharma solutions and global critical care (GCC). PHL also has a niche presence in the global critical care (GCC) business, comprising IA products (halothene and isoflurane). Revenues from GCC business were Rs 3.3 billion in 200910 accounting for 89 per cent of its total revenues.
PHL launched 223 new products (including line extensions of existing brands) in the domestic formulations market in 200910. PHL is the leader in terms of sales from new launches among large pharma companies in India. The new products contributed 15.3 per cent of the companys domestic formulation sales in 200910. The company acquired Minrad for $50 million in 200809 to gain access to sevoflurane and desflurane, which are key IA products in the US market.

FINANCIAL PROFILE
Steady growth in revenues; Operating margins remain stable
PHLs topline grew significantly at a CAGR of 22 per cent from 200405 to 200910. The domestic formulations business and domestic pharma solutions business offered superior growth and margins and aided offsetting headwinds in the pharma solutions business outside India. The CRAMS business witnessed a decline in 200910 due to lower demand. Operating margin of the company was stable at 1920 per cent in 200910.

COMPARITIVE ANALYSIS
NAME OF THE COMPANY Sunpharma Ranbaxy Cadilla Healthcare Cipla Piramal HealthCare 0.6 0.61 0.53 0.57 0.8 0.39 10 yrs 8 yrs 0.43 1.5 0.5 BETA REQUIRED RATE OF RETURN 5.51 -2.81 4.73 0.032 0.052 0.51 6 yrs 15 yrs 7 yrs RETURN ON EQUITY DURATION OF BONDS

EPS
Series1

27.28

29.81

13.36

11.96

11.44

ranbaxy

sunpharma

cadilla healthcare

cipla

piramal healthcare

ROCE
35% 30% 25% 20% 15% 10% 5% 0%
ranbaxy sunpharma cadilla healthcare
Series1

cipla

piramal healthcare

BETA AND EPS

The beta of Ranbaxy is 1.5 which is maximum amongst the all the five companies, and Sunpharma has a beta of 0.43 which is the lowest amongst all. The Piramal Healthcare and Cipla is 0.6, which is a moderate one. A higher BETA signifies high risk. Therefore we can say that a stock of Ranbaxy carries the maximum risk and a stock of Sunpharma carries the minimum risk, whereas Piramal, Cipla and Cadilla posses moderate risk. But it is also known that a stock with high risk gives high return. We observe that the earning per share is maximum for Cadilla healthcare that is 29.81 followed by Ranbaxy if 27.28. The lowest EPS is of Cipla and Piramal Healthcare. This may be due to the reason that the EBIT is less and the number of shares outstanding in the market is more which gives a comparatively lower EPS.

The Return on Capital Employed

The Return on Capital Employed (ROCE) is one of the most important operating ratios that can be used to assess corporate profitability. Here we see that Piramal Healthcare has the maximum ROCE of 31.80. this signifies corporate profits but it is always not necessary that a high ROCE means a profitable business.

It is known that the ROCE must always be higher than the rate at which the company borrows otherwise the shareholders earning goes down, which is actually low in case of Piramal compared to other companies.

RETURN ON EQUITY
In general, financial analysts consider return on equity ratios in the 15-20% range as representing attractive levels of investment quality. This is only in case of Ranbaxy and Sunpharma. They have a ROE of 5.2% and 3.2% respectively. CIPLA has the maximum ROE of 80%. Piramal has a moderate one of 39.20%. ROE basically compares net income over shareholders equity. There must be a correct balance between debt and equity in the capital structure of a company. A high, or low, ROE needs to be interpreted in the context of a company's debt-equity relationship.

SUGGESTION
Pharmaceutical industry being in the growth stage has a huge potential. Ranbaxy stock should be held, because Ranbaxy has presence all over the world. Because of depreciating rupee, Ranbaxy is having losses and also their drug has been banned in US and they are suffering forex losses too. Now their drug called Lipitor is going to be launched on Nov 30 and there can be some upside on the stock. As an investor it is advisable to invest in any of the 5 companies, but if the investment is for short term than Sunpharma could be a good stock. Looking at the findings, we see that beta values do not have significant difference. But among all the 5 companies, Sunpharma has the lowest beta with maximum expected return. Sun Pharma reported higher than expected 2QFY2012 performance. Net sales reported 38.3% yoy growth. Net profit grew by 18.7 % yoy. Sun Pharma is one of the largest and fastest growing Indian Pharmaceutical companies.

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