The pharmaceutical industry did not disappoint investors in 2013 with the BSE healthcare index returning 22.7% compared with a 9.7% increase in the broader market. But it was not smooth sailing always (as the chart shows) as the industry had its share of unpleasant surprises. There was one positive surprise, however. The industry benefited from the sharp depreciation in the rupee, with the currency falling to as low as Rs.68-levels against the dollar in the second half. A weak rupee boosted export realizations in rupee terms and yielded translation gains for revenues of overseas subsidiaries. The worry is that a stable rupee, or even a stronger one, could affect financials in the current fiscal (especially in the second half). Another question mark is the domestic pharmaceutical market. The economic slowdown had already affected growth. But the new drug pricing policy introduced during 2013 had some side-effects beyond the expected cut in revenues. Companies wanted to cut commissions to protect their own margins but trade channels pushed back aggressively by refusing to lift stocks and that adversely affected sales growth. The situation is expected to normalize in 2014 and should also give investors a clearer idea about life in the new price control era. It will have a bigger impact on multinational companies than on Indian companies that depend more on overseas markets for growth—the US market being the main one. Most large Indian companies launched a number of generic products in the US market, some of them with a six-month marketing exclusivity period. But as the number of patent expiries decline, performance will depend more on market share gains than on launches. Competition is becoming tougher and price pressures too are becoming visible. The US market itself is expected to see some changes due to the new health insurance norms. Still, the US market will continue to be a growth driver in 2014. A few companies stumbled in the US market, after the US Food and Drug Administration (FDA) found gaps in compliance at their plants. Ranbaxy Laboratories Ltd and Wockhardt Ltd were two such entities. Investors will be hoping that 2014 does not see any more casualties on the compliance front. These factors are only a continuation of what was visible in 2013. What would be really interesting is if Indian companies make some really bold moves. Most large companies have sizeable cash surpluses. Acquisitions have happened, but of local businesses by multinationals. An exception was the recent acquisition of Elder Pharmaceuticals Ltd’s domestic pharmaceutical business by Torrent Pharmaceuticals Ltd. If a few more such acquisitions happen, it can be called a trend. Action was visible in the form of tie-ups, either in specific therapeutic areas or in specific co-development projects. But no major acquisitions were visible. Investors will be looking to see if Indian companies use their cash chests to make acquisitions, perhaps in emerging markets where growth remains healthy compared with developed markets. The rupee, FDA-related compliance issues and volatility in the domestic market are key risks. Better-than-expected US generic market growth and acquisitions could be positive triggers.

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