Mumbai: Stocks of multinational pharmaceutical companies have outclassed their Indian peers this year, and chances are they could continue to maintain their edge in the near future. An index comprising of seven MNC pharma companies delivered returns of 9.3% since April this year as compared to a drop of 13% drop in a set of 20 Indian pharma stocks, data compiled by Mint Research shows. That results in an outperformance of as over 25%.

A combination of high domestic growth and better products in the domestic market are some of the key drivers for MNC pharma stocks.

"MNC pharma companies focus on a few brand products and enjoy premium pricing on these products as they are restricted to the top-end of the market. They also are 100% focused on the India market where there is less regulatory risk and on growing fewer premium brands in the domestic market. Whereas Indian pharmaceutical companies have about 30% of their revenue coming from the domestic market, and the rest is from overseas businesses. This exposes them to regulatory, currency and geopolitical risks which has an impact on their performance," says Krishnanath Munde, senior analyst, Reliance Securities Ltd.

No doubt, overseas exposure did boost the prospects of Indian pharmaceutical companies a few years ago, but US FDA inspections leading to cancellation of some drug launches in the US market has now impacted most Indian companies.

MNC pharma companies, on the other hand, are riding on the innovation done by their parent companies and are operating in niches and therapies where there is less competition. This gives them an edge in the domestic market. "Some MNC pharma companies are into chronic therapies, which can persist for life, which is why MNCs command a valuation premium too," notes Munde.

Besides, these companies have traditionally had negligible debt on their balance sheets and better dividend payouts.

A drawback is that many of these MNC companies are not highly liquid or heavily traded, which results in a higher impact cost for investors who want to take large positions. As their stock prices have also run up significantly, some of these stocks are beginning to quote at astronomical valuations.

Astra Zeneca, for instance, quotes at a price-earnings multiple of 74 times trailing twelve- month earnings. Correspondingly, most Indian pharma companies quote at lower than 20 times earnings on the bourses. Hence, given the run up in MNC pharma companies and some lofty valuations, a health check-up of these stocks may do no harm.

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