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Saturday, December 29, 2007

Indian Pharma giants change strategy

Indian pharmaceutical majors, such as Ranbaxy Lab and Dr Reddy's, are changing their tactics to concentrate on brand acquisitions and strategic investments rather than risky big ticket cross-border acquisitions to boost their global business. Year 2007 witnessed only 25 M&As with 15 cross border transactions with an estimated value of about $ 600-700 million in the Indian pharmaceutical sector. (This figure excludes Sun Pharma's unsuccessful attempts so far since March this year to take over Israel's Taro for $ 454 million).

The domestic pharmaceutical companies had executed more than 40 deals with 32 cross-border transactions worth about $2,000 million in 2006, including big ticket deals like Dr Reddy's acquisition of Betapharm of Germany for ¤480 million (Rs 2,550 crore) and Ranbaxy's Terapia buy in Romania for $ 324 million (over Rs 1,250 crore), according to industry observers.

The major pharmaceutical M&A deals in 2007 were Wockhardt's acquisition of the French company Negma Laboratories for $ 265 million (Rs 1,045 crore) and the US-based Morton Grove Pharmaceuticals for $ 38 million (Rs 150 crore), Jubilant Organosys's acquisition of Hollister-Stier Laboratories of the US for $122.5 million (about Rs 500 crore) and Alembic's buyout of the entire domestic non-oncology formulation business of Dabur Pharma for Rs 159 crore.

Industry experts cite relatively small deals like Lupin's acquisition of Rubamin Laboratories, Baroda to enter into the contract research and manufacturing services (CRAMS) business and Zydus Cadila's buyout of Liva Healthcare of Mumbai to strengthen its dermatology product portfolio as glaring examples of an emerging trend of brand and strategic buyouts.

"Focus on brands will be an emerging trend in future, both for domestic companies and overseas firms looking at India. Almost all companies are strategising innovative opportunities that suit them to build brands in India as big deals become more expensive," said Shailesh Gadre, managing director, ORG-IMS, a leading market research based consulting company.

Experts also said that most of the domestic deal activity so far is focused on small asset or brand purchases with the exception of the Liva and Dabur deals and are yet to see domestic consolidation in the mid-cap or large-cap space.

"This can only be driven by farsighted boards that put senior managements through a systematic internal and competitive review, scenario planning and regular review of progress against corporate goals. Rationale for domestic consolidation requires more analysis than cross-border transactions but can have a significant impact if the right parties come together," said Rajiv Shukla, executive director of Avendus Capital and a seasoned pharmaceutical M&A expert in Mumbai.

Ranbaxy, which executed five cross-border acquisitions in 2006 (Ethimed of Belgium, GSK's facilities in Spain and Italy, Terapia and Be-Tabs of South Africa) refrained from any acquisitions in 2007. Instead, it made a strategic investment in the Hyderabad-based upcoming company Zenotech Laboratories to hike its equity stake to 45 per cent for Rs 214 crore. The investment was to access Zenotech's pipeline of specialty injectibles, cancer and off-patent biotechnology drugs. Though Ranbaxy was in fray to acquire the generics business of Merck KGaA, it withdrew from the bid mid-way due to the high valuations. Dr Reddy's and Ahmedabad based Torrent were also reported to be in fray for Merck Generics assets, which was eventually taken over by Mylan Laboratories of US for $ 6.6 billion.

Similarly Dr Reddy's Laboratories, which is yet to recover from the Betapharm acquisition due to various reasons and Aurobindo, which acquired a manufacturing unit in the US and Milpharm of the UK in 2006, did not buy any new facilities in 2007.

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Understanding Short Term Trading

Before I begin, this blog is not for intraday traders. My definition of short term implies duration of around 2 to 3 months.

Short Term stock picking is no rocket science, but rather a visual interpretation of technical charts. A basic moving average on a time frame chart will show the direction of the securities movement.

Moving averages is a mathematical results calculated by averaging a number of past data points. Moving averages (MA) in it's basic form is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. Once the value of MA has been calculated, they are plotted onto a chart and then connected to create a moving average line. Typical moving averages used for short term trading are 50 MA and 100 MA.

Types of Moving Averages

1) Simple Moving Average (SMA)

SMA is calculated by taking the arithmetic mean of a given set of values on a rolling window of timeframe. The usefulness of the SMA is limited because each point in the data series is weighted the same, regardless of where it occurs in the sequence. Critics argue that the most recent data is more significant than the older data and should have a greater influence on the final result.

2) Exponential Moving Average (EMA)

EMA overcomes the limits of SMA, where more weight is given to the recent prices in an attempt to make it more responsive to new information. When calculating the first point of the EMA, we may notice that there is no value available to use as the previous EMA. This small problem can be solved by starting the calculation with a simple moving average and continuing on with calculating the EMA.

The primary functions of a moving average is to identify trends and reversals, measure the strength of an asset's momentum and determine potential areas where an asset will find support or resistance. Moving averages are lagging indicator, which means they do not predict new trend, but confirm trends once they have been established.

A stock is deemed to be in an uptrend when the price is above a moving average and the average is sloping upward. Conversely, a trader will use a price below a downward sloping average to confirm a downtrend. Many traders will only consider holding a long position in an asset when the price is trading above a moving average.

In general, short-term momentum can be gauged by looking at moving averages that focus on time periods of 50 days or less. Looking at moving averages that are created with a period of 50 to 100 days is generally regarded as a good measure of medium-term momentum. Finally, any moving average that uses 100 days or more in the calculation can be used as a measure of long-term momentum.

Support, resistence and stoploss can be infered by referring the closet MA below or above the market price. The other factor that is used in short term momentum is the trading volume. The moving averages along with the trading volume can provide a better insight to short term movement.

Markets are moved by their largest participants - I believe this is the single most important principle in short-term trading. Accordingly, I track the presence of large traders by determining how much volume is in the market and how that compares to average. Because volume correlates very highly with volatility, the market's relative volume helps you determine the amount of movement likely at any given time frame--and it helps you handicap the odds of trending vs. remaining slow and range bound.