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Why Pharma stocks are going through a rough patch?

14 Apr 2017 |By: Sunil Patni

Indian Pharma Sector

Over the last few months, Pharma companies in India are being haunted by the US FDA. From a stock market perspective, Indian pharma companies are intensely dependent on actions from the USFDA. After a series of poor performance against notifications from the USFDA, the pharma sector has shed significant amount of its market capitalisation though the Healthcare index at the BSE rose by about 3% YTD.

Stock market’s reaction

In less than a month Divi’s Laboratories came down from about Rs.800 on 20th March to Rs.650 on 13th April consequent to an import alert issued by the USFDA. The stock has lost 18% YTD. Similar is the case with Sun Pharma post an import alert issued in November, 2016. Although the company’s shares managed to look up in the month of March, 2017, it continues to hover around the Rs.700 mark in April, 2017 registering a fall of about Rs.135 compared to April, 2016. Interestingly, the stock has not regained lost ground even after the USFA lifted the import alert.

Notably, the Healthcare Index at the BSE was among the biggest gainers during the period May 2014 and May 2015 registering a gain of 55% against a 14% sluggish growth recorded by the Sensex. Those were also days when the Indian Pharma sector was riding the high waves and the earnings always stood on very healthy grounds, with strong contributions coming from the overseas markets.

India has a strong foothold in pharmaceutical exports

In volume terms, India ranks 3rd in pharmaceutical exports and enjoys a strong foothold in the US markets. By 2018, the global pharma sector is poised to scale up to $1.3 trillion in sales and close to $500 billion from this is expected from the US alone. About 40% of generic drugs and OTC drugs sold in the US have their origins on Indian soil.

Tighter regulations and select companies coming under the scanner

Thankfully, it is not a case where the entire Indian pharma sector has come under some kind of cloud. Tighter regulations from the USFDA have impacted select companies and in most instances it is the current food manufacturing practices or CGMP that has come under the hammer. Cadila, Dr.Reddy’s, IPCA Labs, Lupin and Alkem Labs are among the companies feeling the heat, apart from Divis and Sun Pharma. Adverse reports on Indian Pharmaceutical companies are also not unique to the USFDA, since regulators from Netherlands and Germany have also raised similar red flags in the recent past.

Indian regulators also into the act

Recent events have also encouraged the Indian regulators to tighten vigilance on the pharma sector. As a result, some 340 FDC or fixed dose combination drugs have been banned impacting some 3% of 100,000 crore Indian pharma sector. The warnings and observations by the USFDA have also been   taken seriously by the investors, primarily because export earnings of these companies are bound to suffer.

Quick turnaround is still possible

Indian pharma industry should take cognizance of the recent events and focus more on compliance with tighter measures for quality control and enhanced spending on R&D for a quick turnaround from the current situation.

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