Pharma Woes

What exactly is wrong with the pharmaceutical stocks in India?

The sector that has corrected sharply in the last few weeks is the pharma sector. At a time when the Nifty has bounced nearly 750 points from its budget-day low, the pharma sector has largely underperformed. This is ironic because over the last 5 years, these pharma stocks have been the best performers in the market overall. So what exactly has spooked these pharma companies?

US FDA gets stringent…

 This has been an issue for quite some time. Major Indian pharma companies like Sun Pharma, Lupin and Cipla have been at the receiving end of the USFDA observations regarding its operating facilities. Normally, markets tend to view any USFDA stricture negatively since the US continues to be the largest pharma market in the world. Most Indian companies still derive a chunk of their export business from the US. Most observations have to do with lab controls, test procedures, documenting procedures, maintenance and controls. In many cases, Indian pharma companies have lagged in these areas due to lack of qualified people to do the job. But this remains the biggest visibility risk for the Indian pharma sector. That is also the reason CLSA has downgraded its price target for Lupin.

Government ban on FDCs…

The government had recently banned 344 fixed drug combinations (FDC) as they were seen to add little value. These 344 FDCs, incidentally, comprise a large chunk of the annual sales of pharma companies. The Indian Pharma Alliance estimates that the loss to the pharma industry as a result of the ban on these 344 FDCs would be to the tune of Rs.10,000 crore. That is a substantial chunk of revenues for the industry to give away. To an extent this ban has been driven by Western examples, but then India may have a unique case for their continuance. Till the cloud clears, one can expect further pressure on the pharma stocks.

Valuations were steep…

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