No relief for pharma stocks in sight yet

Pharmaceutical stocks, once seen as safe bets for investors, are increasingly under pressure as a combination of domestic and external factors depress earnings.

The BSE Healthcare index fell 12.9% in 2016, its first decline since 2011. It’s the worst performer among BSE’s sectoral indices in the year so far, shedding 3.47% while the benchmark Sensex rose 14%.

Indian drug makers are facing pricing pressures and greater regulatory scrutiny in the US, their largest market. On Tuesday, shares of India’s largest drug maker Sun Pharmaceuticals Ltd fell 4.2% after March quarter revenue and profit at its US unit Taro Pharmaceutical Industries Ltd missed expectations, thanks to pricing pressures and competition. The BSE Healthcare index was Tuesday’s worst-performing sectoral index, losing 2.68%.

“Indian generic companies are going through a painful transition that is getting more challenging than envisaged. The pain is aggravated by a deteriorating price environment in the US and heightened compliance hurdles,” said Vishal Manchanda, an analyst at Nirmal Bang Institutional Equities.

For most leading pharmaceutical companies, at least half of revenues comes from the US and a setback there could have serious impact on earnings.

The Sun Pharma stock is down 2.66% since the start of 2017. Twenty-three of 40 stocks in the healthcare index have posted a decline year to date. The stocks that have fallen the most are Glenmark Pharmaceuticals Ltd, Divi’s Laboratories Ltd, and Indoco Remedies Ltd.

“Even the domestic markets are losing charm because of government getting aggressive on price controls. We are also aware of currency depreciation in emerging markets,” Manchanda of Nirmal Bang added.

The BSE Healthcare index currently trades at 19.74 times one-year forward earnings, down from its five-year average of 21.27 times, data from Bloomberg showed. However, analysts said valuations are still high.

A Credit Suisse note dated May 22 said it expects a further de-rating of the pharma sector, due to the impact of greater price erosion on earnings.

Credit Suisse has cut fiscal year 2019 earnings estimates for the pharma companies it covers by an average of 7% to factor in the impact of channel consolidation and rupee appreciation.