Non-FDA Triggers Key to Gradual Pharma Recovery
Drug approvals by USFDA gives product-specific gains to cos; US’ push to cut medication cost another positive
ET Intelligence Group: Indian pharma companies are paying the price for becoming significant players in the US drug market. The outperformance of drug companies has been blunted in the past one year — thanks to regulatory headwinds as well as intensifying competition — both in the US and in local markets.
After hitting record highs on the bourses in 2015, pharma stocks have taken a beating with valuations having rationalised — coming off from the peak valuations of their heydays. USFDA warning letters have become a key reason for increasing the risk profile of the sector, otherwise perceived to be defensive. Credit rating agency ICRA finds 143% increase in such notices in 2015 over the previous year. Most pharma firms have borne the brunt of FDA action. According to Credit Suisse, FDArelated pain is likely to last another year and should lessen in the next round of inspections as firms upgrade their systems and practices.
In the domestic market, the increase in number of drugs under price control and banning of 344 fixed dose combination drugs are likely to in- tensify pressure on the companies.
At such a time, Aurobindo Pharma, the fifth largest pharma company by revenues, has made an entry into the benchmark Nifty Index from April 1. The 50-member index now has five pharma companies having a cumulative weight of 7.5%.
As regulatory overhang has cooled down the valuations, non-FDA triggers are likely to result in a gradual recovery in these stocks. A pickup in the pace of drug approvals by the
USFDA unveils product-specific gains to companies. Besides, recent buyouts, especially in the US, by companies like Lupin, Cipla and Sun Pharma, are slated to enhance their drug pipelines. Lupin on Tuesday launched its first product from Gavis. The sustained push in the US for bringing down cost of medication remains a secular positive factor.
For investors keen to partake in the pharma growth story, the recent correctioncouldbeablessingindisguise.