Investor community has always considered pharma stocks as defensive play. But if we look at recent no. this strategy may not be working. BSE healthcare index last year in Apr2017 was at 15,472.99 while the FY2017 closed at 13,157.62 indicating a large percentage decline. Sun Pharma and Cipla are up by 0.59% and 16.60% respectively as compared to Lupin and Dr. Reddy lab which are down by 20.24% and 14.90% respectively. These are the top 4 companies as per market capital. Some argue that reason for weak performance could be selling of shares by Foreign Investors to recover losses incurred in other sectors, while others blame increased interference of US FDA (Food and Drug Administration) and EMA (European Medical Agency). Some suggest that increase in stock indices could be because of increase in R&D spend or launching new products. Whatever it is but the fact cannot be overlooked that pharma stocks may be losing their defensive edge.
The Sunshine Sector: Indian pharma stocks are in a growth spree from last 25 yrs. dominated by branded generics which constitute 70% to 80% of the market. Indian drug market is 10th in value and 3rd in volume globally. As per India rating, a Fitch company, Indian pharma industry to grow at 22.4% C.A.G.R. over 2015-2020 and will outperform global pharma sector, which is expected to grow at 5% over the same period. India is the largest provider of generic drugs globally with the Indian generics accounting for 20 per cent of global exports in terms of volume. In FY17, India exported pharmaceutical products worth US$ 16.8 billion, with the number expected to reach US$ 40 billion by 2020. As per a report, healthcare sector in India is to grow from US$ 110 billion to US$ 372 billion by 2022. This will be reflected in Indian pharma sector, which is supposed to grow around $55 billion by 2020 and $100 Billion by 2025 dominated by generic drugs. There is also rise in number of M&A activities by domestic companies to better understand foreign markets. In 2017, Indian pharmaceutical sector witnessed 46 merger & acquisition (M&A) deals worth US$ 1.47 billion.
With regard to impact of GST on the pharmaceutical sector, the reports said; GST will streamline taxation structure as also lead to ease of doing business by minimising cascading effect of many taxes applied to a product, rationalise supply chain, enable flow of seamless tax credit, lower manufacturing cost and cost of technology and make healthcare affordable.
The Black Clouds: It is being estimated that around 40% of generic drugs in the US comes from India and with Obamacare is increasing its grounds, this figure is set to rise in future. But Indian companies are facing export problems as US FDA and EMA, top 2 markets of Indian exports has stepped up its interference and taking repeated actions against Indian pharma companies. US FDA has issued 50% warning letters in 2015 whereas 2017-18 received 29% US FDA warning letters. This decline is due to improvement in quality standards and regulatory compliance. Also, there is a decline in import alerts from 40% in 2015 to 30% in 2017-18. Same on the line, while EU banned 700 generic drugs tested by GVK Biosciences in 2015, EU suspended more than 300 generic drug approvals in FY2017. Later an independent committee found nothing irregular in the company. Above matter is still pending with government authorities. Pharma companies argue that moves by FDA and EMA are motivated rather than genuine but issues pertaining to quality cannot be overlooked.
Another major issue is regarding off-patent drugs. Earlier Indian companies used to take advantage of 180 days exclusive period to market generics products along with patent holder if they file Abbreviated New Drug Application (ANDA) first. But with increased competition and decreasing no. of drugs going off-patent above opportunity has shrunken. Domestically, issues like licence fee hike and regular intervention by National Pharma Pricing Authority (NPPA) through Drug Price Control Order has left the pharma sector red faced. Industry leaders say that such drastic and frequent policy changes are detrimental to the growth and prospects of pharma companies in domestic market.
Boost by Govt.: Common man in India still have poor access to quality medicines and treatment facilities particularly in semi urban and rural areas. The National Family Health Survey shows the plight of health conditions and services in India. Despite the existence of Drug Price Control Order (DPCO), many of life saving drugs and medical devices are sold at high margins which reflect an untapped market for reasonably priced drugs and equipment.
Govt. on its side has taken many initiatives to cure sectoral problems:
1. Govt. unveiled ‘Vision Pharma 2020’ and ‘Make India’, aimed at making India a global leader in end-to-end drug manufacture.
2. In March 2018, the Drug Controller General of India (DCGI) announced its plans to start a single-window facility to provide consents, approvals and other information.
3. Govt. has simultaneously revised its custom duty structure to boost domestic manufacturing of medical devices. Policy initiatives like 100% FDI in pharma will bring technology and necessary inputs also increase in competition in the sector leading to better prices.
4. The Intensified Mission Indradhanush (IMI) has been launched by the GOI with the aim of improving coverage of immunisation in the country and reaches every child under two years of age and all the pregnant women who have not been part of the routine immunisation programme.
5. Also Govt. is reviving Jan Aushadhi Scheme, which provides unbranded generic medicines (same efficiency as branded drugs) with much lower cost. It is under plan to authorise Ayush doctors (Homeopathy) and pharmacist to prescribe drugs for minor ailments in rural areas.
6. In March 2018, Union Cabinet approved budget support of Rs 85,271 crore (US$ 13.16 billion) for the period of April 2017- March 2020 under the National Health Mission to encourage medical infrastructure in India.
The Way forward: “Every other human being is a patient”, replied one analyst when asked about future of pharma sector in India. It is unfortunate, but true. As per an independent survey conducted by me among 25+ analyst, more than 65%were bullish on pharma sector in long run, but many remains cautious regarding foreign inspection agencies actions and suggest that do not look the space as a top down while look for names in the mid cap sector.
Indian pharma stocks are always backed by solid fundamentals. With greater health insurance coverage and rising income levels, pharma industry has huge potential to grow. Also pharma companies need to rise their investment in R&D to tackle the industry threats and develop a global world view.
In the light of recent events and red flags, “Buy Pharma – Go Defensive” strategy has taken the back seat and analysts are reviewing every movement of pharma sector. The game of the day requires analysts to look into the basics. Being realistic will save the day and the hard earned money too.
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