The pharmaceutical sector has been under pressure during the quarter ended March 31, 2016, with share prices of most companies tanking as manufacturing facilities of several leading players came under scrutiny of the US Food and Drug Administration (USFDA).
A series of inspections and negative observations on drug majors like Cadila Healthcare for its Moraiya formulation facility, Wockhardt’s Shendra facility, two facilities of Aurobindo Pharma and the Goa plant of Lupin has prompted negative sentiments to build with shares tanking during the last quarter ended March 31, 2016.
More recently, on Thursday, the UK health regulator, The Medicines and Healthcare Products Regulator Agency added to the woes by making 8 observations on Alkem Laboratories after inspecting its manufacturing plant at Taloja,Maharashtra.
While the biggest fall among pharma shares has been of Sharon Bio-Medicine which has fallen 60.47 per cent to Rs 10.95 on March 31, 2016 from Rs 27.70 on December 31, 2015, bigger players such as Wockhardt fell 36 per cent to Rs 973.95 during the quarter, Cipla falling 21.21 per cent to Rs 511, Lupin down 19.39 per cent to Rs 1479.25 and Aurobindo Pharma down 15 per cent to Rs 744.90. However, Cadila Heathcare shares managed to stem the fall and dipped only 3.25 per cent to Rs 316.90.
“The pharma sector is facing turmoil as the USFDA has imposed tough inspections on most export facilities over recent years. The litigation and legal hassles caused due to this are effecting pharma companies. There have been multiple bans on fixed-dose combination drugs which are causing significant losses to most pharma companies. These factors are affecting the typically insulated cycles of pharma companies and evoking heavy losses in this sector,” according to Nikhil Kamath, co-Founder & Director, Zerodha.
Runjhun Jain, Senior Research Analyst, Nirmal Bang Securities, agrees. “Greater scrutiny by the US regulator is becoming a key challenge for Indian companies who are struggling to keep pace with the higher safety norms. India has highest number of USFDA approved manufacturing plants outside US. US accounts for 33 per cent of overall revenues for Indian companies having grown at 34-35 per cent CAGR over last five years. As US remains a key market for Indian pharmaceutical industry, delay in product approvals by USFDA and incidences like warning letter, import alert letter put speed-breakers in the growth story of the sector. The higher occurrences of such incidents in the recent past including on large-cap companies have eroded the valuations premium.
However, Jain believes these are temporary roadblocks . “Indian Pharma sector has become an integral part of the US markets and it is not easy to replace it. Also, indian companies are moving higher on the value chain by developing complex generics. We believe it is a temporary roadblock. We are optimistic on the long term outlook of the indian pharma sector.”
Runjhun’s top pharma picks are Granules India, Ajanta Pharma, Alembic Pharma and Indoco Remedies.
For Kamath, the best picks for the coming financial year are Sun Pharma, Lupin, Cipla and Glenmark.