Mumbai: Despite concern and scepticism around pharmaceutical stocks, investors don’t seem to have become jittery about the sector. Pharma stocks have not corrected much in 2017, though most analysts are worried about overhang of regulatory inspection by the US Food and Drug Administration (USFDA) and pricing in the US. Surprisingly, BSE Healthcare index gained 4% while the Sensex was up 7% in the year-to-date period till 17 February.
US President Donald Trump’s statements on drug overpricing had sparked sell-off in pharma stocks in mid-January but they recovered soon. Trump has vowed to force US drug industry to manufacture domestically and cut prices which may hurt Indian pharma companies.
Another concern which has got analysts worried is the proposed border adjustment tax (BAT) meant to boost domestic US manufacturing by taxing imports.
Bank of Merrill Lynch Global Research had said in a report that BAT in its proposed form (tax rate 20%) may negatively impact EBIT of Indian pharma companies by 17-46% but if BAT is implemented and corporate tax rate is retained at the existing level of 35%, the impact is likely to be as severe as 30-80% of FY18.
This is why analysts are negative on the sector expecting pharma stock prices to fall.
Surajit Pal, pharma analyst at brokerage firm Prabhudas Lilladher believes that the sector is going through a transition period and the worst is yet to come. He says that the sector will underperform its peers and the stocks may see around a 20% downside ahead.
What is ailing the sector is worry that US revenue for most Indian pharma companies will decline if Trump takes a policy stance on drug pricing. Major Indian pharmaceutical companies earn around 40-60% revenue from the US market. Companies like Sun Pharma, Cadila Health, Lupin, Cipla, Glenmark and Dr Reddy’s earn a sizeable amount of their revenue from the US markets.
In the December quarter, India’s largest drug maker by sales, Sun Pharma saw slower sales growth in the US and Indian markets. US generics business that accounts for nearly half of Sun Pharma sales grew 4% in Q3. Its Q3 net profit fell 5% to Rs1,471.8 crore.
However, even after the nervousness around the sector, market valuation has not been eroded much. BSE Healthcare index price to earnings (PE) ratio is at 27.85 whereas Sensex PE ratio stands at 22.85. But in the one-year period the BSE Sensex is up 22% whereas the BSE Healthcare index is up only by a marginally 0.8%. Natco Pharma, Cadila, Biocon and Sun Pharma are up 7-31% in the year-to-date period.
Indian pharma companies are also staring at local problems which may hurt the sector. Praful Bohra of Religare Capital Markets adds that besides global uncertainties, goods and service (GST) tax implementation and demonetisation may impact pharma companies.