Will Donald Trump turn out to be a bitter pill for Indian pharma stocks again?
The US healthcare system under Trump 2.0 are likely to benefit Indian players, except for the push for increased US drug production. It said that expanding US drug manufacturing on a large scale is a counter-intuitive move, as it would likely lead to higher drug prices.
Donald Trump entered the White House for his second term as US President on January 20 and wasted no time implementing his "Make America Great Again" agenda. Within his first two days in office, he announced a series of decisions aimed at reinforcing his vision for the country.
His policies remain firmly centered on protecting American businesses and citizens. Key measures include efforts to bolster domestic manufacturing, reduce dependency on foreign imports, and implement stricter trade practices to safeguard American industries.
While his trade policies could benefit American industries, they may come at the expense of other countries by creating trade imbalances, imposing tariffs, and reducing access to the US market for foreign exporters.
In this backdrop, many Indian sectors depend on the US market, with Indian pharma being one of them. Several leading Indian pharmaceutical companies, such as Cipla, Sun Pharma, Dr. Reddy’s, Lupin, and Aurobindo Pharma, have a substantial R&D and manufacturing presence in the US, along with significant revenue contributions from the North American region.
The country's drugs and pharma exports increased by 9.67 per cent year-on-year to USD 27.9 billion in FY24, even as the total exports dipped by 3 per cent in the last fiscal, as per the commerce data.
Pharma stocks underperformed during Trump 1.0
As per the analysis done by the domestic brokerage firm JM Financial, during Trump’s first term in office, the Indian pharmaceutical sector struggled with challenges including consolidation in US distribution channels, regulatory challenges from the FDA concerning key plants, a lack of major product approvals, as well as price control measures and a ban on FDCs in India.
As a result, the pharmaceutical stocks underperformed. Nifty Pharma delivered a close to 20% return during Trump’s first term (Jan-2017 to Jan-2021) vs. Nifty 50’s absolute return of 80%.
Large-cap stocks such as Cipla tumbled 16% between 2017 and 2019, while those of Sun Pharma and Lupin corrected by 31% and 49% during the same period, as these companies had significant exposure to the US markets and were directly impacted by the regulatory and policy changes.
"Though Trump 1.0 saw significantly stricter USFDA regulatory oversight and increased compliance costs, the underperformance of Indian Pharma during this period was driven more by macro headwinds such as buyer consolidation, increased competition, and plant issues, rather than the direct policy stance of the US," the brokerage noted.
The Pharma industry bounced back post-Covid-19, a trend uniform across healthcare and allied industries. The policy changes that the Trump administration managed during the first tenure were: removing the Affordable Care Act’s (ACA) individual mandate, allowing imports from Canada, ending gag clauses, and reducing insulin costs.
None of these had direct implications for Indian generic players. The biggest failure during this term was his inability to replace the Affordable Care Act (ACA) with ‘Trumpcare’ as claimed during his campaign for the presidency, JM Financial stated.
Focus on boosting domestic manufacturing capabilities
Drawing from his first term, Trump is likely to continue efforts to amend the ACA, though support for such changes now is even weaker than it was during Trump 1.0. Still, his focus in general remains on prioritizing domestic manufacturing, both to boost employment and reduce reliance on countries like China for essential medicines.
Trump has decried the alarming drug shortage rates during Biden term, citing 30% increase in shortages with 295 active drug shortages recorded by end of 2022. These remarks concern the US’s reliance on China for essential medicines.
However, the cost of production in the US remains relatively high, and at best, the country could build the capacity to manufacture a limited number of critical medicines needed in emergencies.
The most probable outcome in Trump 2.0 appears to be the continued allowance of price negotiations for Medicare procurements, with the current list of 25 drugs likely to expand during his tenure. While there is also discussion around eliminating Pharmacy Benefit Managers (PBMs) or middlemen, thus, the brokerage believes this outcome is unlikely at present.
Trump 2.0 Policies: A mixed bag for Indian pharma players
According to JM Financial, most of the expected changes to the US healthcare system under Trump 2.0 are likely to benefit Indian players, except for the push for increased US drug production. "It said that expanding US drug manufacturing on a large scale is a counter-intuitive move, as it would likely lead to higher drug prices, undermining the primary goal of reducing healthcare costs," said JM Financial.
While price negotiations for novel products may drive more outsourcing to CDMOs, the removal of Pharmacy Benefit Managers (PBMs) or the introduction of more wholesaler groups to reduce the bargaining power of intermediaries would benefit Indian generic players, the brokerage noted.
Additionally, the brokerage noted that the imposition of high tariffs on China, along with efforts to reduce dependence on China for medicines and medical research, would benefit Indian manufacturers. Furthermore, there appears to be strong bipartisan support for the China+1 initiative.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions
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