Let’s study Pharma industry in India, current issues it is facing and industry outlook in 2018. We will touch upon Pharma industry background, it’s glorious past, issues it is facing in India and in USA. And finally we will end with our stock picks from Pharma industry in India.
Pharma industry in India, it’s Overview and Outlook in 2018
A Quick Background:
Pharma industry in India is the third largest in terms of volume and thirteenth largest in terms of value, and it accounts for 20 per cent in the volume terms and 1.4 per cent in value terms of the Global Pharmaceutical Industry as per a report by Equity Master. 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.
With 71 per cent market share, generic drugs form the largest segment of pharma industry in India. India has become the third largest global generic API merchant market by 2016, with a 7.2 per cent market share. The country accounts for the second largest number of Abbreviated New Drug Applications (ANDAs) and is the world’s leader in Drug Master Files (DMFs) applications with the US.
Golden Period, it was:
Few years back Pharma sector was considered as a defensive sector. To put in simple words, it means no matter what happens in stock market your money is safe in Pharma socks.
S&P BSE HEALTHCARE index was at 5000 in first month of 2010 and it went past 18,000 mark in 2015. So to say index has given an exceptional return of more than 260 percent within a period of 5 years compared to less than 100 % Sensex return. Needless to say Healthcare sector has given mind-blowing number of multibaggers during that period and made many Indian millionaires and multimillionaires.
Recent Turmoil Pharma sector is going through:
Few months back in August 2017, Nifty Pharma touched 3 year low point.
US market issues:
The US constitutes almost 40% of major Indian pharma companies’ revenues. Donald Trump’s excoriation towards the high pricing of drugs by the pharmaceutical industry created quite a few challenges for the industry.
on the other side, FDA observations are on the rise, and pharma companies in India have been slow to address these. The USFDA’s enhanced suspicion towards the Indian pharma companies’ quality control in manufacturing further aggravated their woes.
Compliance hurdles and import reduction was further heightened by deteriorating price environment(especially for generics) in the United States. This was a direct impact of greater competition, triggered when the US FDA increased its pace of approvals in America, granting approval to 800 drug applications in 2016, a number known to be the highest for a single year.
Another major drawback is number of Litigation going on in USA. Whenever there is litigation, there is launch delays.
India market issue:
GST, whose implementation has led to unprepared stockists in the supply chain refusing to stock medicines due to the uncertainties of the outcome of this destination-based tax. This issue has been highlighted by Biocon Chairman and Managing Director, Kiran Mazumdar-Shaw herself when she cautioned everyone of possible drug shortage. As per The Economic Times, dated June 30, 2017, she is said to have claimed that the pharmaceutical companies have taken a huge hit on their margins due to this new taxation policy.
In general, for the past few years, Indian government seems to be more inclined towards reducing the burden of healthcare costs on its citizens. Government have amended the Drug and Cosmetic Rules, 1945. The amendment made it mandatory for doctors to prescribe generic name two font larger than trade name. This has impacted margin for many pharma companies in India.
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Biggest possible risk
Policy, known as value-based pricing, if implemented in USA could be detrimental to drug companies, which manufacture very expensive drugs to cure rare diseases. The idea refers to paying drug companies for the value that a drug brings and refunding money if a drug fails to prevent a critical health condition. This will benefit drug manufacturers only if their drug is successful in terms of treating a rare disease. Thus, the companies’ focus will have to shift from expenditure in marketing the drugs to expenditure in research and development.
Way ahead for Pharma companies: Worst is behind now?
The exports of Indian pharmaceutical industry to the US will get a boost in FY18, as branded drugs worth US$ 50 billion will become off-patented.
Post GST implementation in July 1, 2017, the disruption caused over confusion in taxation is gradually dissipating and hence improvement observed in offtake in Q2FY18.
Average sustainable growth guidance is 6-8% in FY18E and 8-10% in FY19.
If we go back few years, Indian Pharma companies were making acquisitions to expand manufacturing capabilities and to also increase their portfolio of generic drugs, which are copycat versions of branded medicines. However, in the past couple of years, the focus has shifted from acquisitions to buying companies, assets or products in the specialty, complex generics or branded space as these acquisitions have the potential for much higher returns.
So, Is worst behind now in Pharma Industry?
There is no clear sign of it as of now. But if companies can realign their business strategy to shift focus from exisintg generic to speciality segment then they are certain to outperform industry guidance.
And Our stock picks from Pharma sectors for 2018:
After careful analysis of all Pharma companies, we have shortlisted 5 stocks that have the potential to provide decent returns over next 12 to 18 months.
1. Biocon (CMP: Rs 540)
2. Piramal Enterprises (CMP: Rs 2900)
Other 3 stocks are small cap/ penny stocks. You may contact us for the details.