Bitter Pill For Pharma Sector--What Does It Mean For The Individual Investors

The Government’s notification of banning over 300 fixed dose combination drugs, including cough syrup compositions was on the ground that they pose ‘risk’ to humans and safer alternatives were available. The drugs were immediately banned after an expert committee found that they posed health risks.

The companies whose products are being impacted by the recent FDC ban by the drug controller include Pfizer, Glenmark, Procter and Gamble (P&G) and Cipla, Glaxo Smithkline, Reckitt Benckiser, Abbott Healthcare, Piramal, Lupin, Mankind Pharma and Wockhardt, Alembic Pharmaceutical, Ajanta Pharma, Macleods Pharmaceuticals, Dr Reddy's, Laborate Pharmaceuticals, Alkem Laboratories, Khandelwal Laboratories, Micro Lab Ltd, FDC Ltd, Coral Laboratories Ltd and Eris Lifesciences Pvt Ltd.

Explains Digesh Shah, Equity Research Analyst at Veracity Financial Services, “FDC is a combination of two or more APIs combined in a single dosage form. This FDC combination includes mainly cough syrups, pain killers and anti-diabetic medicines.”

Shah is of the view that if all these samples are found irrational FDCs and are banned, then the industry would have to suffer losses of Rs 10,000 crore.

Recently, the Delhi high court stayed a government order that banned drugs made by Abbott India and Macleods Pharma. Reports suggest that some of the medicines on which the ban on sale has been lifted include Pfizer's Corex cough syrup, Glaxo's Piriton expectorant, P&G's Vicks Action 500 extra, Reckitt's D'Cold, Piramal's Saridon, Glenmark's Ascoril and Alex cough syrups, Abbott's Phensedyl cough syrup and Alembic's Glycodin cough syrup.

An interim relief was given to Pfizer's cough syrup ‘Corex’ on March 14. Later the same was granted to over 30 companies, including Glaxo Smithkline, Reckitt Benckiser, Abbott Healthcare, Piramal, Lupin, Mankind Pharma and Wockhardt. Reports suggest that other companies that have moved the high court include Alembic Pharmaceutical, Ajanta Pharma, Macleods Pharmaceuticals, Dr Reddy's, Laborate Pharmaceuticals, Alkem Laboratories, Khandelwal Laboratories Pvt Ltd, Micro Lab Ltd, FDC Ltd, Coral Laboratories Ltd and Eris Lifesciences Pvt Ltd.

Says Sujay Shetty, Partner, Leader, Pharma & Life Sciences at PricewaterhouseCoopers (PwC) India, “The FDC ban was being talked about for some time though the timing took everybody by surprise. The financial hit is very significant. We are not sure if the Government will back down but are waiting to see the outcome of the court stay. In the medium term the companies will devise plans to recover lost ground but in the short term the financial hit is substantial.”

“Companies that are likely to be seriously affected include Macleods Pharma, Pfizer and Abbott mainly because these companies have some of their flagship products which will be affected. For instance, Corex cough syrup from Pfizer, Lupin’s anti-diabetic drug called Gluconorm –PG with sales of Rs 46.5 crore, which are banned will have adverse impact on the companies,” adds Parakh. Corex recorded sales of Rs 176 crore for the first nine months of the fiscal year ended on 31 December 2015. Another banned cough syrup brand Phensedyl, marketed by Abbott, accounts for around three percent of Abbott’s $1 billion India revenue.

Impact on share prices

Since the time the ban is imposed, BSE Healthcare Index has plunged by almost three percent. Shares of Lupin have fallen by almost 16 percent, since 10 March to trade at Rs 1,524 per share, on 23 March, while Pfizer stocks have fallen by almost 12 percent to close at Rs 1,712 per share, during the same period. It touched a low of Rs 1,611 per share on 18 March.

A recent report by HDFC Securities says, “The Pharma sector has been underperforming in the broader market over the last few weeks and the sector has slipped into sharp decline. Major participants in the pharma sector such as Lupin, Sun Pharma, Genmark pharma and Auro Pharma are depicting a negative trend, along with other participants like Wockhardt and Cipla. The underlying trend of CNX Pharma sector is sideways with weak bias.”

While companies like Pfizer, Abbott, Sun Pharma, Alchem and Ipca Labs are likely to see an impact in their sales, following the FDC ban, there could be some other who may also escape the hit.

“The sale ban for pharma companies may impact companies such as Pfizer, Abbott, Sun Pharma, Alchem, Ipca Labs and the impact could be between 5-10 percent of the sale. I believe the recent fall in Lupin Ltd was on the back of US Food and Drug Administration (USFDA). Some of the companies that could escape from the hit of FDC ban are Lupin, Biocon, JB Chem including others,” says Shah.

“The immediate ban on FDC by the Government has already affected and definitely has a negative impact as the volume from such medicines is high. But more of the sentimental impact on the stock price has already been factored in as we did observe weakness in the stock price well before the news came out,” he adds.

However, on the positive side, Shah believes that as the Pharma industry research oriented, the launch of the new drug products may result in the shift of volume. “I am of the view that the recent ban of the FDC will have a temporary impact on the market sentiment but there are some positive sides of the pharma industry that will have a larger positive impact over and above the FDC issue in the long run.”

Bullish on India’s future in healthcare segment

According to reports from the Department of Pharmaceuticals, PwC, McKinsey and TechSci Research, the revenue of the Indian Pharmaceutical Industry has grown five times from $5bn to $30bn in 2005 and 2015, respectively. Going forward, the revenue in this space is expected to touch $ 55bn in 2020, and grow at around 15 percent on annual basis and it may even outperform the global pharma industry.

Shah observes that in the last decade, between the year 2005 and 2015, the industry did go through various legacy issues…but despite that the sector did well. “Despite the current issues, the industry does have several strengths. We only foresee a growth in the Indian Pharmaceutical industry. According to me, this kind of legacy issue provides an excellent buying opportunity having a long-term time horizon. So investors should start accumulating pharma stocks,” he notes.

Last year, the Union Cabinet gave its nod for the amendment of the existing Foreign Direct Investment (FDI) policy in the pharmaceutical sector in order to allow FDI up to 100 per cent under the automatic route.

Shah is of the view that the recent outcome of budget stating 10 percent tax rebate on income from the worldwide exploitation of pattern developed and registered in India, will too have a positive impact on the sector.

Parakh opines that although this move to ban FDC will be great for the health of the citizens of the country, when it comes to the financial health of an investor, it surely will affect them negatively. However, he also believes that the pharma sector will stay evergreen as always, as we would always need drugs…and better drugs. “The ban is a good opportunity for investors to pick pharma stocks, if they further fall, as the future of the sector looks bright.”

Talking about the rapid progression of pharma sector in India, Parakh says, “Today, the Indian Pharma companies are rapidly progressing in both the domestic and overseas market. In fact, the country has already become the most sought after nation for multinational companies to manufacture their products here in India. There are a lot of mergers and acquisitions happening in this space since quite some time now and India has been placed amongst the top global pharmaceutical producers in the world. We export to more than 150 countries and produce more than 50 percent of the WHO demand for DPT/BCG.”

He adds, “Our manufacturing costs to produce drugs in India are approximately 30 to 40 percent lower than that in the US. Pharmaceutical stocks will continue to be driven by their companies' strong performance, free cash flows and the future outlook. Global consultancy company, McKinsey & Co too has pegged Indian pharma sector to grow to $55 billion by 2020.”

The only flip side for these companies will be a need to overcome challenges in terms of competition or price wars and these challenges will be even more for those companies who are more focused on the Indian territory, notes Parakh.