Expediting Drug Approval Process to be a Positive for Industry - Chart Of The Day 5 July 2017 - Equitymaster
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Expediting Drug Approval Process to be a Positive for Industry
Jul 5, 2017


Speaking of valuations, the BSE Healthcare Index is down 16.5% in two years. This is a mighty fall compared to the benchmark index, which is up 11% during the same period. A downgrade in the earnings estimates has led to a selloff in the pharma space, which has led to a contraction in the price to earnings ratio (PE) of the pharma index.

The PE ratio of the Nifty Pharma Index for a five year period stands at 46 times. This ratio has contracted to 35 times currently. The headwinds being faced by this sector, have led to such lethal contraction.

USFDA alerts on Indian pharma companies have increased over the past few years. Regulators used to visit the plants every two years. Now they come every eight months. Increasing inspections has led to a total of 41 import alerts in the past eight years - 33 of them (80%) in just the last four years (2013-16). This clearly signifies increased USFDA scrutiny on Indian pharma firms. If that wasn't enough, increasing pricing pressure in the generics segment has dented realizations.

In this dull scenario, there appears to be some respite as the USFDA has expedited the drug approval process. Drug approvals for Indian companies have gone up 50% in the period from January to June 2017 compared to the same period last year.

While short-term pain is expected, companies with strong R&D capabilities and compliant plants (subscription required) will do well over the long term. The uncertainties make it important to be stock specific in the sector. It is important to look for companies that have the competence and staying power to overcome the challenges facing the sector.

In the latest issue of The India Letter (subscription required), we have identified a pharma stock which we believe will outlast others in the long run.

Data Source: Business Standard

This Chart Of The Day was published in The 5 Minute WrapUp - Would Buying Coke Along with Warren Buffett have been a Good Idea?

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