Defensive pharma, the darling of the stock markets in 2015, is down in the dumps. Since the start of 2017, the BSE Pharma Index has fallen 20%. The combined market capitalisation of the top pharma stocks is now less than that of Reliance Industries.
Over the last three years, the USFDA raised numerous regulatory concerns, resulting in import bans and suspension of new drug approvals from facilities of Indian pharma companies. This has hurt the sector's revenues and earnings and is behind much of the pessimism surrounding the sector.
But amid this pessimism, a smart pick-up in new drug approvals has provided some solace. There has been a 45% YoY jump in approvals for generic drugs in the first seven months of 2017 as the FDA aims to bring down healthcare costs. Even the new FDA commissioner, Scott Gottlieb, wants to expedite the entry of new generic drugs to provide affordable medicines to people in the US.
But consolidation of suppliers in the US has resulted in greater bargaining power for distributors and pharmacies, which has led to price erosion for generic drug manufacturers.
In other words, there are some negatives and some positives for domestic drug-exporting companies. But painting the entire industry with the same brush is not the right way. Despite the regulatory and pricing pressure, some drug companies may be better placed in terms of geographic diversity or superior manufacturing practices.
And with valuations turning attractive, the time may be just right to look for fundamentally sound pharma companies armed with a durable and sustainable moat.
Data Source: ACE Equity