Mounting debt, promoter pledging, falling working capital are internal challenges which any company can face. However, there is one more issue which companies generally face in the external environment and this tends to be on the regulatory front. Indeed, sectors such as telecom, power and the like have time and again been at the receiving end due to various government regulations. So is the pharma sector the next in line which will face consequences of increasing regulation?
Unlike many other sectors, most of the pharma companies are not only exposed to regulations by the Indian government but also due to the ones imposed by foreign countries. This is because most of the companies earn large part of their revenues through exports. So in a way, Indian pharma companies have to take care of the regulations not only in the domestic market but also in the international markets in which they are present.
The recent price correction of Ranbaxy and Wockhardt fits the case here. The market caps of both the companies witnessed sharp erosion on the back of issues and concerns raised by the USFDA (United States Food and Drug Association). The acquisition of Betapharm in Germany by Dr Reddy's is one more example. Soon after Dr Reddy's entered the German market, regulations of that country changed and the company had to take a hit on its revenues.
That is not all. The new domestic pricing policy is also expected to impact the sector. The higher impact is expected to be felt by MNC pharma companies as they have a large proportion of sales coming from the domestic market. Thus MNCs like GSK, Novartis, Aventis are likely to face the brunt. But the impact would also be felt by domestic companies such as Cipla, Cadila, Ranbaxy among others on not only their revenues but also on margins.
At the same time one should note that companies such as Lupin, Ipca etc. have also faced similar challenges. But these companies have been successful in addressing the issues as and when required. So what is the reason for this?
All the regulatory risks cannot be fully avoided. But companies who are vigilant enough and follow all fair practices will remain ahead in the curve. Some of the practices which are followed by successful pharma companies are, strictly following good manufacturing practices (GMP). Even when these companies face any problems, they quickly take steps to resolve the issues. Lupin is the best example. In spite of a warning letter issued by USFDA couple of years back on its Mandideep facility, the company could clear the same in a year's time.
Other than that, following fair practices like not overcharging for drugs, making acquisitions after having full knowledge of the markets in and out, having diversified drug portfolios and so on can help the pharma companies grow despite various challenges. In this the management quality of the company plays a very important role.
Thus investors should take into account the management quality and all the above discussed aspects while making investments companies from the pharma space.