Regulatory issues bridle pharma returns, USFDA scrutiny a major hurdle

Pharmaceutical companies, which have underperformed the broader indices, could face further headwinds, given the increased regulatory scrutiny from the US drug regulator. The BSE Healthcare Index is up 4.5 per cent since the start of the year, compared to Sensex returns of over 11 per cent.

Cadila Healthcare, Torrent Pharmaceuticals, and Aurobindo Pharma have received multiple observations (between 10-14 for Aurobindo and Cadila) for their key plants at Moraiya, Dahej, and Hyderabad.

Analysts say the large number of observations is alarming, given that some of these sites have already been inspected in the past and been cleared. “Indian pharma majors, with substantial exposure to the US market, are behind the curve when it comes to manufacturing, both in terms of trained manpower and the latest techniques. A large number of repeat inspections bear testimony to this,” says an analyst at a domestic brokerage.

The next negative trigger for the sector would be adverse objections to the ongoing US Food and Drug Administration (FDA) inspection of Sun Pharmaceutical Industries’ Halol facility. Analysts believe the sector could see some derating if regulatory problems mount for Sun Pharma as well as others currently under the US FDA scanner. Sun, Cadila, and Aurobindo get 45-50 per cent of their consolidated revenues from the US market.

The impact of an escalation of the observations will hit their profit estimates over the next couple of years. Amey Chalke and Eshan Desai of HDFC Securities believe that a warning letter for Cadila Healthcare could impact the company’s 2020-21 earnings by up to 37 per cent.

The other issue with repeat observations is that it pushes the launch dates for drugs in the pipeline into the future or from alternative sites. This not only delays but increases the cost. Rival launches and lost opportunities lead to downward revision of the earnings potential from the affected drugs.

Given the risks, analysts suggest investors should stick to companies which have a larger share of business from India such as multinational pharma companies as well as companies such as Alkem Laboratories and Ipca Laboratories. This should help derisk revenues and ensure stable growth.