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Despite the sharp plunge that pharma stocks saw last week over US regulatory concerns, stocks of domestic generic drug makers are still trading at a record 138 per cent premium to their US generics peers in terms of forward price-to-earnings multiples.
Even as pharma stocks gained some ground on Monday following a piece of positive news on Lupin’s Goa plant, valuations of most pharma counters, especially in the midcap space, are unjustified and demand a steep correction going ahead, say experts. Uncertainty over the pricing environment as the leadership in the US changes would just be one such excuse, they said.
“Any restrictive policies towards Indian pharma exports by the new US president would lead to a severe drop in midcap pharma stocks,” said G Chokkalingam, founder & managing director of Equinomics Research & Advisory. He is advising investors to accumulate large-cap pharma stocks while booking profits in the mid-cap pharma space in the short term.
On Monday, the Nifty Pharma index fell 1.41 per cent from its previous close to end at to close at 10,656.80. The index has underperformed the market by falling 10.85 per cent year-to-date, against a 7.52 per cent rise in the Nifty50. The pharma index on Friday last week recorded its sharpest intra-day fall in the past seven months. Stocks like Aurobindo Pharma, Torrent Pharma and Sun Pharma have been the worst performers, falling up to 18 per cent in the past month alone.
Experts said that given the challenging global environment, the extent of the premium pharma stocks were enjoying was questionable, especially with the deteriorating dynamics of US businesses, which had contributed the bulk of the growth for domestic generic makers so far.
Election overhang
Add to that the US elections. Brokerage Kotak Institutional Equities believes a Democrat (Hillary Clinton) sweep across Houses could pose pricing challenges for the domestic pharma industry, and pave the way for tighter pricing regulations for both branded and generic drug makers.
Meanwhile, the brokerage noted that both US presidential candidates -- Hillary Clinton and Donald Trump had argued in favour of allowing the US government’s medicare programme, which accounts for over 20 per cent of total US drug spend, to directly negotiate drug prices with manufacturers.
US probe against cartelisation
Last week, global and Indian generics stocks went for a toss on media reports suggesting that the US Justice Department (DoJ) was looking to file charges against many generic drug companies, including Sun Pharma, over charges of price cartelisation, by the end of this calendar year.
The investigation’s focus is on a dozen companies and over two dozen drugs, many of which are not in the public domain.
“Among Indian companies involved are Sun (doxycycline and albuterol), Dr Reddy’s (Depakote ER and pravastatin), Zydus (Depakote ER), and Taro (drug names not disclosed), though the scope could likely be expanded to include other companies as well,” the Kotak Institutional Equities report said.
