A bear phase for pharma pack! 10 stocks fall up to 40% from highs

NEW DELHI: Healthcare stocks have failed to provide relief to investors in last one year. The Nifty Pharma index is down over 20 per cent from its 52-week high of 13,753.50, which indicates a bearish phase for the index.

Generally, a correction below 20 per cent is defined as the beginning of bear market.

Top ten stocks listed in the Nifty Pharma index have plunged up to 40 per cent from their respective 52-week highs in the last one year, which include names like Glenmark Pharma, Cipla, Lupin, Cadila, Sun Pharma, Aurobindo and Piramal.

The bad news doesn't end there. After the disappointing March quarter numbers, the pharmaceuticals market grew at the slowest pace in two years in May, weighed down by a drop in sales, fresh price cuts and lower-than-expected uptake, according to AIOCD PharmaTrack.



What are the concerns?
Most of the pharma companies such as Sun Pharma, Lupin, Cipla, Dr Reddy's Labs and Cadila Healthcare posted results below expectations. The quantum of negative EPS revisions for FY17 has been the highest in pharma stocks besides banks and industrials. FDA concerns continue to weigh on growth in US business.

Though First to File (FTFs) like generic Glumetza and Gleevec helped Lupin and Sun, but R&D expenses increased across sectors and guidance suggests an increasing trend. Volatile currencies impacted business in emerging markets.

Sun Pharma issued guidance for modest top line at 8-10 per cent growth in FY17. Divi's Laboratories maintained its revenue guidance at 15-16 per cent. Lupin expects to achieve $3.5b top line by FY18. Dr Reddy’s has given a weak guidance for Q1 of FY17, affected by emerging market currencies and seasonality in the US market.

Increasing concerns over USFDA, currency woes and slowdown in US business could well hurt Indian pharma in the near term, which could weight on margins and sales in the near term.

“These issues are mainly related to individual company bases and their cultural maintenance and internal control over operations. The opportunities in the US are diminishing. It is no more a low-hanging fruit,” Surajit Pal, Research Analyst, Prabhudas Lilladher, said in an interview with ET Now.

Pharma companies are getting into new portfolios and that involves high cost and some of the smaller players may not be able to get the margins because of increasing competition.

"Bigger guys such as Sun Pharma and Dr Reddy’s, which have some experience in the branded business in India and other markets, can capitalise on those experiences in the US market," Pal said.

What are global brokerages firms recommending?
Some experts see the pharma pack as a value bet if someone has a time horizon of more than a year, preferably 2-3 years. And the headwinds that we are talking about are more of short term in nature, they say.

Even after muted Q4 results, most of the global brokerage firms maintain positive rating for 80 per cent of the pharma names.

Top global brokerage firms in separate notes to their clients maintain buy ratings on Glenmark Pharma, Lupin, Dr Reddy's and Aurobindo Pharma. They maintain outperform rating on Cipla and Cadila Healthcare.