Nifty Pharma index hits 2-year low; Cipla, Divis, Laurus Labs at 52-wk lows

Analysts said the pace of US FDA inspections has again picked-up in the last few months post Covid, and they have seen increased incidents with 483 observations and adverse outcomes

Shares of pharmaceutical companies came under selling pressure on Tuesday with Nifty Pharma index hitting nearly two-year low of 11,542 on the National Stock Exchange (NSE) in the intra-day trade on growth concerns. The pharma index was trading at its lowest level since March 19, 2021.

Cipla, Divis Laboratories, Biocon, Eris Lifescience, Ipca Laboratories, Laurus Labs, Pfizer, Wockhardt, and Jubilant Pharmova hit their respective 52-week lows on the bourses. In the past one month, these stocks have decline up to 15 per cent, as compared to 5 per cent decline in Nifty 50.

Among individual stocks, Cipla hit a fresh 52-week low of Rs 853.85, down 2 per cent on the NSE. In the past one month, it has slipped 15 per cent on concerns of product launch delay in the US.

Cipla, on February 18, said that the United States Food and Drug Administration (US FDA) has issued Form 483 with 8 observations after the inspection of its Pithampur manufacturing facilities. Cipla's Pithampur plant is one of the most important plants for the company, besides Goa plant.

Pithampur plant is estimated to be contributing around 5 per cent of the revenue and around 15 per cent of Ebitda for FY2023. The plant manufactures its blockbuster respiratory products such as Albuterol and Arformoterol; and gAdvair, which is soon to be launched, has been filed from the same plant.

Analysts say US FDA regulatory uncertainty is the biggest concern for the Pharma sector besides the price erosion in US generics.

"Indian Pharma companies have not been able to address these issues for a long time. Also, the US FDA inspection rate is expected to increase from here on because the number of inspections is still way below the pre-Covid level (330 in 2019; 54 in 2022)," according to analysts at Nirmal Bang Equities.

The expected increase in US FDA inspections is due to both enhanced scrutiny as well as higher complex/specialty drug filings amid stiff competition in conventional products. Hence, we believe that the USFDA compliance issues will keep putting pressure on stock prices of Pharma companies, the brokerage firm said.

According to analysts at BNP Paribas, the pace of US FDA inspections has again picked-up in the last few months post Covid and we have seen increased incidents with 483 observations and adverse outcomes.

Regulatory compliance remains a key precursor to succeed in the US market and new approvals are key growth drivers. “We think companies with plants that have a clear USFDA track record are better positioned to grow revenue organically as well as to gain market share from companies impacted by adverse outcomes of USFDA inspections”, the brokerage firm said in sector report.

Meanwhile, gross margins of Pharma companies the brokerage firm cover were under pressure in 9MFY23 due to higher raw-material costs and increased freight expenses on higher crude-oil prices. Pricing pressure in the US generics business added to the pressure. This was mainly seen in case of companies focused on US generics.

However, raw-material costs have started easing and declining crude-oil price should result in lower freight costs. The brokerage firm expects gross margin to gradually improve and Ebitda margins to expand with better gross margin and steady to declining R&D spends as a proportion of sales.

"We think the India Pharma story remains intact with 10-11 per cent revenue growth potential, and high margin and premium valuations remaining sticky. We expect price erosion in the US market to abate to midsingle digits and prefer companies with commercialized specialty portfolios, a clear FDA status and lower product concentration risk," analyst said.