Pharma shares fall on new drug policy

Cadila Health, Cipla, Dr.Reddy's and Aurobindo Pharma down 1.3%, 1.7%, 1.5% and 1.1%, respectively

Shares of drug makers fell on Monday, after the government notified a new pricing policy designed to cap the prices of a greater number of formulations. The BSE's healthcare index fell 1.8 per cent, against the Sensex's 0.3 per cent fall, as investors were concerned the policy could force a few companies to cut prices and take a hit on their profitability.

On Monday, Cadila Health, Cipla, Dr.Reddy's and Aurobindo Pharma fell 1.3 per cent, 1.7 per cent, 1.5 per cent and 1.1 per cent, respectively, on the BSE.

"There is a knee-jerk reaction to the new drug price control policy. Also, in the case of some of the companies, the market is reacting to the results," said Sadanand Shetty, vice-president and senior fund manager (equity), Taurus Mutual Fund.

Shares of Lupin slumped 4.5 per cent after rival Mylan launched a generic version of the cholesterol-lowering Tricor tablets. Credit Suisse downgraded the Lupin stock from 'outperform' to 'neutral'.

Analysts said the impact of the new drug policy wasn't very severe, as the policy was in line with the National Pharmaceuticals Pricing Policy, 2012, announced in December 2012. "In terms of value, it brings about 17-18 per cent of the Indian pharmaceutical market under price control. The policy should imply immediate product-level price cuts for price leaders and some headwinds to growth in F13," Morgan Stanley's analysts Sameer Baisiwala and Saniel Chandrawat said in a client note.

A few analysts said the effect of the new rules on pharmaceutical companies could be short-lived. "The new drug policy will only have a one-time impact on the Indian businesses of pharmaceutical companies, as the profitability of these companies would come under pressure this year," said Sunil Jain, head of research, Nirmal Bang. "This will not have a long-term impact on the stock, and the outlook for these companies continues to be robust."

In the last few years, shares of drug makers have been the top picks of investors, owing to steady earnings in the sector. And, despite the high stock valuations, investors are still betting on these.

Morgan Stanley said companies such as GSK Pharma, Ranbaxy and Cipla could bear the brunt f the drug policy; Glaxo could see double-digit erosion in operating profit. The impact on Sun, Dr.Reddy's, Lupin and Glenmark would be the least.