 "pharma, medicine")
After the exemption, came the jolt for the pharma sector as US President Donald Trump talked about imposing tariffs that “haven’t been seen before.”
A threat of unprecedented tariffs sent Nifty Pharma lower by 4 per cent at close. It was the second biggest loser among the Nifty sectoral indices.
Among the Nifty Pharma constituents, four stocks — Laurus Laboratories, Ipca Labs, Aurobindo Pharma and Granules India — shed between 6 and 7 per cent each on Friday.
Among the largest listed players by market capitalisation — Sun Pharmaceutical Industries, Aurobindo Pharma, Zydus Lifesciences, Dr Reddy’s Laboratories and Lupin — have the highest exposures to the US market with their shares ranging from 30 per cent to 50 per cent.
Brokerages believe that if the 26 per cent tariff is imposed, the impact on operating profit will be the highest for Aurobindo Pharma in the formulations space and Biocon in the biosimilar segment. The US accounts for about 45-50 per cent of their operating profit.
If Indian drug majors absorb the cost of a 26 per cent tariff, Mehul Sheth and Divyaxa Agnihotri of HDFC Securities believe that the impact on their FY27 operating profit will be 3-45 per cent.
If pharma players absorb half of the impact and pass on the rest to distributors/end market, the impact could be pegged at 2-22 per cent. If a third of the total is borne by the companies, then the impact would be lower at 1-16 per cent.
If the Indian companies pass on the cost to the end consumer, it could lead to higher cost of medicines in that market and force the firms to rationalise their product basket and weed out lower-margin products.
If the tariffs are global in nature, Indian companies will remain competitive and may not have to undercut their peers.
Companies such as Sun Pharma, which have a significant specialty portfolio, could be less impacted than Indian peers in the US market. This is given its lower competition in niche segments.
About 55-57 per cent of US revenues for Sun come from specialty products.
Further, given a larger share of profits coming from India and other markets, it will limit the impact on the company.
Analysts led by Alankar Garude of Kotak Research believe that if the tariffs are not rolled back, pharma companies would be forced to prune their US portfolio (completely exit in some cases) after exhausting other avenues such as passing on the higher costs.
However, they expect pharma distributors to also bear the burden of tariffs.
In addition to passing on the costs, pharma companies could target the rest of the world as well as the domestic market.
However, aggression in other global markets and in India could lead to price wars, which could further weigh on their margins.
Other measures to mitigate the tariff impact would be to set up a manufacturing base in the US.
Currently, Piramal Pharma, Cipla, Sun Pharma, Lupin and Aurobindo Pharma have two or more plants in the US though their contribution to overall sales is in the mid-to-low single digits.
However, brokerages believe that given the cost of building a new plant, gestation period and regulatory compliances, the risk reward would be unfavourable.
Analysts led by Saion Mukherjee of Nomura Research believe that companies are unlikely to make significant investments in capacities in the US even in the eventuality of high tariffs.
This is due to low economic viability and uncertainty over tariff policy in the long run. It takes at least three years to set up a greenfield capacity and gain regulatory approvals in the US.
The longer timeline may deter companies from undertaking investments in the US, says the brokerage.
Given the uncertainty related to the US market, brokerages suggest that investors stick to domestic-focused companies such as Torrent Pharmaceuticals, Mankind Pharma, Eris Lifesciences, and JB Chemicals and Pharmaceuticals.
