USFDA glare, high valuations trigger correction in pharma stocks
While the broad-based Nifty Pharma index is down 12.4% from November 4 till date, the loss has been more pronounced in individual stocks.
While the broad-based Nifty Pharma index is down 12.4 per cent from November 4 till date, the loss has been more pronounced in several individual stocks; Hyderabad-based Dr Reddy’s is down 24 per cent, Sun Pharma has lost 14 per cent and Lupin is down 3 per cent.
"Many companies have been trading at high valuations. With bad news from USFDA hitting some companies, the sector has corrected sharply," says Sarabjit Kour Nangra, VP (research) at Angel Broking.
Among the large-caps, Dr Reddy’s has been the biggest loser in the last one week, after the company announced it had formal warnings from the USFDA over three of its plants located in Andhra Pradesh. Another bad news came in for the company when a US court passed a temporary restraining order against its esomeprazole as AstraZeneca objected to the usage of purple colour.
In the case of Sun Pharma, the management disclosed that the USFDA had issued an OAI (Official Action Indicated) document on its Halol facility. In addition to this, lower sales growth, supply constraints and currency movements in emerging markets led to lower second quarter earnings.
Sun Pharma’s results missed expectations with net profit almost halving to Rs 1,106 crore, while sales slipped 15 per cent to Rs 6,837 crore. The moves prompted analysts to cut earnings estimates for the full year. Kotak Institutional Equities has cut its 2016-18 EPS estimate by 11-12 per cent and has a ‘Sell’ rating with a target price of Rs 750 per share.
"Valuations in the pharma sector are ruling high. With USFDA warnings coming in for a couple of larger players, it has had a rub-off effect on other stocks as well, leading to a correction in the entire sector," says Shreyash Devalkar, fund manager at BNP Paribas Mutual Fund.
Analysts believe, going ahead, investors should evaluate companies on a stock specific basis. Investors should be in no hurry to buy some of the companies hit by USFDA rulings as they will take at least acouple of quarters to recover.
"Indian pharma companies are going through a learning phase where such incidents are bound to happen. Over a period of time, they will learn and come out winners. Given the huge potential in the sector and to de-risk from such an event, investors must own a basket of pharma companies in their portfolio instead of betting on one or two companies," says Gopal Agrawal, chief investment officer, Mirae AMC.
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