Reverse tailwind - WSJ:
Indian Pharma Is Tied to the U.S.—in Sickness and in Health
By
ABHEEK BHATTACHARYA
CONNECT
The biggest influence on the health of India's pharmaceutical sector is America.
Though talk of the Federal Reserve scaling back bond purchases has weakened the rupee and generally hurt import-dependent India, it has helped this industry. The U.S. is the biggest market for many Indian drug makers. Depending on the company, a 1% decline in the rupee against the dollar can raise margins up to 2.4%, according to Citi.
image
image
Agence France-Presse/Getty Images
A pharmacy in New Delhi stocks Ranbaxy-manufactured drugs, seen in a May display. The biggest influence on the health of India's pharmaceutical sector is the U.S.
Indian investors, faced with bleaker prospects in other areas, have piled into this sector. Pharma stocks are up 18% this year, while the broader market has stayed flat. The rupee has slumped 12% against the dollar in this period.
But U.S. dependency has a downside, too. It has made U.S. regulation all important.
Take Ranbaxy Laboratories, which last year was the largest company in the industry by sales. Its shares plunged 28% this week after the U.S. Food and Drug Administration said it would block imports from its newest facility in north India, because of quality concerns. Ranbaxy is owned by Japan's Daiichi Sankyo, whose stock slumped 7% in Tokyo Tuesday. The company says it hopes to address the concerns soon.
Ranbaxy has had prior run-ins with the FDA. In May, it was hit with U.S. charges over adulterated drugs, while in 2008 the FDA blocked imports from two of its other facilities. These blocks are still in place.
Another major drug maker, Wockhardt, has also run afoul of the FDA. In May, the U.S. agency banned imports from one of its facilities, and in July sent the company a letter citing further violations. Its shares are down 66% this year.
And U.S. regulatory risk could increase. Thanks to a U.S. law in effect from late last year, the FDA has to make inspections in India more frequently to bring them in line with U.S. practices. It has recently increased its staff presence in India.
Ranbaxy is trading at 11 times earnings for the next 12 months, according to FactSet. Wockhardt is at 4.9 times. In contrast, Lupin trades at 21.4 times forward earnings and Dr. Reddy's Laboratories at 19.7 times. Though the FDA found shortfalls a few years ago at Lupin and Dr. Reddy's, both companies speedily resolved them—and neither currently faces compliance issues.
So while currency gains are welcome, investors are right to recognize that regulatory challenges are the bigger issue when it comes to long-term growth.
Write to Abheek Bhattacharya at abheek.bhattacharya@wsj.com
