Some Indian pharmaceutical companies are facing increased regulatory scrutiny in developed markets and that's perking up the view on the sector.
Generic drug makers like Ranbaxy Laboratories Ltd., Sun Pharmaceutical Industries Ltd. and Lupin Ltd. are in trouble with authorities in the U.S. over issues such as the quality of test data and manufacturing practices at their plants in India and abroad.
These companies are now scrambling to improve standards. As a result, they will be in a better position to increase their business over the next five years when $100 billion worth of drugs will go off-patent, say analysts.
With manufacturing costs nearly 40% lower in India than in the West and the global drive to cut healthcare expenses, India's generic drugmakers are unlikely to lose, they say.
Although competition from other countries such as Israel and China is increasing, India has an advantage in that it has 107 plants approved by the Food and Drug Administration, the highest number outside the U.S., and thrice the number in China.
"These plants are cost competitive. I think that's a huge value proposition," said Hitesh Gajaria, executive director at KPMG, who is bullish on India's generic drug makers.
Stocks in the sector have recovered most of the losses incurred in the wake of the FDA moves. Shares of Lupin, which said May 13 that it had received a warning letter from the FDA for not giving a satisfactory response to some non-compliance issues, have risen 21% since. The benchmark Sensex has risen 28% in the same period.
Lupin, India's fifth-largest drug firm by revenue sells both generic drugs as well as branded products in the U.S., a market that accounts for about 35% of its revenue.
Following the FDA move, Lupin appointed a consultant to advise it on the regulator's quality requirements. It is also upgrading equipment to improve quality control methods.
Shares of Sun Pharma, the fourth-largest Indian drug firm by revenue, tumbled 13% on June 26 after the FDA seized drugs made by its Caraco Pharmaceutical Laboratories unit in Michigan.
The company subsequently withdrew its revenue forecast for the current financial year. Nomura estimates the FDA action could potentially shave at least 10% of its full-year revenue.
Sun Pharma closed Monday down 0.10% at 1244.75 rupees, 5% below its June 25 closing price.
Mohit Mirchandani, vice president and head of equity investments at Taurus Asset Management, said his fund has not sold any of the pharmaceutical stocks in his portfolio as a result of the FDA moves.
The U.S. is the biggest market for India's generic drugs such as sumatriptan succinate, the generic version of the migraine drug Imitrex.
Companies such as Ranbaxy, which was acquired by Japan's Daiichi Sankyo Co. last year, and Dr. Reddy's Laboratories Ltd. now get almost half their revenue from developed markets like the U.S. and European Union.
Some firms have also started selling generic drugs into newer markets like China, Japan, Brazil and Mexico in a bid to spread their revenue sources, a positive step according to industry watchers.
In June, Dr. Reddy's, the second-largest Indian drug firm by revenue, and GlaxoSmithKline PLC signed a partnership to develop and sell selected generic products across emerging markets, excluding India.
Lupin forayed into Japan, the second largest pharmaceutical market in the world after the U.S., by acquiring a majority stake in Kyowa Pharmaceutical Industry Co. in 2007.
However, not everyone is convinced that Indian pharma stocks are without risk.
Prateek Agrawal, head of equity at Bharti AXA Investment Managers, said the current regulatory climate is a deterrent for investors because some companies may face a sales ban like Ranbaxy unless they handle the situation effectively.
In September, the FDA banned Ranbaxy from selling some of its drugs in the U.S. saying it violated manufacturing guidelines at two plants in India.
Ranbaxy, India's biggest drug maker by sales, Friday reported a profit for the April-June quarter after posting losses in the past three sequential quarters, hit by unfavorable currency bets, regulatory problems in the U.S., and weak demand in emerging markets.
The FDA is now reviewing Ranbaxy's corrective action plan for one of the plants which it submitted in May.