Pharma stocks slip on fears of US clamp down

NEW DELHI: Stock prices of leading Indian pharmaceutical companies dropped yesterday after reports indicated new US norms mandating companies to use locally manufactured bulk drugs for procurement by the government .

Bulk drugs, or active pharmaceutical ingredients (APIs), are the ingredients used to give a drug its therapeutic effect.

Among leading drug makers, Sun Pharma, Lupin, Cipla, Dr Reddy’s and Aurobindo Pharma all saw a decline of 2% to 4%, on BSE on speculations that exports may take a hit.

Though analysts raised doubts on the actual impact of such provisions, if any, a few experts noted that restricting the use of Indian bulk drugs in formulations meant for the US government supplies may not seriously dent earnings of top drug makers.

“Indian companies have low exposure to the government purchases. Our estimate is 5% of total revenues,” stated Indian financial services company IIFL’s pharma analyst, Abhishek Sharma. “These Make in US rules are based on Trade Agreements Act of 1979. Hence there is nothing new here,” he added.

Restricting companies to locally manufactured APIs would moderate the growth of API only players at best, according to Surya Narayan Patra, Vice President - Healthcare Research at Phillip Capital.

“US government has made it mandatory for APIs to be manufactured locally for governmental supplies of drugs but not for retail marketing,” he said.

“Already the controlled substances, which account for meaningful chunk of government supplies, use API from within US spillers. So it won't have any impact on pharma formulation peers,” he added.

While the US has not imposed any new rules on API procurement lately, Pharmexcil, a drug export body of the commerce ministry did send alarming signals of a larger impact on exports. Officials held out a November 2015 notice by the US authorities related to an API for a HIV drug imported from India and China.

The notice labelled India and China as the countries of origin of the drug acyclovir despite it having been processed in the US “…CBP (US Custom and Business Protection) concluded that the processing in the United States does not result in a substantial transformation,” stated the notice.

“Substantial” implies the final product should have a different name, character and use from the original API used.

Pharmexcil expressed its concerns noting that the issue shouldn’t be taken lightly. “We have brought to the Commerce Ministry’s notice the impending adverse effect or dangers because of the US government’s interpretation regarding substantial manufacture for formulations,” Pharmexcil director general PV Appaji told ET.

According to him, such interpretation or policy clarification could adversely impact those procuring APIs from India, including Indian pharma companies with subsidiaries in the US.

Pharmexcil also feared that Indian drug exports could face issues were other countries to adopt a similar policy. At least 10%-15% of India’s total pharmaceutical exports would be going into government procurement in different countries, said Appaji.