Indian pharma turns to home remedy as tariff malady looms

Companies focusing on the Indian pharmaceutical market are likely to offer a hedge against the ongoing tariff woes even though the fate of the broader sector remains uncertain, according to analysts. 

Shares of India-focused Mankind Pharma Ltd, Alkem Laboratories Ltd, Abbott India Ltd and JB Chemicals & Pharmaceuticals Ltd have fallen only 3-5% since the reciprocal tariffs were announced. With only 10% revenue exposure to the US, Torrent Pharmaceuticals has fallen around 4%.

By comparison, Aurobindo Pharma Ltd, Divi’s Laboratories Ltd, Glenmark Pharmaceuticals Ltd and Granules India Ltd have each tumbled around 6-10% in the last five trading sessions. US accounts for 30-50% of their revenue.

“As growth in the US generics business plateaus because of weaker demand and stiffer competition, Indian pharma companies have been increasingly tapping the domestic market for branded medicines and health products, which has plenty of room to grow,” said Prashant Nair, lead pharma and healthcare analyst at Ambit Capital. Even without tariffs, “it would be better (for investors) to be India-focused as US generics is a very cyclical business and valuations of those stocks are not cheap.”

The Trump administration has imposed tariffs on various trading partners, including a 27% levy on major Indian exports to the US. He also wants to claw back drug manufacturing. According to a Nuvama Institutional Equities report, the US imports $110 billion worth of pharmaceutical products from Europe. 

Also read | Indian pharma companies escape Trump’s reciprocal tariffs, for now

The $50-billion Indian pharmaceutical industry exports $10 billion worth of drugs to the American market, mostly cheaper generics.

Deserve ‘higher valuation’

Against this backdrop, domestic-focused companies deserve a higher valuation because of their inherent business stability and better growth prospects compared to US generic drug manufacturers, said Tausif Shaikh, Indian pharma and healthcare analyst at BNP Paribas.

A Centrum Broking report expects the majority of the brokerage’s portfolio earnings growth for the March quarter (Q4FY25) to be led by domestic formulations, growing 12% year-on-year versus a 5% rise in US sales.

“Amongst the domestic-focused companies, those catering to chronic treatments like cardiology and anti-diabetes are more positively placed and expected to outperform the domestic market in Q4,” Sumit Gupta, healthcare analyst at Centrum Broking, told Mint.

The industry’s domestic focus was also evident in mergers and acquisitions in the past 18 months, according to Shaikh from BNP Paribas.

“We haven’t seen significant M&As or investments (from domestic players) in the US market recently. Companies are aware that they need to invest more in India,” he said. “They are either going through in-licensing or chasing inorganic growth to increase their presence in the domestic market since the global side is volatile right now.”

Not all is lost

To be sure, there is still no clarity on tariffs on drug exports to the US. However, the tariffs won’t spell complete doom and gloom for all Indian drug exporters. Companies with a bigger share of biosimilars, specialty medicines and niche generics in their US portfolios are better positioned to weather the tariff pain, said experts.

Indian pharma companies have a 47% and 15% share in generics and biosimilar prescriptions, respectively, in the US, according to IQVIA data. By volume, 89% of the American market is generics and the remaining 11% is branded, said the Nuvama report. By value, however, generics account for 9% versus 91% for branded drugs.

“I would imagine Sun (Pharmaceutical Industries) is better positioned as a big part of its US business is specialty products where pricing power is higher than generics,” said Nair from Ambit Capital.

A Kotak Institutional Equities report, however, said that while the limited availability of substitutes will act as a moat for Sun Pharma, already high prices for its specialty products could make it more challenging for it to pass on higher costs to US patients.

Also read | New introductions and price growth driving pharma market growth

According to Sreeram Ramdas, vice president at Green Portfolio PMS, complex generics like biosimilars and injectables command 40-60% gross margins compared with 15-25% for commodity generics.

Hence, “it would be easier for companies with operating margins greater than 25% to absorb any tariff shock while maintaining their market shares,” he said. “We could see a limited 200-400bps (basis point) erosion on the overall margins of the biggest Indian US generic manufacturers.”

India imposes about 5-10% tariffs on pharma products imported from the US. If the tariff burden in the US is anything above 10%, most experts anticipate Indian companies to pass it on to distributors, insurance providers and US consumers. 

Large players with existing manufacturing facilities in the US, such as Piramal Pharma Ltd, Dr. Reddy’s Laboratories Ltd, Sun Pharma and Aurobindo Pharma, are better insulated from tariffs even though the cost of manufacturing generics in the US is significantly higher, they said.

“In the medium term, it would be the mid and small-scale manufacturers that would lose market share in the US as their capability to build capacities in the US is no match against the giant manufacturers,” said Ramdas. “De-risking the supply chain by establishing facilities outside India will drive higher valuation multiples for domestic pharma companies.”