Why Investors Are Betting On MNCs Over Homegrown Drugmakers

Investors have shown a healthy appetite for shares of multinational pharmaceutical companies, even as stocks of homegrown drugmakers continue to struggle.

Stocks such as Sanofi India Ltd. are trading at fresh record highs, while Lupin Ltd. is trading near fresh 52-week lows. Year-to-date returns show that MNC stocks such as Sanofi India, Pfizer Ltd. and Abbott India Ltd. have given positive returns, while the Nifty Pharma Index is down close to 10 percent.

Stocks such as Dr. Reddys Laboratories Ltd., Cadila Healthcare Ltd., Lupin and Aurobindo Pharma Ltd.have dropped in double digits so far this year.

So what’s changed for the MNC pharma stocks?

The triple impact of regulatory price controls, Goods and Service Tax and demonetisation-led disruptions has created a level playing field for MNC pharma companies.

Several domestic generic giants, which had been growing rapidly on the back of the fast-growing the U.S. market, are now on the back foot, as competition and pricing control have dented overseas revenues and margins.

MNC pharma companies are now showing better financial performance, with margins at par or in some cases even better than their Indian counterparts. Domestic pharma companies, which were clocking earnings before interest, tax, depreciation and amortisation margins in excess of 25-30 percent, are now seeing margins of 20 percent, according to data compiled by BloombergQuint.

Limited impact of regulatory scrutiny, high dividends, strong global brands and improving financials are also some of the reasons that are making MNC drugmakers attractive, according to analysts.

What’s Aiding Pharma MNCs

  • No hurdles by foreign regulators as focus is India

  • High dividend paying companies

  • Most MNC pharma companies are debt free

  • High return ratios

  • Improving financials

What’s Denting Domestic Pharma

  • U.S. markets declining due to competition and pricing pressures

  • Regulatory hurdles by foreign agencies on plants and products

  • Weakening financials with global uncertainty

  • Low clarity on future drug pipeline

  • High R&D investments

Source: Bloomberg


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