InvestorQ : Recently Aurobindo Pharma got pulled up by the FDA of the US. What are the challenges that India pharma companies are facing today?
Arya Nanda made post

Recently Aurobindo Pharma got pulled up by the FDA of the US. What are the challenges that India pharma companies are facing today?

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Deepa Salunkhe answered.
2 years ago
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US FDA investigations and the FORMR 483 objections are some of the challenges that Indian pharma companies are facing. Broadly, the challenges of India pharma companies can be summed up in a few key points.

· The consolidation of the buying pharmacies in the US and even in Europe has been escalating in the last few years. This gives more bargaining power to the buyers and puts the generic suppliers from India at disadvantage. This has largely dented margins of Indian pharma companies and that trend is continuing.

· Competition is building up systematically in the last few years and that has also led to compression of margins. That is evident from the falling OPMs and NPMs of the Indian pharma companies that are reconciling to the new pricing structure and US government regulation is overseeing pricing of generics more closely. Also, scrapping of Obamacare comes as a jolt to many Indian pharma companies.

· Of course, the biggest risk to the pharma industry comes from the Food and Drug Administration (FDA). During the last year, the total instances of inspections of Indian facilities were up by 18% while the overall inspections of the FDA of other facilities across the world actually fell by more than 20%. This is not great news for Indian pharma companies. In the last few years we have seen most leading pharma companies ranging from Sun Pharma to Lupin to Aurobindo, Cipla and Reddy Labs coming under the scanner of the FDA for two reasons. FDA has objected to below production standards in the factories and inadequate hygiene factors in the testing laboratories and research centres. The intensity of investigations and inspections into Indian facilities indicate that this could be the big risk for the Indian pharma companies. Lately, even Biocon came in for some censure.

The bottom line is that the US accounts for over 60% of the pharma demand for Indian companies and to that extent the FDA continues to play a key role. That is likely to continue to be an overhang for Indian pharma although the weak rupee may offer some support. From a valuation perspective, risk is much higher in Indian pharma stocks; both in terms of future margins and the impact of regulations.

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