Pharma stocks rally up to 4%, but will Trump order really have minimal impact?

Synopsis

The Nifty Pharma index gained around 2% on Tuesday, defying the broader market trend, as the Nifty slipped nearly 0.5% amid profit-booking following Monday’s sharp rally — the strongest single-day gain in the past four years for the benchmark indices.

Shares of pharmaceutical companies rallied up to 4% on Tuesday as investors expect that US President Donald Trump's executive order will have minimal impact on US generics. Dr Reddy's shares were up around 4% while Granules, Glenmark, Lupin, Divi's Lab, and Aurobindo Pharma were trading around 3% higher.

Nifty Pharma index itself rose around 2% even when Nifty fell around 0.5% amid profit-booking post Monday's rally, which saw the benchmark indices making the sharpest single-day gain in the last 4 years.

"As far as the impact on Indian pharma companies is concerned, we foresee very limited impact. Based on our interaction with companies, the generics pricing spread is thin across developed nations, and hence, the scope of reduction in prices is expected to be limited on the US generics portfolio," brokerage Motilal Oswal said.

Trump's order says that the drug prices in the US should be aligned to the prices in other developed countries. Trump intends to take action against pharmaceutical manufacturers charging higher prices to Americans while providing steep discounts to other wealthy nations but analysts say there is uncertainty on how successfully the executive order is eventually implemented.

An earlier attempt by the Trump 1 administration in 2020 to implement a similar order for lowering pricing was defeated in various courts

"The order is more inclined toward innovator pharma companies, which might be having pricing disparity on medicines sold in the US and other developed nations," Motilal said, adding that it estimates a very limited impact of the executive order on US generics.

Nomura, however, warned that If the executive order is implemented, it will have a negative impact on branded and specialty drug sales.

"In our coverage universe, Sun Pharma has the largest exposure to branded sales in the US. We estimate that US specialty sales are at ~USD1036mn (FY25F) for Sun Pharma. The largest product Ilumya (FY25F US sales of ~USD570mn) is largely supported through Medicare Part B, which possibly accounts for 50%+ of the sales of the company, in our assessment. The listed price of Ilumya in the US is ~4x that in other developed countries, in our view. Therefore, the implementation of lower pricing can have a significant negative impact on revenues and earnings, in our view," Nomura said.

As generics are priced at only a modest discount (~30-40%) to the brand prices, the brokerage firm said it is not likely to have a negative impact on typical commoditized generics with more than five players in the market.

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