Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

For years now, India's generic drugmakers and their cheap copycat pills have raised the blood pressure of storied multinationals. Increasingly, though, the challengers are getting a taste of their own medicine.

For shareholders in these once-successful Indian stocks, the prognosis looks far from reassuring. A market capitalization-weighted index of the top six producers of generic treatments has lost a quarter of its value over the past year, after jumping ninefold since April 2009.

Bitter Pill
Indian generic drugmakers' shares are down 25% in a year*
Source: Bloomberg
*Market capitalization-weighted index of top six companies.

The rudest shock to the industry has come from the U.S. Food and Drug Administration. It's issued eight warning letters to Indian drugmakers since October, hauling up companies including Sun Pharma and Dr. Reddy's Laboratories, the biggest and third-biggest generic producers by market value, for infractions ranging from using buckets to collect rainwater from leaky ceilings to not doing enough to prevent possible manipulation of lab data submitted to the regulator.

Since October 2015, 35 percent of all warning letters relating to violation of good manufacturing practices have been targeted at Indian facilities, according to Goldman Sachs. Lupin, the second-biggest Indian generic company, saw its share price tumble 9 percent on Friday after posting better-than-expected quarterly profit. The one-day slide, the steepest in almost eight years, was fueled by concerns that FDA approvals for products made in its key Goa manufacturing unit may not be forthcoming soon. Lupin said on an earnings call that its facilities had been inspected as many as 12 times over the past year.

Still, there are at least three reasons to expect a recovery in the medium term. For one, the market for generics and biosimilars has plenty of room to grow. By the end of this decade, drugs worth $190 billion in annual sales will be going off patent, globally. Second, treatments are moving away from simple tablets and capsules to more complex applications such as injections and inhalers. Assuming that the top Indian generic drugmakers succeed in "cracking the code" of complexity, as Goldman analysts term it, their stalling operating margins could start expanding again.

Searching for Second Wind
Indian generic companies have surrendered their profitability edge to global peers
Source: Bloomberg
*Indian companies include Sun Pharma, Lupin, Dr. Reddy's, Aurobindo Pharma, Cipla and Glenmark; global generic drugmakers include Teva, Mylan, Perrigo and Hikma.

Finally, rapidly aging populations in both developed and developing countries create a powerful incentive for governments to cut public health-care costs by promoting cheaper medicines. For instance, Japan is targeting 80 percent generic use between 2018 and 2020, up from 56 percent by volume last year. To make the most of this opportunity, the industry will first have to bring down its cost of equity, which has shot up to between 13 and 14 percent for the top three Indian drugmakers, up from 9 to 9.5 percent three years ago.

The easiest way to to soothe investors' nerves will be for companies to stop flunking their regulatory fitness tests. Until they can do that, though, shareholders' headache might just keep getting worse.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at

To contact the editor responsible for this story:
Matthew Brooker at