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Templeton, ICICI’s Bet on Indian Pharmaceuticals Is Paying Off

  • ICICI Prudential overweight on drugmakers on improving outlook
  • Antique prefers large pharma on under-ownership, generics push

India’s pharmaceutical industry is helping lead an equity bull run as investors wager on a resolution to U.S. regulatory sanctions that rocked companies in the sector last year.

Franklin Templeton Investment’s biggest India stock fund added to its holdings of Dr. Reddy’s Laboratories Ltd. in November, when the stock plunged 27 percent, building it up by more than half through the first quarter of this year. ICICI Prudential Asset Management Co., India’s top money manager, has been buying Sun Pharmaceutical Industries Ltd. and Cipla Ltd., betting that the Food and Drug Administration will begin to indicate that its criticisms have been addressed and lift restrictions on certain plants.

Sun Pharma and Dr. Reddy’s, the nation’s top health-care companies, said last quarter that they will fix problems highlighted by the U.S. regulator and ask for re-inspection of some censured facilities by the end of June. The warnings didn’t slow the record pace of FDA approvals for drug applications from India, strengthening the case for the industry -- the world’s largest supplier of generic drugs -- to benefit as aging populations force developed-world governments to lower healthcare costs.

“We are overweight on pharma as the outlook for pharmaceutical companies will improve on a two-year view,” S. Naren, chief investment officer at ICICI Prudential, with $29 billion in assets, said in an interview. “Many firms will be able to put away FDA issues.”

An industry equity gauge tumbled as much as 20 percent from last year’s high through May this year. The 73-member index has rebounded 10 percent in the past month, and trades at 24 times projected 12-month profits. The valuation has contracted from a high of 29 in August last year and compares with 16.5 for the MSCI World Healthcare Index.

Companies including Sun Pharma and Dr. Reddy’s were hit by a wave of FDA sanctions in 2015 that threatened access to the profitable U.S. market. These included failures to follow procedures meant to prevent contamination as well as incomplete recording of and unauthorized access to data.

FDA Pain

FDA-related “pain” should lessen in the next round of inspections as companies upgrade their systems and practices, Credit Suisse Group AG Anubhav Aggarwal and Chunky Shah wrote in a March report.

Investors didn’t wait.

Franklin India Prima Plus, the $1.3 billion fund managed by Franklin Templeton India, had 650,000 shares of Dr. Reddy’s as of June 30, unchanged from the end of March. The fund held 400,000 in October. The money manager increased its position in Sun Pharma in April and May, and added to shares of Cadila Healthcare Ltd. in June. The Prima fund has risen 17 percent annually in the past five years, beating 92 percent of its peers, data compiled by Bloomberg show.

The ICICI Prudential Value Discovery Fund held 4.6 percent of its $2 billion assets in Sun Pharma as of June 30, up from 2.5 percent in May, data on the fund manager’s website show. ICICI’s Balanced Fund raised its holdings in Cipla to 4.2 percent from 3.4 percent, while Focused Bluechip Equity Fund’s stake in Lupin Ltd. increased to 1.8 percent from 1 percent, the data show.

Warning Letter

The FDA never gave Lupin a warning letter but asked the nation’s third-largest drugmaker to address certain faults at its Goa facility discovered during inspections in 2015 and this year. Earlier this month, the company said the regulator had cleared it of the deficiencies found in the 2015 report, sending the stock up as much as 9 percent that day.

With expectations building the industry will be able to put the troubles behind it, investors are focusing on the long-term prospects, Shankar Char, a senior vice president at Antique Stock Broking Ltd. in Mumbai, said by phone.

Demand for generic drugs, copies of brand-name treatments that sell for considerably less, looks set to grow as governments look for ways to cut healthcare costs as populations age and reduce drug spending in particular emerging markets.

“My bet is on the large-cap pharma names to outperform due to under-ownership by foreign investors and a renewed global push for generics to reduce healthcare costs,” Char said.

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