Kotak Equities is optimistic on Indian pharma despite US tariff uncertainties; Sun Pharma, Lupin, Cipla among top picks

In light of uncertainties surrounding US tariffs on pharmaceuticals, Kotak Institutional Equities noted in a recent report that the most likely scenario (for both companies and investors) is that high tariffs (above 10%) are improbable as they would be unfeasible. However, in a worst-case scenario involving substantial tariffs, companies might have to streamline their US operations (potentially exiting entirely) after exploring other options like passing the increased costs onto US consumers.

Maintaining their base case, Kotak has reaffirmed its optimistic view on the sector and their preferred companies include Sun Pharmaceuticals, Cipla, Lupin, J.B. Chemicals and Pharmaceuticals, and Emcure Pharmaceuticals.

The brokerage's report indicates that the US depends on India for approximately 45% of its generic drug supplies and 10-15% of its biosimilars supplies by volume. According to a white paper published by the API Innovation Center, 83 of the top 100 generic medications prescribed in the US do not have a domestic API source. While the production of APIs in the US has fallen by 61% over the last decade, there has been a rise in API manufacturing capacity in both India and China.

"We highlight, value-wise, size of the US generics market is less than 10% of the ~US$600 bn overall US pharma market. Thus, the value impact of Indian generics on the overall US pharma market is quite low.

We highlight the Indian government has taken steps to demonstrate reciprocity. For instance, in the recent Union Budget, the Indian government has fully exempted 36 life-saving drugs from basic customs duty.

In addition, customs duty for six additional drugs has been reduced to 5%. Further, 37 additional drugs will be fully exempt from customs duty under patient assistance programs," the brokerage said.

Generics versus Biosimilars

Kotak Institutional Equities noted in its report that among its formulations and biosimilars coverage, Aurobindo Pharma and Biocon lead with a US EBITDA contribution of 45-50%. Unlike generics, the US does not rely heavily on India for biosimilars, making it more difficult to pass on increased tariffs to American patients.

Sun Pharmaceuticals' specialty portfolio may face greater challenges compared to US generics, as the higher existing price points could hinder the ability to transfer additional costs. However, the limited availability of alternatives for Sun Pharmaceuticals' specialty products might provide some protection. Among our API/CRDMO coverage, Gland shows the highest direct contribution to US EBITDA.

“Nevertheless, given the B2B nature of the business, API/CRDMO companies will be directly shielded from the tariffs and would have a slightly higher ability to pass on the tariffs to their clients. However, there remains an indirect exposure to US tariffs for these companies as well,” added the brokerage.

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