From being the safest bets until the last few months, pharma shares in the last few weeks have become the riskiest bets in the markets. The one and the only one reason is warning letters from the US FDA.
Take the latest case of Dr Reddy's Labs. The stock has fallen almost Rs 1300, from Rs 4386 to the current levels of Rs 3067 and looks like it is due for more.
"Several violations are recurrent or represent long-standing failures to adequately resolve significant manufacturing quality problems. It is apparent that you have not implemented a robust quality system at your sites," the US FDA has said.
"These deviations and violations cause your APIs and finished drug products to be adulterated within the meaning of Section 501(a)(2)(B) of the Federal Food, Drug, and Cosmetic Act (the FD&C Act), 21 U.S.C. 351(a)(2)(B). The methods used in, or the facilities or controls used for, their manufacture, processing, packing, or holding do not conform to, or are not operated or administered in conformity with, CGMP," the US FDA has said in its warning letter.
What this means is that exports to the US Markets, which is a major market for Indian pharma gets hit and share prices plunge after the warning letters. This leaves investors completely exposed.
Several Indian pharma companies have seen their share price eroding by as much as 20-30 percent in the last few months. The shares have become extremely risky to bet on, especially since individuals would not know, when they could be hit by warning letters.
So, the best bet is to stay away from pharma company shares, which in any case are highly priced.