Cipla, Sun, Biocon, Aurobindo: US tariff on pharma? Kotak sees up to 27% EPS cuts

Kotak Institutional Equities has highlighted lingering uncertainty over whether a 25% tariff imposed by the US administration on Indian imports will extend to the pharmaceutical sector.

This situation arises amidst confusion regarding the inclusion of pharmaceuticals in the recent US-EU trade agreement. Even if clarity is achieved regarding the applicability of these tariffs to Indian pharmaceuticals, Kotak foresees ongoing ambiguities. The potential for these tariffs to add to existing country-specific tariffs further complicates the situation.

Kotak's analysis assumes a 25% tariff on Indian pharmaceutical companies with a zero pass-through, suggesting a potential earnings per share (EPS) impact ranging from 0 to 27% for generics. This analysis underscores the varied impact across different pharmaceutical sectors and highlights the potential financial repercussions for companies reliant on US markets.

Some Indian pharmaceutical companies may be positioned to mitigate these impacts better due to their US manufacturing presence. Companies such as Cipla, with flexible supply chains and US footprints, might manage potential tariff impacts more effectively than others. The ability to adapt supply chains could be a crucial factor in navigating these challenges.

The anticipated tariffs are expected to affect different pharmaceutical segments unevenly. For instance, Biocon and Aurobindo Pharma are identified as facing significant EPS impacts within the generics and biosimilars domain. The dependency on Indian generics in the US market contrasts with the lesser reliance on biosimilars, complicating the pass-through of higher tariffs.

Sun Pharma's specialty portfolio might also encounter challenges in passing on increased costs due to pre-existing elevated price points. However, limited substitutes for its specialty products may offer some protection against these impacts. For Contract Research and Development Manufacturing Organisations (CRDMOs), tariffs could partially be passed on to clients, though this remains uncertain.

In response to these uncertainties, there is an anticipation that increased US manufacturing by large pharmaceutical entities, particularly for active pharmaceutical ingredients (APIs), may slightly reduce outsourcing practices. The evolving trade landscape thus continues to pose significant strategic challenges for the Indian pharmaceutical sector.

Furthermore, the strategic positioning of companies with diversified portfolios and robust domestic operations may serve as a buffer against these external pressures. Overall, the ongoing developments necessitate careful monitoring as the situation evolves, with the potential for further policy shifts impacting the future outlook for Indian pharma firms reliant on US markets.