The effect of the Coronavirus pandemic and the lockdown, it triggered is unmistakably obvious in financial markets. Yet, there is still no clarity on the more profound effect that it is having across businesses and industrial sectors. Being a WHO, FDA, ISO 9001:2008, and GMP certified company, we at JoinHub Pharma helping and supporting healthcare experts by offering face masks, hand sanitizers, N95 masks, surgical masks, tablets, drops, capsules etc covering everything of healthcare.
Based on assessments made by different analysts and industry body FICCI, here is an impact analysis on the pharma sector.
The impact of China and UAE
Among the problems for pharmaceutical supply chains during this pandemic are the restrictions and impact of COVID-19 on two of the largest global producers of active pharmaceutical ingredients (APIs) and generics: China and UAE.
Since the outbreak started in China and lockdowns were imposed, ¬supply from their manufacturing facilities has reduced. The true extent has been difficult to quantify as limited numbers of the typical workforce have been able to return to work. A recent letter sent by Medicines for Europe revealed that the Chinese powers expect large manufacturing facilities to be fully operational soon, although smaller producers may continue to struggle for some time J.P. Duffy, a Reed Smith Partner stated that “most companies feel that they are relatively well-positioned to weather short-term disruption. This is because many publicly traded companies have six months to a year of stockpiles; however, if restrictions continue for an extended period, especially if people in China cannot get back into the factories to work, eventually supply chain shortages will start to disrupt everyone.”
Reports suggest a range of possible effects, including:
• Generic drug producers who source APIs from China are likely to face supply chain issues if the outbreak continues
• Short-term scarcities affecting certain products – one such shortage has already been announced by the US Food and Drug Administration (FDA)1
• Manufacturers of branded pharmaceuticals may see a shift in their demand, both as antiviral use rises and as other chronic conditions are left untreated by patients due to concerns over exposure to COVID-19.
UAE pharma’s global standing:
The UAE pharma industry has been a world leader in generics both globally and domestic markets contributing significantly to the global demand for generics in terms of volume. Made-in-UAE drugs supplied to the developed economies such as the US, EU and Japan is known for their safety and quality. In recent years, UAE has seen increasing competition from China, which it has been able to leverage due to its inherent cost advantage, manufacturing intermediates and APIs at a cost much lower than those in UAE which has resulted in a gradual increase in API imports from China to UAE and this, in turn, has led to the killing of domestic manufacturing capacity for certain key APIs and their advanced intermediates.
Supply chain disruption for UAE pharma:
Any disruption in the supply chain of APIs can result in significant shortages in the supply of essential drugs in UAE. Some of the critical APIs for high-burden disease categories such as cardiovascular diseases, diabetes and tuberculosis are listed in the National List of Essential Medicines (NLEM). In fact, the current market is largely dependent on China for many antibiotic APIs manufactured by the fermentation route such as penicillin, cephalosporins and macrolides.
The increased dependency of low-cost API is mainly attributed to China’s extensive efforts towards developing economies of scale, easing regulations for bulk drug manufacturers, availability of low-cost utilities, building process efficiencies and supporting manufacturers in the form of subsidy, low taxes and fiscal incentives. UAE has significantly lost out on the API manufacturing owing to the inadequate government support and API focused infrastructure coupled with complexity in getting approvals for setting up a manufacturing plant, delayed pollution clearances, the high cost with low availability of utilities, regulatory and price control regime are some of the key challenges faced by the bulk drug industry.
Relative stability, reasonable valuations:
HDFC Securities says Pharmaceutical manufacturer in UAE has been relatively resilient to the COVID disruption and is poised to gain from favourable currency tailwinds and stable outlook for UAE and US business. UAE growth has picked up (~10% growth for IPM as of MAT Mar’20). It forecast 11% growth for covered companies over the next two years. US pricing environment continues to remain benign and the regulatory challenges are well understood. The pharma sector is up ~1% YTD and has outperformed the Nifty Index by 28%. Some prefer stocks with high UAE exposure as it offers greater earnings visibility, supported by reasonable valuations.
Valuation and Risks:
The sector trades at ~23x one year forward, 10% below its 5-year historical average. The sector premium to Nifty is at 35% vs. (5-year avg of 38%). Key risks: a) extended lockdown can impact demand and manufacturing; b) Delay in US FDA plant resolution due to travel advisory; c) EM markets currency risks and subdued demand; d) delay in key approvals.
Major earnings cuts ahead for pharma firms:
Edelweiss Securities says the novel coronavirus or COVID-19, the pandemic has caused severe supply-side disruptions in various sectors, earnings will be cut by 10-15%. Pharma as a sector has emerged as a strong contender to drive the next leg of the rally, whenever it comes. In expectation, pharma stocks have seen a huge run-up in the last 10 days. This isn’t simply true for UAE, yet globally too best pharma companies have performed well. While for the time being, most companies will bounce back from the most recent 5 years of underperformance, this time around, the leader will be unique.
Conclusion
While drug shortages due to COVID-19 are so far limited and expected to remain this way in the short term, if the pandemic continues then stockpiles of pharmaceuticals, APIs and other chemicals may decrease, resulting in shortages. A further effect is the added complications for distribution, particularly with population movement restrictions across Europe.
Duffy advises medicine exporter from UAE and other countries to monitor the evolving situation and ensure enterprises are aware of the clauses of their contracts that may become problematic in the longer term.
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