Market Movers: Why Dr Reddy’s fell & took other drug stocks down with it

One of the biggest money makers of the past 18 months, pharmaceutical stocks were the undisputed pick of almost every investor you could speak with. The tailwinds from the pandemic, the improving business metrics and adoption of technology – everything worked in the sector’s favour, until it didn’t anymore.

On Tuesday, shares of Dr Reddy’s nosedived more than 10 per cent, likely its biggest fall since March-May last year. Initially the selloff was triggered by the lower-than-expected earnings for the June quarter that the company had reported.

As investors parsed through the fine print and management commentary, realization dawned that the company is facing pricing pressure in the US, just like had warned of on Monday.

However, the biggest trigger for the nose bleeding fall in the stock was hidden away in the notes to account of the company’s P&L statement. Dr Reddy’s said it has commenced investigation on an anonymous complaint that healthcare professionals in Ukraine and few other markets were provided with improper payments on behalf of the company.

Dr Reddy’s said that it has been subpeoned by the US Securities Exchange Commission to hand over documents and that if found guilty the company could face civil or criminal action under US anti-corruption laws. That is a lot to digest even for the blindfold-wearing optimists on the Street.

TAKE THE SHIP DOWN

While the SEC subpoena might have spooked investors of Dr Reddy’s, the company’s commentary coupled with the pessimism of Pharma on Monday has triggered an exit by investors in other pharma stocks.

Dr Reddy’s merely reported a 1 per cent on-year growth in revenues in North America, its biggest market. The company said that it witnessed pricing pressure in some products. On Monday, Alembic Pharma withdrew its profit guidance for the year, citing increasing price erosion in its US portfolio and no visibility on product launches.

With investors heading into the June quarter earnings with heady optimism, commentaries and earnings of the two drug companies have knocked the stuffing out of investors. The Nifty Pharma index nosedived over 4 per cent, its biggest fall this year.

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