Indian pharma stocks have rallied over last 3 months, led by signs of improving earnings trajectory in Q4 and forex tailwinds from a depreciating rupee, say Goldman Sachs (GS) analysts.

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Correlation of rupee-dollar rate to pharma index has shot up, as investors have added exposure to likely beneficiaries, says GS.

Stabilising US drug price erosion trends and closing of long-drawn regulatory compliance issues are fundamental drivers to optimism, says GS.

Despite optimism, remain wary of pending product backlog and sharp uptick in approvals from the US FDA which could bring increased supply activity in the future.

On average, for every 1 percent dip in rupee, sector EBITDA rises 1.4 percent; Dr. Reddy’s Laboratories Ltd and Aurobindo Pharma Ltd are best exposed to depreciating rupee; both have rallied nearly 22 percent in last 3 months.

Nifty Pharma Index has gained approximately 24 percent since May 22; poised for third straight monthly gain, its longest such streak in over 3 years.

If a company is looking to enter the Chinese market owing to the Chinese government’s significant moves to welcome Indian generic drug makers, preferred entry strategy would be to explore JVs with domestic firms, GS said.

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