Pharma index up 20% YTD, new generic launches to drive growth

Pharma sector in focus: The Nifty Pharma index soared to an all-time high at the beginning of August, as investor interest in defencive investment themes surged. Analysts attributed the rise in pharmaceutical shares to a comeback rally, as these stocks had been lagging the broader market for some time.

However, Gagan Manchanda, CEO & Co-Founder, Positive Gems highlighted that the Pharma stocks in India have been outperforming the benchmark index Nifty 50 this year, as of September 25, 2023. Factors driving the gains include improved performance in the US generics market, robust performance in branded markets, lower raw material costs, and market share gains in new products.”

Manchanda further said that stocks of Aurobindo Pharma jumped 91 per cent, Glenmark Pharma rose 94 per cent, Lupin gained 34 per cent, and Sun Pharma increased 26 per cent this year. Other pharma stocks such as Cipla, Dr Reddy’s, Cadila Healthcare, and Biocon also posted double-digit returns. “Pharma stocks have also been supported by the positive outlook for the sector, as the demand for healthcare products and services is expected to remain high in the future. The pharma market growth in the past three months was 14.1 per cent, against the 7.1 per cent degrowth in March-May 2022. The growth remains broad-based and across therapies, which is an encouraging sign,” Manchanda added.

Year-to-date, the Nifty Pharma index has soared 19.86 per cent, with the S&P BSE Healthcare index closely following with a 20.91 per cent gain during the same period.

Another factor contributing to the pharmaceutical sector's impressive performance has been the inflow of foreign portfolio investments (FPIs). Between May and July, FPIs purchased pharmaceutical shares worth Rs 6,725 crore, injecting fresh capital and optimism into the sector, according to reports.

“Pharma stocks are at their peak given the belief that the industry is likely to consolidate and small players may get acquired or get merged with larger players. This is causing both large and small investors to invest in Pharma stocks,” said Anurag Dhingra, Co-Founder, MediSage.

The country’s pharmaceutical sector's growth can also be attributed to its expertise in manufacturing high-quality medicines at competitive prices. Notably, India stands as the world's third-largest pharmaceutical market in terms of volume and is a leading provider of generic medicines globally.

Beyond generic drug production, the sector has made significant strides in research and development. Numerous research institutes and companies contribute to innovation in pharmaceuticals, solidifying India's position as a key player in the international pharmaceutical market.

Some of the most prominent players in the Indian pharmaceutical industry include Cipla, Torrent, and Zydus.

Harini Dedhia, Portfolio Manager and Head of Research, Tamohara Investments said, “For pharma companies selling formulations, domestic or exporting globally, we should on an average see a high single digit, low double digit revenue growth led by volume growth in India and new generic launches globally.”

Dedhia further said, "We should see year on year margin expansion led by gross margin expansion owing to resilience in pricing of generics as well as cooling off in cost of good of sold (COGS). Should see mid teen operating profit growth for the pharma pack on an average. In Active Pharmaceutical Ingredient (API), it would be more of a mixed bag on a year over year basis. Though sequentially we should see margin improvement and growth across most players."

"Diagnostic companies too should see significant improvement in margins as price wars have abated in that space, and early signs of a return to pre-covid margin levels on an operating basis should be seen in that space along with volume growth. The pharmaceutical and healthcare sectors in India are experiencing a remarkable resurgence, driven by investor confidence, foreign investments, and a commitment to quality and innovation," Dedhia added.

On expectation from the pharmaceutical sector’s Q2 results, Dhingra said, “We expect muted growth given no new launches, stable disease conditions. Price hikes, if any, may lead to better growth.”

“Overall outlook looks stable to positive. No predictable headwinds until the generics bill comes into play,” added Dhingra.

India pharmaceutical market size

The India pharmaceutical market size reached $48.4 billion in 2022. IMARC Group expects the market to reach $102.7 billion by 2028, exhibiting a growth rate (CAGR) of 13.01 per cent during 2023-2028. The increasing burden of diseases and healthcare needs, favourable government initiatives promoting the development of healthcare infrastructure, and rising health consciousness among the masses are among the key factors driving the market growth.

Pharmaceutical sector outlook

“The outlook on the pharma sector in the current market scenario is positive, as the sector is expected to maintain its growth momentum and resilience in the face of market challenges and uncertainties,” said Manchanda.

“The pharma sector is likely to benefit from the factors like increasing demand for healthcare products and services in the domestic and international markets, especially in the US revenue streams, the government’s support and incentives for the pharma sector, such as the production-linked incentive (PLI) schemes, the umbrella scheme for development of pharmaceutical industry, the schematic and non-schematic interventions for promotion of medical devices sector, and the pharma bureau, the innovation and R&D capabilities of the pharma companies, as they launch new products and enter new segments, such as biosimilars, specialty drugs, vaccines, and nutraceuticals, and the consolidation and collaboration opportunities in the pharma sector, as the companies pursue mergers and acquisitions, partnerships, and alliances to enhance their scale, scope, and synergies,” Manchanda added.