Pharma sector has been pulled out of slumber of more than 5 years after Covid19 hit India and the world.
Nifty Pharma Index post March 2020 market mayhem vis-à-vis Nifty 50.
Mutual Fund industry has increased the allocation to Healthcare segment to 5 years high.
Healthcare allocation in Nifty 50 Index has also risen in last 6 months –
We believe Pharma sector has suffered in the past due to high allocation to outside India geography and increasing restrictions by US FDA and other regulatory authorities to reduce dependence on cheap generics. Also, competition from China and other countries also made US and other markets less lucrative for Indian pharma. Due to all these factors, pharma industry was in a valuation slumber for more than 5 years which have suddenly woken up with Covid19. Currently, Pharma industry valuations are looking optimum and following are major Headwinds and Tailwinds which pharma industry is facing which will decide the future path of various companies’ future earnings –
- Atmanirbharta for the sector is being encouraged through various regulatory steps such as announcement of a ₹14,000 Cr fund for three bulk drug manufacturing hubs and identification of 53 critical APIs whose domestic output will be boosted on priority. These slews of measures are aimed at reducing the current overdependence on China for bulk drugs (~70% of imports)
- Indian domestic markets are expected to well and are expected to grow between 12-15% in next 5 years. Good for companies with very good domestic presence like Cipla, Alkem, Ipca & MNC pharmas such as Glaxo, Sanofi, Abbott.
- Global de-risking strategy coupled with shut down of API facilities in China has opened a window of opportunity for Indian API. This business was slowing down in last few years due to increasing regulatory hurdles created by western countries and China competition. But Covid has given this market a major boost. Good for companies such as Divi’s, Dr Reddy’s and Aurobindo.
- Can India become Pharmacy of the world? We have the skillset; we have the infrastructure and we have strong companies. Indian pharmaceutical firms are the largest among Asian countries in their capacity to produce generic medicines. While developed nations look to use re-purposed drugs to manage Covid-19 and are lagging in inventory levels of key drugs like hydroxychloroquine (HCQ) and paracetamol, India has come to their rescue and gone for medical diplomacy. Recent developments include DOP’s green signal for export of ~2,000 metric tons of paracetamol API, Indian pharma’s pioneer ship in export of Favipiravir and multiple non-exclusive in-licensing agreements with Gilead Lifesciences for India manufacture of Remdesivir. Strong regulatory push in terms of policy changes coupled with a favorable currency movement can bring India a step closer to becoming the pharmacy to the world. Good for all companies with high exports such as Dr. Reddy’s, Glenmark, Sun Pharma, Lupin, Aurobindo & Cipla.
- Online pharmacy finds favor which would increase the affordability and also reach of various medicines. It will also give push to OTC or consumer health segments such as Vitamin’s & Minerals, Derma & Pain segments. MNC Pharma score in this with brands like Allegra and Combiflam of Sanofi, Becosules of Pfizer and Calpol of Glaxo Pharma. Even Indian companies like Cipla are also trying to make their mark in this segment.
- Consolidation in the market: We are seeing a major wave of consolidation in Indian domestic Pharma market. In the past all major Indian pharma companies were focused on expanding outside India and exporting their products but recently, things are changing. Various PE and M&A deals are showing growing focus on India business acquisition, here is a chart which shows that trend –
- Because of High regulation, Pharma sector will take time to switch from supplies from China to India or other countries. Major API players may take a hit for a short time if India and world’s relations with China continue to go south. Indian antibiotic manufacturers rely heavily — close to about 90% — on Chinese imports of raw materials. A number of Indian pharmaceutical companies are dependent on Chinese APIs for manufacturing medicines. Granules India and Aurobindo Pharma has among the highest exposure to imports of APIs from China.
- NPPA – India keeps on putting price ceiling on various essential drugs which reduces the margins of manufacturers
- 10k+ companies in India will always keep the competition very high in India
- Increasing protectionism in the world and most of the government’s focus on self-dependence may put stress on new business coming to India in Long term.