Opportunity in adversity – Alphaniti

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The story of India’s pharmaceuticals industry in the context of COVID-19

Not every extraordinary situation turns out to be unfavourable for an economy. There are sectors which benefit amply from extraordinary situations like the pandemic. One such sector is pharmaceuticals. The pandemic which had destroyed demand in most key sectors has clearly brought India’s pharmaceuticals sector at the centre of most analysis and predictions.

The quest for discovery of the vaccine which can substantially reduce the fatal impact of the Coronavirus is clearly an opportunity for pharmaceuticals companies in India.    

India’s pharmaceuticals companies have been preferred as mass manufacturing partners or for trials by global pharmaceutical companies. For example, Serum Institute of India has tied up with British-Swedish firm AstraZeneca to manufacture its experimental vaccine developed by University of Oxford. Dr Reddy’s tied up with Russian vaccine – Sputnik V for clinical trials.

As global pharmaceutical majors in developed nations mull over shifting their manufacturing centres away from China, India is a natural beneficiary. Indian pharmaceutical companies have gained as global supply chains are restructured by large corporations in the USA and Europe. The manufacturing base from China for specialty chemicals and other key inputs in pharmaceuticals are expected to move to India. The increase in exports from India is a clear indicator of this. In the first half of the current financial year FY21 pharma exports jumped 15% in the first half. With 21.85% growth in drug formulations and biological, Indian pharmaceutical companies have met increased demand across the world.

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This is also reflected in increase in the domestic and exports market concerning pharmaceuticals products. Indian pharma market has registered a growth rate of 13% for the year ended September 2020, compared to 3% registered in March 2020. The massive spurt in growth is ably supported by investments done by Indian pharma companies in the past. For example, expenditure on research and development (R&D) incurred by Indian pharma companies increased to 8.5% in FY20 compared to 5.6% of sales in FY12 according to the data shared by India Ratings. The R&D expenditure of India’s pharmaceuticals sector has gone up to Rs 126 billion in FY20 compared to Rs 30 billion in FY12. Indian pharma majors are not only investing in intellectual property rights and R&D, but also gearing up to set up manufacturing centres and supply chains across the world. For example, six Indian generic drug makers including Dr Reddy’s Labs, Zydus Cadilla, Glenmark Pharma, Torrent Pharma entered into an agreement with a state in Mexico to set up pharma clusters for production and logistics.

Stock markets have been prompt enough to recognise the importance of these developments. For example, the Nifty Pharma TRI has risen to 13940 on November 18 compared to 9586 on December 31, 2019—growth of 45.4%. Actively managed pharma focused mutual fund schemes with Rs 10651 crore in assets under management as on October 31, 2020 have done better with 51.73% returns over the same period of time. Though the initial phase of growth is behind us, a structural growth trend will soon be visible in India’s pharmaceuticals industry. Covid-19 will open doors of opportunity in multiple ways for Indian pharmaceutical companies. However, investors need to understand that the massive outperformance by stocks of leading pharmaceuticals companies has its genesis in two aspects– depressed valuations over FY18-FY20 and improved revenue growth numbers posted in FY21. In the coming quarters, though the growth momentum is expected to continue, it may be at a slower pace. Also the valuation expansion may not be as much as we have seen in the past two quarters. Investors need to moderate their returns expectations in this context.

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