Pharma, healthcare growing, but they face challenges beyond Covid-19

These sectors will face another tough year after coronavirus pandemic, the first challenge being vaccination of India's 1.3 billion people. Devangshu Datta explains the opportunities and threats

The Indian pharmaceuticals industry and the healthcare sector are gearing up for a second year of extreme stress. Apart from dealing with Covid-19, and perhaps a new threat of bird flu, pharmaceutical and healthcare face several other challenges. 

First, there is the task of inoculating a vast population for Covid-19. The cost and logistics of this would be challenging. In addition, there is the imperative to get back to business as usual. Healthcare procedures not related to Covid-19 were delayed and there would be pent-up demand in these areas. Pharma companies also have to ramp up growth in non-Covid-19 medications. 

India’s drug regulator has granted emergency use approval to the Oxford and AstraZeneca’s Covishield and Bharat Biotech and ICMR’s Covaxin as the first two Covid-19 vaccines. Covishield, which the Serum Institute of India is manufacturing, is backed by multi-national Phase-3 data. Covaxin is still in Phase-3 trials. The accelerated approval for Covaxin, even as a backup, may be driven by economic considerations. 

At Covaxin's indicative prices, the government budget for immunising India would be less than with the Covishield. It is extremely unclear, however, which listed companies may benefit from this. It is also unclear if listed Indian pharma companies can pick up significant contracts abroad for vaccine production, but there are opportunities here. Aurobindo Pharma, for instance, has a deal with Bangladesh. 

In other areas, the Indian pharma industry seems to have recovered from the impact of Covid-19 as growth has rebounded after nine months. Profits for a sample of 140 listed pharma companies grew by 26.6 per cent in Q3, 2020-21, over the same period of 2019-20. Revenues grew 8.7 per cent in Q3, FY2020-21, and about 0.9 per cent in April-Dec 2020 over the same period of 2019. There was apparent acceleration of activity in December 2020, over November 2020. The healthcare industry also had encouraging results. A sample of 29 listed healthcare firms showed revenue growth of 4.6 per cent, and profit expansion of 13.9 per cent in the same quarter.

Hospitals and medical labs are seeing more patients: a trend that should continue. Pent up demand for elective procedures deferred during the peak of Covid-19's spread should be completed in six months. A positive aspect of the nationwide lockdown to contain the spread of Covid-19 has been the increased efficiency and cost cutting. These steps should persist and help in creating and maintaining increased margins. 

Volume growth should continue, with the healthcare industry seeing higher occupancy and revenue increases in high single digits. The pharma industry can reasonably look at double-digit revenue expansion. Profitability growth may be higher due to the low base effects of the 2020-21 fiscal.  

The NSE Nifty Pharma Index has seen a run up of 67 per cent in the past year (until Jan 8, 2021) and it has grown by 7.5 per cent in December. Valuations for the index are running at P/E 39, which is higher than the Nifty. Pharma has always been highly valued, often at P/E 45. 

Investors will surely be keeping a keen watch on the news flow on the vaccine front but apart from those uncertainties, business as usual could be a driver.