Steady sales, Covid-treatment portfolio could drive pharma rerating

Better US prospects, India recovery, boosting sector's outlook

The Indian pharma sector is running out of steam despite being among the few to have posted two consecutive quarters of robust sales.
 

Over the last three months, the Nifty Pharma has underperformed the Nifty50 by 14 per cent. The reason, say analysts, is that investors are exploring other opportunities, given the economic recovery and positive news on Covid-19 vaccines. Nevertheless, growth prospects for the sector are firm and the earnings momentum may continue. The recent stock underperformance and earnings upgrades provide a buying opportunity, given the potential for rerating.

Amey Chalke of Haitong Securities says: “Vaccine filings/approvals are on the horizon, which is why the shift in sector allocation is keeping pharma stocks under pressure. However, we maintain a bullish stance.”
 

There are multiple reasons behind this stance. Companies with significant exposure to US markets have seen growth prospects strengthen, driven by a strong product pipeline, rising approvals, and more launches of generics.
 

In addition, the pricing pressure earlier prevalent in the US has moderated, while the shortage of drugs is leading to higher opportunities for Indian players.
 

On the other hand, growth of generic formulations in India is catching up, with the acute segment rebounding and chronic segment standing its ground.
 

Chalke says there is good visibility on pharma earnings for the next three years, led by niche product approvals in the US, ramp-up in specialty businesses, recovery in India with an improved cost structure, and the migration of active pharma ingredients (API) from China to India. He doesn’t see any significant regulatory hurdle over the next six months.
 

Regulatory woes of Indian pharma players have, to a large extent, been resolved, with only a few like Lupin, Sun Pharma, and Cadila Healthcare awaiting resolution.

 

Nevertheless, Cadila has resorted to product transfers and supplies from other facilities, while Sun is betting big on its specialty range in the US.
 

Among others, Biocon’s growth is being driven by commercialisation of its biosimilars portfolio. Cipla and Lupin have recently seen gains from respiratory launches. While Dr Reddy’s has cashed in on niche products and injectables, Aurobindo has witnessed steady growth in injectables.
 

Most of them have seen a higher number of generic launches. Sales of Covid-related drugs, niche product approvals, and launches of regular generics have helped the sector report 11.4 per cent average growth in the US in Q2, say analysts, with the lead being taken by Aurobindo, Cadila, Dr Reddy’s Alkem, and Cipla.
 

Likewise, the domestic market saw 9.8 per cent year-on-year (YoY) sales growth in October 2020, compared to 4.7 per cent in September 2020. The acute segment recorded growth of 8.2 per cent YoY in October, an improvement over the 2.4 per cent YoY growth in September. The chronic segment, which continued its strong trajectory, grew 13.1 per cent YoY in October against 9.5 per cent in September.
 

Growth is also being aided by rising clinic visits. Covid treatment drugs, too, contributed to Cipla’s, Glenmark’s, and Cadila’s performance. IPCA, too, has benefitted from HCQS, prescribed for Covid-19 treatment.
 

Analysts at Nomura say the pandemic has fast-tracked the consolidation process, with the top 20 companies expanding their market share by close to 100 basis points, in the past nine months.
 

Covid drug sales, looked at as a near-term growth driver, may continue to contribute in the longer term too, feel analysts. Covid is likely to stay even in the face of positive vaccine data that we are seeing, and remdesivir is likely to continue as a standard anti-viral Covid cure at hospitals, highlight analysts at Jefferies.
 

This is positive news for many Indian companies that have licensed the drug from innovators.
 

Further, many firms in India are working on vaccines and success could lead to multiple upgrades for those entities.

CIMB Research says the improving US outlook and negative operating leverage, which had compressed return ratios in the past, should improve hereon.
 

The firm has an ‘overweight’ rating on the sector. A key positive is that US FDA compliance issues at manufacturing facilities are being resolved more quickly by pharma companies, given the rising shortage in oral drugs.
 

Further, a recovery in revenue growth in the domestic pharma market could generate better cash flow and healthy return on capital employed, says the firm. This could lead to a re-rating of the sector.