Pharma's power pill: A strong dose of steady pricing and new launches

Pricing pulse check: US market demand, domestic stability as growth tonics

The Nifty Pharma is the second-best-performing sectoral index this year, delivering returns of over 39 per cent compared to 17 per cent for the benchmark index, Nifty 50. This week, eight listed pharmaceutical (pharma) majors crossed the Rs 1 trillion mark in market capitalisation, up from just three a year ago. The latest addition to this elite group is Mankind Pharma, which reached this milestone on Friday.
 

These gains stem from the sector’s ability to maintain growth momentum, supported by new product launches, stable generics pricing, drug shortages in the US market, and consistent domestic market performance.
 

After achieving revenue growth of 10 per cent last year, most brokerages and rating agencies expect the Indian pharma sector to grow by 8-10 per cent this year. This growth will likely come from opportunities in both the domestic market and exports to regulated and semi-regulated markets.

 

Aniket Dani, director of CRISIL Market Intelligence & Analytics, anticipates formulation exports to rise by 12-14 per cent in rupee terms in 2024-25 (FY25). The regulated markets of the US and Europe are projected to expand by 13-15 per cent, buoyed up by drug shortages, easing pricing pressures in the US generics market, and increased volumes from product launches, along with a shift towards niche molecules and specialty products.
 

Exports to semi-regulated markets are expected to grow at 8-10 per cent in FY25, aided by improving foreign exchange reserves, strengthening local currencies against the dollar, and relief from economic crises in certain African and Latin American countries.
 

Growth in the US market is anticipated to remain robust, according to analysts Ankush Mahajan and Aman Goyal of 

Axis Securities. This growth will be supported by price normalisation in the base business, a continued ramp-up of the generic version of the cancer drug Revlimid, and new product launches. Supply constraints have led to a significant reduction in price erosion, which is expected to stay low for the remainder of FY25. Lupin and Aurobindo Pharma are highlighted as key picks in the sector.
 

In addition to stable prices in the US, lower raw material costs are expected to keep operating profit margins healthy at 22 per cent for FY25, an increase of about 100 basis points (bps) from last year.
 

Operating profit margins in the April-June quarter reached a record high of 25.3 per cent, up 220 bps year-on-year and 230 bps quarter-on-quarter. This improvement was due to a better product mix, strong growth in the domestic formulation business, solid performance in the US generics market, and softening raw material prices.
 

Companies have been implementing cost-saving initiatives, including portfolio optimisation, field force rationalisation, and divesting non-core assets to improve efficiency and profitability, according to the rating agency.
 

A recent catalyst for the sector has been the Biosecure Act introduced in the US Congress, which will limit global pharma companies from outsourcing their work packages to China. Indian contract development and manufacturing companies are expected to benefit from this in the medium to long term, according to InCred Research.
 

The market will also keep an eye on growth rates for the domestic pharma segment. So far, performance has been driven by price increases and a strong showing in chronic therapies. The domestic business is expected to achieve high single-digit growth for FY25.
 

Analysts at Kotak Institutional Equities, led by Alankar Garude, believe that ongoing stability in US generics pricing, combined with sustained elevated drug shortages and relatively stable raw material pricing, will drive earnings growth of 14.3 per cent over the period from 2023-24 through 2025-26. Sun Pharmaceutical Industries, JB Chemicals & Pharmaceuticals, and Cipla are the brokerage’s preferred picks.
 

Macquarie Capital shares optimism about the pharma sector, citing mild price erosion in the US generics market and 

resilient domestic market growth. It maintains an ‘outperform’ rating on largecap pharma majors and Eris Lifesciences, while assigning a ‘neutral’ rating to Mankind Pharma and Ipca Laboratories, and an ‘underperform’ rating to Alkem Laboratories.