The pharmaceutical industry is one sector that will never go out of demand. For the simple reason - the world will always need doctors and medicines. During the COVID-19 pandemic, the industry witnessed a boost like never before. A rise in demand and safe-haven buying amid a global economic slowdown led to a sharp rally in 2020. But since June 2021, the sector has turned gloomy. Most stocks are trading lower than expectations.
Raamdeo Agrawal, chairman and co-founder, Motilal Oswal Financial Services, in a media interview, explained that the pharma sector is product and molecule-specific, unlike the IT sector, which is in sync with the demand trend. What he meant was that when the demand for some molecules or formulations is high, that stock will rise. Hence, careful selection is mandatory in the pharma space.
In fact, over the past decade, the Nifty Pharma index has reported a 12.3% CAGR compared to Nifty50 returns of 13.7% CAGR. This is mainly because of the pharma sector’s massive exposure to the US market. Strict US FDA regulations, pricing pressure, and excessive competition reduces pharma’s revenues. This directly impacted the stocks and the index performance.
During the mid-20th century, India relied heavily on foreign countries for its pharma deliveries. Cut to 2021, India stands as one of the leaders of the pharma landscape. While India continues to supply 20% of global exports of generic drugs, why is the pharma space still volatile? Well, it’s because of our huge exposure to the US market. Most pharma companies receive their majority revenue from the US, which is a lucrative market. However, strict US FDA regulations, price erosion, and competition make it troublesome to garner revenue from the US market. This is the biggest problem for Indian pharma companies.
Analysts believe to see sustained revenue growth of 10-15% over the next few years in the pharma companies. The domestic market currently remains hot, on the back of increasing health awareness, a higher number of people reaching the age of 50, lifestyle changes etc. But, catering only to the domestic market won’t get as much revenue, and that’s the only reason why the pharma companies continue to bear the heat from the US.
How Gloomy Can It Get?
A few weeks back, big bull Rakesh Jhunjhunwala cut his stake in Lupin, which caused an uproar against the pharma space. Since then, Lupin has been on a downtrend just like its peers, but this gloomy period won’t last long. Market analysts continue to remain positive on the long-term growth story of the pharma space. They expect it to grow 3x in the coming decade, reaching up to $130 billion. With China taking a step back in the manufacturing space, India is the next-best pharma industry to rely upon.
Once the market is corrected, and the pharma valuations are back on the line, the appreciation in the share price will begin. Logically, the demand for pharma space will not decline. It will only rise from here, given the increasing level of pollution, lifestyle changes, the prevalence of communicated diseases etc. The long-term benefits of the pharma stocks remain intact, but it is important to choose the best out of the lot. Taking into consideration the industry's competitive nature, it is vital to study the company and its products deeply before investing.
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