Pharma sector Update in Corona Pandemic

Outlook

Growth momentum to pick up: Indian pharmaceutical companies are better placed to harness opportunities and post healthy growth going ahead. Indian companies are among the most competitive ones globally and hold a sizeable market share in most developed as well as other markets. Indian
pharmaceutical companies have over the years developed strong capabilities, which are depicted in their inherent strength. Moreover, other factors such as -
1) easing of pricing pressures (especially in the US generics market), 

2) rise in product approvals by the USFDA coupled with improving growth prospects in domestic markets, and
3) emerging opportunities in the API space would be key growth drivers.

This would be complemented by strong capabilities developed by Indian companies (leading to a shift towards complex molecules and biosimilars) and commissioning of expanded capacities by select players over the medium term. Collectively, this points towards a strong growth potential going ahead, which would place pharmaceuticals companies in a higher earnings growth trajectory as compared
to slow earnings growth in the recent past. 

Valuation Sector view - Positive: 

The pharma index has largely underperformed the benchmark indices considering a longer tenure from around April 2015 till date. However, in a little over the past year, the Nifty pharma index had bucked its trend and outperformed the benchmark, reporting a sturdy 63% return as compared to ~17% return by the benchmark. 

The strong outperformance is expected to continue going ahead as well. We see this as the beginning of a multi-year bull runs for pharmaceuticals. Indian pharma companies are amongst the most competitive ones globally and, over the years, have developed strong capabilities, which have laid the footing for strong growth ahead. 

The confluence of other factors including improved growth prospects in exports as well as domestic markets, easing of regulatory pressures, and focus on specialty/ complex products in addition to emerging opportunities in the API space would be key growth drivers. Improving growth prospects in domestic markets could benefit India-focused MNCs.Collectively, all this points towards a strong growth potential, which would gradually unfold. 

Consequently, the earnings growth trajectory of pharmaceutical companies is expected to shift upwards. Based on this, we have a positive view on the sector. 

 Key Risks 

 1) Adverse regulatory changes could impact the sector's performance. 

2) Currency volatility could dent earnings. 

Leaders: Divis Laboratories, Laurus Labs, Cipla, Solara Active Pharma Science Laggards: Torrent Pharma, Shilpa Medicare Preferred Picks: Aurobindo, Cipla, Divis Laboratories, Laurus Labs, Granules, Sanofi India, Abbott India, Strides Pharma Science

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