After hitting its all-time high of 19,991.9 on July 20, the Nifty 50 index missed the much-anticipated 20K level by a sneeze and reversed course. The benchmark is now set to post a monthly loss in August – for the first time since February this year.
High food inflation in July due to El Nino and a fear of contagion from the shadow banking crisis in China dampened investor sentiment in August. The 20,000 mark remains elusive so far for the Nifty.
The deathless zombie that is inflation also returned – it rose above the RBI’s upper tolerance limit of 6% in July.
Food prices had started rising in June, and accelerated in July as farmers across India were hit by unseasonal rains and heatwaves that destroyed several crops. The resulting unexpected rise in food inflation has made investors cautious.
But despite the Nifty falling in the past month, one industry that rose is Pharmaceuticals. In fact, this industry has outperformed the Nifty 50 over the past quarter and year.
The pharma sector’s rise accelerated after its Q1FY24 results, as these companies showed healthy revenue and profit growth thanks to a turnaround in the US generics market. This comes after a long period of weakness for Indian drug makers. Is the pharma sector set to continue outperforming in the coming months? Let’s find out.
In this week’s Analyticks,
- Mood shift: US market back on pharma companies’ radar as pricing pressures ease
- Screener: Pharma stocks rising more than 5% over the past month, with YoY growth in net profit and revenue, and operating margin growth
A tough time for Indian pharma in the US may finally end
Domestic pharma companies were the pandemic stars of 2020, but their lights dimmed in 2021 and 2022. The Nifty Pharma underperformed the benchmark Nifty 50 index by 14% and 15.5% in 2021 and 2022 respectively. The US generics market, which had been a cash cow for Indian pharma in the past decade, failed to deliver after the US regulator encouraged more competition in this space. The resulting pressure on prices hit profitability hard.
But the prolonged period of intense competition in the US saw many losers. On Cipla’s Q1FY24 earnings call, Umang Vohra, Managing Director and Global CEO said, “A large number of US companies are either amalgamating, merging, or going bankrupt. That is eliminating a number of players in the system.”
The pricing pressure has as a result, eased in the past two quarters and the management of all major Indian companies see a better outlook in US generics for FY24.
Better supply, new launches and lower raw material costs are also driving the generics segment’s rebound.
The two tough years for Indian pharma saw them improvising more. Drug makers like Sun Pharma, Cipla and Zydus Lifesciences diversified their product mix into complex generics, specialty drugs, peptides and injectables, where the pricing pressure was lower.
Now with the generics segment also recovering, pharma companies are reaping benefits from their efforts in higher-margin complex generics as well as the generics segment.
Pharma companies outperform the Nifty 50 over the past quarter and six months
US pharma market outperforms Indian market in FY23
Revenue from the US generics market for top pharma companies rose 16% YoY in FY23 and outperformed the domestic market’s growth by a big margin.
US generics market turns around while the Indian market growth moderates
Top pharma companies’ US business rose sharply in Q1FY24 while Indian business growth moderated.
US and International businesses drive Indian pharma companies’ revenue in Q1FY24
New product launches with drug exclusivity like Revlimid helped grow profit margins in the past two quarters. Companies are focussing on multiple new launches, as margins here are higher before competitors launch alternatives.
To launch a new product in the US, companies need approval from the US Food and Drug Administration (USFDA) via the abbreviated new drug application (ANDA). India’s share in ANDA approvals was at 49% (a record high) of all ANDAs approved in FY23.
Indian drug makers’ ANDA approval share bounces back after a dip in 2021
Falling raw material and freight costs help margins recover
In 2021 and 2022, raw material and freight costs were at an all-time high for pharma companies. But in 2023, raw material and freight costs are on a downtrend.
Input prices fall YoY after reaching all-time highs in 2022
Input prices of major raw materials like para amino phenol and antibiotics have fallen over the past year and helped pharma companies’ margins rise QoQ and YoY in Q1FY24.
New product launches and falling input prices help margins rise in Q1
However, active pharmaceutical ingredient (API) manufacturers like Divi's Laboratories are still facing margin pressure, as these companies import a higher percentage of their inputs (key starting materials) from China, which has pricing power.
China’s share in India’s key starting materials import rises in FY23
API manufacturers also have to compete with China in exports. If China's API exports ramp up, these bulk drug manufacturers’ margin pressures could persist through the year.
Revenue visibility is high, but growth opportunities are murky
The Indian pharma market (IPM) is expected to grow at a steady CAGR of 8-10% over the next five years. Key factors that drive the IPM are volume growth, price hikes and new product launches. The main reason for IPM growth moderating in FY23 is the slower volume growth.
Indian pharma industry grows 9.3% in FY23 led by price hikes
Pharma companies have tried to offset this with price hikes, but they don’t have complete pricing power. The National Pharmaceutical Pricing Authority sets ceiling prices for several essential drugs that are part of the National List of Essential Medicines (NLEMs).
These ceiling prices are revised in line with changes in the wholesale price index (WPI) to factor in inflation on a YoY basis.
Number of drugs covered under NLEM is on a steady rise
For non-NLEM products, Indian pharma companies can increase prices by up to 10% every year.
The magic pill for pharma: a diversified product and geo mix
Banking on just US business growth could be risky for Indian pharma companies, as USFDA regulations and inspections can play spoilsport. For example, Cipla’s share fell over 7% after its Pithampur unit got eight observations from the USFDA in February. This issue is yet to be resolved. This is where a diversified product and geo mix comes into play to reduce risks.
Like any other industry, pharma goes through different cycles as business dynamics change. In a Crisil discussion, Lakhshay Kataria, CFO of J B Chemicals & Pharmaceuticals said, “Two years ago we were apprehensive about the US and international market, but now the US market looks lucrative. So, diversification is key and companies with varied product and geo mixes can ride the winds of change in different geos, and grow at a faster rate”.
Screener: Pharma stocks that are rising over 5% in the past month, with net profit and margin growth
Natco Pharma’s revenue growth is among the highest in the pharma sector
This week, we take a look at pharma stocks that have performed better than the sector in Q1FY24. This screener shows pharma stocks which have risen more than 5% in share price with growth in Q1FY24 revenues, net profit and operating profit margin.
Major stocks in the screener are Caplin Point Laboratories, JB Chemicals & Pharmaceuticals, Lupin, Natco Pharma and Ajanta Pharma.
Caplin Point Laboratories rose 20.9% over the past month, the highest among the pharma stocks. It rose on the back of a 14.2% YoY growth in its revenue in Q1FY24, aided by improved sales in the semi-regulated markets of Latin America and Africa which contributed to 86% of its revenue. The company’s net profit increased by 21.7% YoY, which helped in expanding its operating profit margin.
Natco Pharma gained 8.2% over the past month owing to a 28.9% YoY growth in its revenue in Q1FY24, the highest in the pharma sector. Improvement in sales from gRevlimid, domestic and agrochemicals businesses helped revenues improve. Its net profit grew by 31.2% YoY thanks to a reduction in employee benefit expenses.
Lupin has risen 12.7% over the past month due to a 28.6% YoY growth in its revenue in Q1FY24. Improvement in sales from North America, India and active pharmaceutical ingredient (API) businesses led to topline growth. The company also posted a net profit of Rs 452.3 crore in Q1FY24 compared to a loss in Q1FY23.
You can find more screeners here.
Signing off,
The Trendlyne Team
