Nifty Pharma up 48% in the last 1 year; Zydus, Lupin, Glenmark surge over 95% each; what is driving the pharma pack? | Stock Market News

The Nifty Pharma index hit a fresh 52-week high of 20,575.35 in intraday trade on Monday, July 8. The index, however, failed to hold altitude amid weak market sentiment and ended with a loss of 0.63 per cent, Snapping its six-day winning streak due to profit booking at record levels.

The pharma pack has seen healthy gains over the last year. The Nifty Pharma index has outperformed the benchmark Nifty 50, rising nearly 48 per cent. The benchmark index has gained nearly 26 per cent in the same period.

Most pharma stocks have gained significantly over the last year. Shares of Zydus Lifesciences, Lupin and Glenmark Pharmaceuticals have surged over 95 per cent each in the last one year. As many as 12 components of the index, out of 20, have risen at least 50 per cent or more over the last year.

What is driving the pharma space?

Some experts believe the largecap pharma stocks do not have valuation comfort at this juncture and the rally in the pharma sector stocks is being driven by the midcap players.

“Many midcap stocks are boosting the pharma pack. At present, there is no valuation comfort in the large-cap pharma stocks,” said Amey Chalke, Pharmaceutical Research Analyst at JM Financial Institutional Securities Ltd.

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Chalke pointed out that CDMO (Contract Development and Manufacturing Organization) space is witnessing much investor interest. Foreign institutional investors (FIIs) also appear interested in investing in Indian CDMO companies because they believe India will provide a good alternative to Chinese CDMO players due to the Bio Secure Act.

“CDMO and API (active pharmaceutical ingredient) would probably extend the rally because chemical prices have bottomed out. On the chemical side, these players will start seeing price inflation, which will be reflected in the API space. The API companies will start reporting strong growth in a quarter or two,” Chalke said.

“For us, it is a bottom-up approach because valuations are on the higher side for most of the stocks. It is better to pick and choose rather than go for basket buying in the pharma sector,” said Chalke.

Investors are keenly observing the growth prospects of the pharma sector, which, according to industry experts, is expected to reach $65 billion by the end of 2024 and $130 billion by 2030.

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The sector has seen several tailwinds in recent quarters, such as improved performance in the US generics market, robust performance in branded markets, moderation in raw material costs, and market share gains in recently launched products.

“The sector has seen strong earnings due to factors like an improved US generics market, robust branded market performance, and cost moderation. Growth is expected to be driven by factors like new product launches, rising demand for generics and branded drugs, and a focus on chronic therapies. Additionally, API companies are expanding, further boosting the sector,” said Amit Goel, the co-founder and chief global strategist at Pace 360.

The road ahead

Most industry experts have a stable outlook on the pharmaceutical sector and expect a healthy volume growth of generics and branded products.

Rating agency ICRA maintains a stable outlook for the industry, led by a stable demand environment in the export and domestic markets and a comfortable credit profile for key industry participants.

Kinjal Shah, senior vice president and co-group head of corporate ratings at ICRA, said the revenues of its sample set of 25 Indian pharmaceutical companies (which account for nearly 60 per cent of the overall Indian pharmaceutical industry) may grow by 7-9 per cent in FY25, after a year-on-year (YoY) increase of 12.6 per cent in FY24.

However, Shah added that following the high base of FY24, the revenue growth momentum from the US and Europe markets is expected to moderate to 8-10 per cent and 7-9 per cent, respectively, compared to growth of 18.3 per cent and 15.8 per cent, respectively, in FY24.

Moreover, with NLEM (national list of essential medicines) price increases being minimal in FY25, revenue growth from the domestic market for ICRA’s sample set is expected to moderate to 5-7 per cent, while that from the emerging markets will be 11-13 per cent in FY25, post a 15 per cent growth in FY24, Shah observed.

Shah, while maintaining a stable outlook for the sector, underscored that USFDA inspections have gained traction post-pandemic. Higher issuances of warning letters and import alerts have resulted in delays in product launches, translating into failure to supply penalties and significant costs for remedial measures.

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Prathamesh Masdekar, a research analyst at StoxBox, believes many domestic-focused companies may generate mid-teen growth in FY25 amid a focus on new product launches, pick-up in volume growth and improved demand for generics and branded products.

“Pharma companies (Ajanta Pharma, Torrent Pharma, Eris Lifesciences, and JB Chemicals, among others) have increased their chronic presence, focused on new product launches, and entered into new therapies. API companies (Divis, Laurus Labs, and Aarti Drugs, among others) are undergoing capex, which will aid in further top-line growth; a healthy product mix and softening input costs will sustain higher operating margins in FY25,” Masdekar said.

Masdekar expects India’s business to report high single-digit growth in FY25 driven by deferred acute demand, an uptick in the chronic segment, higher MR productivity, new product launches, and the expectation of a healthy flu season.

He also expects pharma companies (Sun Pharma, Natco Pharma, Lupin, Aurobindo, and Dr Reddy’s), with a focus on US business, to continue growing strongly due to the normalisation of base business prices, field force expansion, niche launches in the US market, continuous acceleration of gRevlimid, and the introduction of new products despite pricing challenges, intense competition, and stricter regulatory compliance requirements.

The Q1FY25 numbers of the Indian pharma companies are expected to be healthy thanks to stable US generic pricing and traction across other markets.

“We expect a healthy Q1FY25 for our pharma coverage led by continued stability in US generics pricing, along with traction across other markets. Overall, we bake in 11 per cent YoY (+6 per cent QoQ) growth in organic revenues in Q1FY25 for our pharma coverage. On the operating front, we build in 14.5 per cent YoY (+9.5 per cent QoQ) growth in overall reported EBITDA, with EBITDA margin improvement of 60 bps YoY,” said brokerage firm Kotak Securities.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.

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