Why Is the Pharma Sector Plateauing Despite High Demand?

Pharmaceutical space has been running dry after 2020. In 2021, the Nifty Pharma index rose only 10%. Despite continuous demand for drugs, why is pharma space plateauing?
Why Is the Pharma Sector Plateauing Despite High Demand?

What’s Happening?

The Indian pharmaceutical industry ranks third in the world in pharma production by volume. Also, we are the largest supplier of generic medicines with a 20% share in the global supply. Despite that, the Nifty Pharma index has not been in proper shape. Three factors that are plateauing in the sector are subdued API sales, supply chain inflation and price erosion in the US market.

The pharma market is a highly regulated sector. Since most Indian pharma makers have high exposure to the US market, the price erosion and the competition makes it difficult for the sector players to reap revenue. And that’s why most of them are expanding their market in India. Aurobindo Pharma announced its entry into the domestic market with a target of reaching Rs 1,000 crore revenue in the next three years.

FDI in the pharma space saw a 200% increase in 2020-21, mainly on account of investments to meet COVID-19 related demands for vaccine and therapeutics. In 2021-22 (April-September), the FDI inflows continued to remain buoyant at Rs 4,413 crore, up 53% since last year. Even though we saw heavy FDI inflows, it’s important to note that India depends heavily on the import of bulk drugs for medicine formulation. And that’s why supply chain inflation and high prices of certain products, like solvents, affect pharma manufacturers a lot.

Furthermore, delays in the inspection of US authorities are adding to the price erosion.

Should This Concern You?

The performance of listed pharma companies has been concerning. December earnings of leading pharma companies remained poor. Sun Pharma reported 11% net profit YoY growth, but Aurobindo Pharma was down 79%. Also, in the past year, Lupin has gone down 27%, Dr Reddy’s went down 6%, and Aurobindo Pharma declined 26%. Only Sun Pharma was up 40%.

This means a significant few reported a decent performance, but others suffered mostly. Those who were overvalued are also witnessing a meaningful correction after the 2020 rally.

What Lies Ahead?

The pharma sector will never go out of business, but few companies will suffer due to various factors discussed above. Since it’s vast and a product-driven space, it’s advisable to study companies thoroughly to cut losses. Also, the COVID-19 wave is nearing its end, so vaccine making companies will see a downfall.

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