Pharmaceuticals Sector Analysis Report 

High-potential Stocks: Top 2 Nifty Contenders

• India is often referred to as the “pharmacy to the world”, ranking 3rd worldwide in total production volume and 10th by value. As per National Indian Promotion Agency, it is the largest producer of generic medicines and vaccines, occupying 20% volume share in generics and 62% in vaccines.
• The Indian pharmaceutical sector is currently valued at US$ 41 bn and is expected to grow to US$ 65 billion industry by 2024. It can be broadly divided into two categories – domestic and exports.
• The domestic market size stands at US$13 billion, with acute therapies accounting for 66% of the market share and chronic therapies accounting for 34% of the market share. In the domestic market, anti-infectives (13.6%), cardiac (12.4%) and gastrointestinal (11.5%) have the biggest market share in terms of revenue.
• The global market size stands at US$ 943 billion led by the United States with a market size of US$ 439 billion (47%), followed by Europe (15%), China (8%) and Japan (8%). The export market can be further classified into four segments – Active Pharmaceutical Ingredients (APIs) (branded and generic), Formulations (branded and generic), Contract Research and Manufacturing Services (CRAMS), and Biosimilars.
• India’s ability to manufacture high quality, low priced medicines, presents a huge business opportunity for the domestic industry. India’s cost of production is approximately 33% lower than that of the US.
• Influx of first-time patients into the healthcare ecosystem from the National Health Protection Scheme (NHPS)- a scheme providing free health coverage at the secondary and tertiary level to the poor and vulnerable sections of the population, relaxation of regulations for patented drugs, and increasing spend on preventive healthcare could emerge as major growth drivers for the sector over the next few years.
• In 2017, the Department of Pharmaceuticals released a new National Pharmaceutical Policy. As per the new policy, the department will have control over the National List of Essential Medicines (NLEM), which decides the drugs for which the Government can control the prices.
• The Government of India’s Pharma Vision 2020 is aimed at making India a global leader in end-to-end drug manufacturing. As per Union Budget 2019-20, Rs 19 billion has been set aside for research by the Ministry of Health and Family Welfare. The government also plans to set up an early Rs 1000 billion fund to provide boost to companies to manufacture pharmaceutical ingredients domestically.
• 100% Foreign Direct Investment is allowed under automatic route for greenfield pharma and brownfield pharma each, wherein 74% is allowed under the automatic route and thereafter through government approval route.

• Supply
• Higher for traditional therapeutic segments, this is typical of a developing market. Relatively lower for lifestyle segment.
• Demand
• Very high for certain therapeutic segments. Will grow as life expectancy, literacy increases.
• Barriers to entry
• High, due to economies of scale in manufacturing, R&D, marketing, distribution and capital requirements. Existing companies have a huge advantage in terms of the costs involved in launching new drugs and formulations.
• Bargaining power of suppliers
• Low. The fragmented nature of the industry prevents the suppliers (organic chemical industries and labor force) from having much bargaining power over the manufacturers as the switching cost is low for the manufacturers.
• Bargaining power of buyers
• Low, because of the presence of an influencing element, in this case, i.e the doctor.
  
  However, due to the extremely fragmented nature of the industry and the presence of government policies like Drug Price Control Order (DPCO), 1970 under which the power to control prices is with the National Pharmaceutical Pricing Authority (NPPA), the low power of the buyers does not have much effect on the manufacturers.
  
  Also, except in generic and OTC medicines, the buyer does not normally switch medicines easily.
• Competition
• High, as the sector is extremely fragmented with around 250- 300 manufacturing and formulation units in the organized sector which contribute to only 70% of the market share of total sales in the country.
• Threat of Substitutes
• In a developing country like India, traditional medicine plays a major substituting role. According to industry estimates, around 70% of the Indian population supplements and at times even replaces pharmaceutical medicines with traditional medicines.

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• Low cost of production and R&D boosted efficiency of Indian pharmaceutical companies, leading to competitive exports. Total pharmaceutical exports from India reached US$ 16.3 billion in FY20. Of this, 32.1% of India’s pharmaceutical exports were to North America, followed by 17.9% to Africa and 15.7% to the European Union.
• Dr Reddy's, one of the leading indian pharmaceutical companies saw a significant growth in existing geographies as well as in the new markets in Europe driven by an expansion of the base business and new product launches. It also filed eight new Abbreviated New Drug Applications (ANDAs) with the USFDA and launched 21 new brands in India.
• Abbott India also saw significant growth in its portfolio led by the Women’s Health and Metabolics segments. Strong brand equity, coverage of doctors with a high premium on safety drove growth in the Women’s Health segment while the flagship position of NeoMercazole (to treat hyperthyroidism) and Thyronorm drove growth in the Metabolics segment. The company also launched five new products in the Women’s Health category.
• During FY20, Sun Pharmaceuticals continued its growth trajectory in FY20 with overall revenues growing by about 13% YoY to Rs 323 billion. Key growth drivers included India, the global specialty business, coupled with growth in the rest of the world and API business. The company also invested Rs 20 billion in research and development.
• Since pharmaceuticals are viewed as essential items, the pharmaceutical industry witnessed relatively less adverse impact of the pandemic, unlike other sectors. Pharmaceutical companies continued to manufacture and distribute its products across the world despite the lockdown. In April 2020, affordable medicines under Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP) achieved record sales turnover of Rs 520 million.
• However, supply chain disruptions of China’s API production due to the Covid-19 pandemic heightened the need for backward integration of major products. This resulted in a significant opportunity for Indian pharmaceutical companies to establish themselves as end-to-end manufacturers in the pharma supply chain.
• With the treatment of Covid-19 patients taking precedence, that of other medical ailments took a back-seat. Delays in the treatment of non Covid-19 patients resulted in a reduced demand for many pharmaceutical products especially in hospitals. With most of the countries closing their borders and enforcing travel restrictions, revenues from medical tourism also saw a significant dip.

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• With 70% of market share (in terms of revenues) generic drugs form the largest segment of the Indian pharmaceutical sector. Over the Counter (OTC) medicines and patented drugs constitute 21% and 9%, respectively. The competence of Indian pharmaceutical companies in this segment offers a great growth opportunity for the sector.
• With rising patient empowerment and growing willingness to self-medicate, there is a growing demand for the drafting of a well-defined over-the counter (OTC) drug policy. Creation of a regulated OTC market coupled with stricter enforcement of prescribing and dispensing regulations will drive growth in the OTC space.
• Global population is projected to exceed 9.3 billion by 2050, of which 21% will be accounted for by those aged 60 and above. As individuals become increasingly health conscious and medical science continues to advance, life expectancy will increase. Due to this increase in life expectancy, demand for high end (lifestyle) drugs is expected to rise. Growing demand could open up the market for production of high end drugs in India.
• With 70% of India's population residing in rural areas, pharmaceutical companies have immense opportunities to tap into the rural market. Demand for generic medicines in rural markets has seen a sharp growth and various companies have already invested in expanding the distribution network in rural areas.
• Pharmaceutical spending in India is projected to grow 9-12% over the next 5 years, leading India to become one of the top 10 countries in terms of medicine spending. Increasing penetration of the health insurance and pharmacies is expected to drive expenditure on medicine.
• Pharmaceutical spending in developed countries is likely to grow at 2-5% CAGR between 2018-22. While launch of innovative products is likely to drive growth, it is expected to be balanced by patent expiries of existing products.
• Due to a genetically diverse population and availability of skilled doctors, India has the potential to attract huge investments to its clinical trial market.
• The Indian healthcare sector is one of the fastest growing sectors. Remote healthcare, patient empowerment and multichannel engagement are likely to be some of the important emerging trends in the sector due to the pandemic.
• Increasing private sector investment in R&D and acquisitions are also expected to drive the growth of the pharmaceutical sector.
• The Contract Research and Manufacturing Services Industry (CRAMS) has more than 1000 players and is expected to bring opportunities to the pharma sector.

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How has the pharmaceutical sector performed in the past decade and when is a good time to invest in the sector?

In the last decade, the pharmaceutical sector has been relatively stable through various periods of peaks and troughs compared to the rest of the stock market. It has been a consistent performer, giving over 150% returns.

As there is a constant demand for pharmaceutical products, stocks from the pharmaceutical sector provide stable earnings regardless of the state of the overall stock market. For this reason, they are often called defensive stocks and can protect your portfolio during bad times.

However, in a sustained bull run, these stocks will underperform the market. The best time to buy such stocks is when there is a gloomy picture on the economic front. Since defensive sectors are less prone to the above mentioned risks, they offer lot of value in uncertain times.

To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Pharma Index and BSE Healthcare Index.

Where can I find a list of pharmaceutical stocks?

The details of listed pharmaceutical companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of pharmaceutical stocks.

Which pharmaceutical stocks were the top performers over the last 5 years?

Natco Pharma, Aurobindo Pharma and Alkem Laboratories were the top performers over the last 5 years in terms of sales and profit growth.

Natco Pharma's growth can be attributed to its strong position in the domestic formulations segment complemented by strong R&D and manufacturing capabilities and the experience of its promoters, whereas Aurobindo Pharma's growth can be attributed to its well-diversified portfolio at the product and therapeutic level, and its position as one of the largest suppliers for majority of its portfolio drugs.

Alkem Laboratories has also done well on the back of its established position in the formulations market, and its strong financial risk profile.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

What kind of dividend yields do pharmaceutical stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

For more details, check out our list of top pharmaceutical stocks offering high dividend yields.

Which are the pharmaceutical stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Ajanta Pharma, Abbott India and Alembic Pharma are the top pharmaceutical stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other pharmaceutical stocks offer great return on capital employed, you can check out the top pharmaceutical stocks offering the best RoCE here.

Which are the best pharmaceutical stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

• Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

  To find stocks with favorable P/E Ratios, check out our list of pharmaceutical stocks according to their P/E Ratios

• Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

  To find stocks with favorable P/BV Ratios, check out our list of pharmaceutical stocks according to their P/BV Ratios