As pharma valuations rise, volume slowdown becomes a concern
Indian pharma market growth slowed in April-May, due to lower number of drug prescriptions
Drug consumption in May showed domestic pharma growth dipping 8.6% year-on-year (y-o-y). While this is better than April’s 10.7% y-o-y decline, indications are that FY21 growth will be flat to negative. The lockdown dragged down volume growth, and may now spoil the runway pharma applecart.
In fact, returns in the pharma sector have been quick. Capital reallocation to the sector drove up the Nifty Pharma index 44% in the past three months. In contrast, the Nifty 50 index rose a mere 4%. Another catalyst that warmed up investors to pharma was global risk aversion in February and March. The low valuations and earnings visibility drew investors to the sector.
“Everything is disrupted because of covid, including pharma and other sectors. Pharma has been relatively less disrupted as an essential service. The sector has again showed resilience versus the other sectors. So, fund managers shifted capital to this sector,” said Aditya Khemka, assistant vice president, equities, DSP Mutual Fund.
With hospitals and clinics shut, patient visits have dropped. This resulted in lower number of drug prescriptions, which explains the dip in volumes. The impact on the acute segment is higher, which accounts for over 60-65% of drug sales. On a positive note, drug prices were steady.
“Volumes fell 16.7% y-o-y in April and 14.4% y-o-y in May as compared to average volume growth of 2.2% during the last 8 quarters.
Price growth during this period is similar to pre-lockdown levels, indicating no pricing pressure,” said analysts at Nomura Financial Advisory Services in a note to clients.
The slowdown has some side benefits. Promotional expenses dipped in April and May. “Decrease in growth rates for the Indian pharma market is a negative. However, savings from reduced promotional activities, travel costs and other overheads are likely. We think 3-4% of sales in savings can be achieved,” said Nomura.
In the US, the industry has also seen a general easing of pricing pressure.
Drug price erosion is now more gradual at about 2-5% a year, than the high-teen drops a few years ago.
But as healthcare is expected to clock a mere 1% growth in FY21, according to analysts, it may put the brakes on the pharma sector’s recent momentum. Earnings are, however, likely to be better in FY22.
“How well the sector will do from here is a factor of earnings. While earnings this year are going to be bad for all sectors, pharma’s earnings are going to be better than many others. I feel the sector’s return on equity will improve from where we are,” said Khemka.
Even so, the pharma sector’s trailing valuations jumped about 80% higher than the Nifty 50 lately, because of the broader market correction. That’s quite a high premium.
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