All in all, it seems like pharma stocks may continue to undershoot the broader market for quite some time
The Indian pharmaceutical market, which has been hedging against lack of growth in the US, clocked slower growth last month
It’s not going to be an easy recovery for the pharma sector. The home market has started to slacken, while the coronavirus outbreak has raised concerns of higher input costs. The Nifty Pharma index is down about 12% in 2019, compared with the Nifty 500’s gain of about 6.8%.
The Indian pharmaceutical market, which has been hedging against lack of growth in the US, clocked slower growth last month. The domestic market grew 7.6% year-on-year in January, lower than the 8.8% year-on-year growth in December and 14.5% in November. This is the third straight month of decelerating growth,with almost negligible volume growth.
Following the sputtering pace in growth in overseas revenue, some of the larger drug makers have been slowly sharpening their focus on the home market. In fact, big pharma companies have outstripped the domestic market growth, reporting about 11% growth in the December quarter. On average, the Indian pharma market posted about 9.5% growth in Q3.
But sales volume in the home market fell 0.3% in January, while it stood at a relatively low 2.2% year-on-year in the past three months. Overall, the lack of increase in volumes means that the domestic market is seeing merely price-related action.
“As per AIOCD data, Indian Pharma Market grew by 7.6% YoY to ₹12,080 crore in January 2020, further moderating from the high single-digit growth seen in December 2019. The growth was driven by pricing, up 5.2%, and new products, up 2.7%, partially offset by a decline in volumes, down 0.3%," said analysts at SBI Capital Markets Ltd. As the acute season—a period when the occurrence of certain illnesses increases—has ended, volume growth could further come off.
The coronavirus epidemic is also hampering raw material supplies. In fact, analysts at HDFC Securities Ltd said: “Indian pharma industry’s dependence on China for key starting material /intermediates/ active pharma ingredients is very high. The share of China in bulk-drug and intermediates imports, at $2.4bn, was 67% in FY19. In the event of a protracted shutdown, the industry faces the risk of supply disruption and higher input costs."
Already, the prices of certain drugs have shot up and the possibility of an impact on volumes, as well as margins, remains high.
Analysts also note that 2019 was a particularly harsh year from the US Food and Drug Administration (FDA) for Indian pharma firms. About 19 plants received official action-indicated status and warning letters from FDA. While this seems to be continuing this year, it puts revenues from the US at risk. Fiscal Q3 US revenue was steady, but growth depends on how quickly the issues are resolved.
All in all, it seems like pharma stocks may continue to undershoot the broader market for quite some time.
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