Has Indian pharma finally hit the pot of gold?

If the pharma index corrected sharply between the middle of February and the middle of March, the index has recovered the losses and more in a span of just 15 trading sessions.

Apr 09, 2020 01:04 IST India Infoline News Service

When COVID-19 was first declared a pandemic by the WHO in late January 2020, pharma companies were in for a shock. They suddenly realized that China will not able to supply them the required active pharma ingredients (APIs) due to a virtual lockdown in some of the key producing regions. That led to a massive sell-off in pharma stocks. 

Data Source: NSE

If the pharma index corrected sharply between the middle of February and the middle of March, the index has recovered the losses and more in a span of just 15 trading sessions. Consider these returns on major pharma stocks.
Stock Name 52-week low Returns from Low Stock Name 52-week low Returns from Low
Cipla Rs.355 (13-Mar) 63% Aurobindo Rs289 (23-Mar) 60%
Sun Pharma Rs.312 (30-Mar) 49% Glenmark Rs.161 (13-Mar) 52%
Lupin Rs.504 (13-Mar) 54% Cadilla Rs.202 (13-Mar) 76%
 Data Source: NSE
 
What is unique about these phenomenal returns on pharma stocks is that they have given these fancy returns in less than one month. Some of the smaller pharma stocks have rallied over 100% but we shall not get into that aspect for now. What exactly has driven these returns by pharma stocks?
 
USFDA may have been forced to become less stringent
 
If there has been one major challenge for Indian pharma since 2015, it has been the pace of FDA approvals. The nodal US drug regulator has found a plethora of faults with Indian manufacturing facilities and testing laboratories. However, the COVID-19 has forced the FDA to be more lenient as India is the only country that can assure bulk supplies of generics in a short span of time. Recent FDA approvals give hope that pharma can monetize the R&D investments of the last few years. The FDA has cleared Sun Pharma’s Halol plant that had been under supply restrictions. With US running short of most generics in the midst of the pandemic, pharma stocks are rallying on the hopes that Indian pharma can reclaim its space in the US markets.
 
Most export bans to be repealed by Indian government
 
When the COVID-19 first struck, the Indian government imposed a ban on exports of APIs to offset the supply disruption from China. That has since been eased. In addition, restrictions on export of hydroxychloroquine (HCQ) have also been lifted at the behest of the US government. This is a useful early stage antidote for the Coronavirus as per researchers.  This opens up a huge window of opportunity for Indian pharma stocks. With China resuming API supplies, disruption of output is no longer a concern for the Indian pharma companies.
 
Pharma could be in a valuation sweet spot
 
Most analysts have already cautioned that all these developments may not impact pharma sector earnings in FY20 or even in FY21. What is likely to happen is a revival of US demand for Indian generics as well as more stocking by wholesalers. That should keep demand buoyant; both in the domestic and the international markets. There is a valuation case too. Most pharma companies are now available at less than 2X price / sales ratio. By mid-March, the P/E ratio of the Pharma index had touched a level of below 20, giving hope that the pick-up would be rapid. Sustaining the momentum will be the key for pharma stocks!

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