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Recap 2020: Pharma index had a dream year, thanks to COVID-19

Updated : December 21, 2020 07:35:31 IST

The Pharma Index has been among the star performers of 2020, gaining over 50 percent year-to-date, and outperforming the Nifty by a wide margin.

Unloved and largely ignored till the pandemic struck, pharma shares saw a dramatic improvement in their fortunes as investors bet on vaccine payday, COVID treatment or a shift in bulk drug sourcing away from China to India. Reflecting the newfound love from fund managers and punters, the Pharma Index has been among the star performers of 2020, gaining over 50 percent year-to-date, and outperforming the Nifty by a wide margin. Within the pack, individual stocks have rallied anywhere between 30 percent to 100 percent.

According to broking firm CLSA, this is the first time in five years that the Pharma Index has outperformed the Nifty.

One of the reasons these pharma stocks gained was because they benefitted from opportunities arising from COVID-19 such as development, repurposing and sale of COVID-19 drugs, R&D on vaccines paying off for some and more orders for bulk drug drug firms as global drug makers companies looked to reduce their reliance on China. In fact, active pharmaceutical ingredient (API, or the bulk drug used for making formulations) sourcing, was one of the major themes of 2020.

Formulation manufacturers realised the need to diversify API supplies, and India was clearly a the next best alternative to China, according to analysts. This is however a more longer term opportunity.

Compared to other sectors, pharma companies suffered less operational disruptions as they were immediately classified as essential services. By altering their product mix and by keeping a lid on costs, most pharma companies were able to expand their operating margins.

Over the past few months, pharma companies have also seen an improvement in drug launches in the US such as cancer drug Revilimid generic being approved for Natco, Dr Reddys and most recently Cipla.

The companies also got a breather from the USFDA on inspections of Indian plants as the resources of the FDA were deployed for the pandemic and travel restrictions. CLSA says the US markets according to them were largely stable in CY20 and Q1 of 2020 did show some progress on resolving of US related compliance issues but key inspections were on hold due to COVID-19.

There has also been a valuation catch up for pharma companies. As of Dec 2019, pharma was trading at nil premium on an EV/EBITDA basis, compared to a 40 percent premium it has traded at in the past 12 years. In 2015, this premium had risen to as high as 100 percent.

CLSA analysts said that the improvement in earnings profile led to a re-rating of the sector which pushed price to earnings-based valuations more than one standard deviation above the long term average.

During this time, pharma and healthcare was probably one of the most active sectors in terms of deals with at least 7 deals in the listed space. Some notable transactions include Dr Reddys buying part of Wockhardt’s domestic business, KKR acquiring 54 percent in JB Chemicals, Carlyle buying Sequent Scientific and minority stake in Piramal Pharma and most recently the listing of Gland Pharma.

Going forward, some of the risks to pharma include COVID-19 related sales reducing as seen in the domestic sales in November, reinspections restarting by USFDA as the vaccine is now rolling out and increased competition in some of key launches in the US market to make the market more price sensitive.

Pharma stock gains since March 2020

COMPANY	% Change
SUN PHARMA	55%
DR REDDYS	75%
TORRENT PH	30%
BIOCON	72%
CIPLA	98%
AURO	79%
LUPIN	54%
CADILA	92%
GLENMARK	91%
DIVIS	72%

Healthcare stock gains since March 2020

DR LALS	30%
THYROCARE	88%
METROPOLIS	2%
APOLLO HOSP	37%
FORTIS	2%

Pharma Stocks

COMPANY	FY22 PE @ CMP	5-year historical valuation
SUN PHARMA	27x	22.9
DR REDDYS	23x	21.7
TORRENT PH	39x	24.9
BIOCON	44x	34.5
CIPLA	27x	22.6
AURO	16x	13.9
LUPIN	27x	22.7
CADILA	25x	19.2
GLENMARK	17x	15.1
DIVIS	40x	25.9

Healthcare stocks

COMPANY	FY22 Val @ CMP	5-year historical valuation
DR LALS (PE)	53x	41.7
THYROCARE (PE)	38x	29.2
METROPOLIS (PE)	45x	41.3
APOLLO HOSP (EV/EBITDA)	17x	18.2
FORTIS (EV/EBITDA)	17x	17.7

Published : December 21, 2020 07:35 PM IST

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