At a point in time, almost every stock in the Pharmaceutical sector was considered a safe stock. You could just pick the top 5-6 companies from the sector and expect to make decent returns over a period of time.
But over the last two to three years, the pharma stocks have been anything but safe. In fact, the BSE Healthcare Index is down 24% in two years. In comparison, Sensex has gained 23% in the same period. Increased regulatory concerns in developed markets, pricing pressure in domestic and export markets have all contributed to lower growth expectations for the future.
But the recent developments have been encouraging. Domestic growth seems to have bounced back post the GST impact. The Indian Pharmaceutical Market (IPM) which declined in July showed a 2.4% YoY growth in August.
Also, Pharma companies have seen a lot of clearances with respect to their manufacturing plants. Dr Reddys received a clearance for their formulation facility in Andhra Pradesh. Divis labs also received a positive response after the USFDA inspection of its Unit II facility at Vishakapatnam.
While the price erosion overhang still remains, positive developments in the domestic and export markets have come as a welcome relief. This downturn has also forced companies to relook at their business models and improve manufacturing standards at their plants.
Pharma companies which can adapt to these changes will thrive in the long run. The uncertainties highlight it important to be stock specific in the sector. It is crucial to look for companies with the competence and staying power to overcome the challenges.
Data Source: AIOCD-AWACS