High Valuations for Pharma Stocks: The Missing Piece

One of the most pressing issues is the declining level of public investment in healthcare. In 2013, India spent 3.7% of its Gross Domestic Product on healthcare. But this figure has seen a steady downward trend.

By 2019, it had dropped to 3%. Current estimates for 2025 and 2026 suggest that the central government's share of health spending remains as low as 0.29% of the GDP. This is one of the lowest rates among major economies.

To put this in perspective, countries like China and Vietnam spend over 5% of their GDP on health, while Brazil allocates 9.6%. Even nearby neighbours like Sri Lanka and Thailand have historically outspent India relative to the size of their economies.

Without significant financial backing from the state, the infrastructure required to support high-end medical research remains underdeveloped.

The global pharmaceutical market is moving rapidly toward biologics, which are medicines made from living organisms rather than through chemical synthesis. These drugs are used to treat complex diseases like cancer and autoimmune disorders.

In the US, biologics now account for 46% of all medicine spending, growing at an annual rate of 12.5% compared to just 1.3% for traditional chemical pills.

Despite this shift, India's participation in the biomanufacturing space is minimal. India holds only about 6.6% of the global biomanufacturing capacity, and a vast majority of that is dedicated to vaccines rather than new-age therapies.

Meanwhile, Asian peers have built massive facilities to dominate this new era. South Korea's Samsung Biologics has a capacity of 784 kiloliters, and China's WuXi Biologics stands at 580 kiloliters. In comparison, India's leading players like Biocon have capacities that are significantly lower, often hovering below 300 kiloliters.

Innovation has become something of an orphan child in the Indian context. In the Healthcare Innovation Index, India often fails to secure a spot in the top 10 for patent publications in biotechnology or medical technology.

While China has emerged as a global hub, accounting for roughly 30% of the world's innovative drug pipeline, India's contribution to drugs under development is estimated at less than 5%.

Most Indian pharmaceutical firms find the economics of innovation difficult to justify.

Developing a new drug requires spending millions of dollars on clinical trials, but in the Indian market, companies often lack the pricing power to recover those costs.

It's a telling sign of the environment that even the largest pharmaceutical companies in India sometimes choose not to market their own new drug applications within the country because the profit margins are too thin to support the business model.

China's rise provides a direct contrast to India's current stagnation.

China joined the International Council for Harmonisation in 2017. With this it aligned its regulatory standards with global benchmarks.

The alliance allowed Chinese companies to conduct clinical trials that are accepted in the US and Europe, effectively turning their domestic trials into a ticket to the global market.

India, however, remains an observer rather than a full member of this council. This means Indian trials often need to be repeated elsewhere, adding time and cost.

Furthermore, China created specialised stock exchanges. Launched in July 2019, the Shanghai Stock Exchange Science and Technology Innovation Board, often known as the STAR Market, supports pre-profit, high-tech firms, including biotech, by offering relaxed listing criteria.

This 'Nasdaq-style' market prioritises growth over immediate profitability, offering crucial fundraising to firms often ignored by traditional equity markets.

This created a flow of capital that simply does not exist in the same way for Indian startups, who struggle to find long-term funding for risky research projects.

The path toward becoming an innovation powerhouse requires a fundamental shift in how India approaches its domestic market.

At present, the Indian government's focus is rightly on making healthcare affordable and accessible to its 1.45 billion (bn) people.

However, this focus on low prices often discourages companies from launching expensive, life-saving new drugs.

To fix this, the country needs to create a market where innovative products can command a fair price. One way to do this is through universal health insurance coverage that includes novel drugs.

If the government or insurance providers pick up the tab, companies can earn the profits needed to reinvest in more research, while patients still get the medicine they need without paying out of pocket.

Talent is another critical piece of the puzzle.

India has a wealth of scientific and manufacturing talent, but much of the high-end research talent (PHDs and research fellows in pharma) tends to move abroad where funding and facilities are better.

To bring this expertise back, the country needs to invest in basic research institutions and improve the regulatory environment for clinical trials.

Harmonising Indian regulations with global standards would make the country a more attractive destination for international pharma companies to conduct their research.

Currently, the fear of intellectual property theft also holds back some international investment. Strengthening the implementation of patent laws would go a long way in reassuring global partners that their inventions are safe in India.

The government has started taking steps in this direction with production linked incentive schemes, which provide financial rewards to companies that manufacture locally.

However, these incentives need to be expanded specifically for capital-intensive biomanufacturing. Building a biologics plant is much more expensive and technically difficult than building a factory for generic pills.

Without state support to level the playing field, Indian companies are unlikely to take the massive financial risks required to compete with the state-backed giants in China and South Korea.

Repurposing existing drugs for new uses is another cost-effective way to innovate. As the industry matures, the focus can then shift toward first-in-class drugs that represent entirely new ways to treat diseases.

The transition from a generics-led industry to an innovation-led one is not just a matter of corporate strategy. It's a necessity for national health security.

Relying solely on the successes of the past will not be enough as the world moves toward personalised medicine and advanced biotechnology.

If India wants to maintain its edge and stop ceding ground to its Asian neighbours, it must bridge the gap between cost-effective manufacturing and new science.

The ingredients for higher stock market valuation of Indian pharma are all there.

There is a massive demand for healthcare. There is a skilled workforce. And there are companies like Sun Pharma, Dr Reddy's, Lupin, Mankind, and Glenmark with a proven track record in pharma manufacturing.

What is missing is a cohesive policy environment that rewards risk and treats innovation as a priority rather than an afterthought.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Quantum Information Services Private Limited (Research Analyst)