What next for the pharma sector? Incred's Aditya Khemka explains

New Delhi: The pharmaceutical industry operates in a dynamic manner and depends heavily on the availability of raw materials. It demands incredibly high levels of precision and care at every stage, from obtaining raw materials to getting goods that are ready for sale. India's pharmaceutical sector is currently valued at $50 billion and is expected to reach $120 billion by 2030.

On the other hand, over the past two years, the COVID-19 epidemic has exacerbated a global economic crisis that has led to supply shortages and a sharp increase in the price of raw materials. Aditya Khemka of Incred provides additional details regarding the sector's future. “So the raw material prices in the pharma sector had actually begun to cool off in the last six months, However, because of a fresh COVID outbreak in China, what we are hearing is raw material costs for COVID related products still continue to go up. And barring those products, for a majority of the other products, raw material costs are coming off.”

Domestic pharma business, is supposed to be the key area for growth. Due to the exponential growth in both supply and demand, India is now dependent on imports for more than 60% of its raw material needs. And most of the imports are from China, where the price has reportedly increased. So balancing this will require tremendous expertise. “Domestic pharma has been over the past decade, one of the best-performing segments for Indian pharma companies. The domestic pharmaceutical industry has grown to 12% CAGR over the past 10 years” Khemka said.

He also discusses the unencouraging nature of the most current export data for Divis Laboratories and Gland Pharmaceuticals. “Divis Laboratories and Gland Pharma are both are different companies and different businesses. I think more than 90% of Gland's revenue is purely generic, it's not branded generic. And because it's unbranded generic, the pricing power in unbranded generic just doesn't appear because the supply is more than the demand. So even if there is raw material inflation, which there is for unbranded generic as well, instead of increasing prices, they're actually still decreasing prices. So you get squeezed on margins.”

He claims that Gland’s generic business is just going down the road. He is not very bullish about businesses like Gland because the industry is in a fundamental decline and he doesn't expect a near-term revival.

About Divis he said “Only a portion of their business is unbranded generic, they are facing trouble in that portion of their unbranded generic. Also Divis last year had significant sales of COVID-related products, which are not recurring this year. So Divis is a slightly different matter”

Aditya has an interesting point of view despite the sector's weak stock performance, with the exception of one or two small- and mid-cap companies. “If you had invested 100 rupees in Nifty 10 years ago, you would have, I believe, 300 rupees today. If you had invested 100 rupees in BSE healthcare 10 years ago, you would have 310 rupees today. By simply investing in the healthcare index, you would have outperformed Nifty by 10 rupees. This is the fun part. If you break up the healthcare index into two halves, the second half is everything else. So companies which are invested in the India business, hospitals, diagnosed states, API, chemical companies, those are the other half.”

“When you say the sector hasn't worked, you are actually focusing on the index, which is 100 to 310. But if you focus on the second half of the index, that has outperformed Nifty by 300% over the last 10 years. So the sector has actually done extremely well,” he concludes.


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