Outlook 2021: Pharma sector surges 54% in 2020, will it sustain the rally?

The pharma sector has been the performing sector in 2020, rising as much as 54 percent in comparison to a 12 percent rise in the benchmarks.

While other sectors were facing the brunt of the pandemic, the sudden importance of the healthcare sector brought the pharma sector into investors’ focus.

The sector outperformed the broader market led by growth visibility, profitability improvement led by cost savings, stable pricing in the US market, and no major regulatory hurdles. Progress of the COVID-10 Vaccines also lifted the investor sentiment in the space.

All constituents in the Nifty Pharma index were also positive for the year with Divi’s Labs surging the most, up over 100 percent. Meanwhile, Aurobindo Pharma, Cadila Health, and Dr Reddy’s rallied 75 percent, 85 percent and 92 percent, respectively in 2020.

Cipla, Torrent Pharma, Alkem Labs, Sun Pharma and Lupin also rose between 25 percent and 65 percent in this period.

Going ahead, will the pharma space repeat this performance in 2021?

ICICI Securities believes it will. The brokerage remains positive on the sector as it expects revenue growth to improve in the coming year.

As per the broking firm, pharma firms’ India business is likely to see a healthy recovery in growth on the low base of CY20, which has been impacted by COVID-19 led lockdown. A 10 percent growth is sustainable over the medium term while CY21 may witness higher growth, it stated.

Cost control measures undertaken during the pandemic and positive growth in US sales on a corrected base coupled with normalised price erosion will also aid profitability, ICICI Securities added.

The brokerage further noted that pharma companies under its coverage have witnessed an average 58 percent growth in stock prices over the past one year largely due to improved profitability and valuation rerating given growth visibility.

Moreover, USFDA inspections were restricted in CY20 owing to travel restrictions caused by the pandemic. ICICI expects these inspections to resume as the situation normalises further.

Key expectations in CY21:

– As per the brokerage, growth recovery in the Indian branded pharma market is likely to be over 10 percent in 2021 versus 3 percent in 2020.

– It also sees a high number of USFDA inspections once the situation normalises since several plants are due for re-inspection.

– Positive growth is also likely in US generic business as price erosion normalises.

– Improved profitability and cost-savings undertaken during lockdown would partially sustain.

– 2021 may also see pharma firms focussing more on execution to improve growth and moderation in capex and R&D spend.

ICICI Securities continues to prefer companies with higher India sales, a complex generic pipeline in the US, and clean FDA status.

The broker’s top picks include Cipla, Alkem Labs, and Abbott India on the back of higher India sales, and improving margins and return ratios.

Considering the recent run-up in stock price, it has downgraded Aurobindo Pharma to ‘add’ from ‘buy’, Cadila to ‘hold’ from ‘buy’.

Glenmark Pharma and JB Chemicals have also been downgraded from ‘add; from ‘buy’. Natco to ‘hold’ from ‘add’, and Pfizer to ‘reduce’ from ‘hold’.

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