Pharmaceuticals Sector Analysis Report 

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• India is often referred to as the “pharmacy to the world”, ranking 3rd worldwide in total production volume and 10th by value. As per National Indian Promotion Agency, it is the largest producer of generic medicines and vaccines, occupying 20% volume share in generics and 62% in vaccines.
• The Indian pharmaceutical sector is currently valued at US$ 42 bn and is expected to grow to US$ 65 billion industry by 2024. It can be broadly divided into two categories – domestic and exports.
• The domestic market size stands at US$13 billion, with acute therapies accounting for 66% of the market share and chronic therapies accounting for 34% of the market share. In the domestic market, anti-infectives (13.6%), cardiac (12.4%) and gastrointestinal (11.5%) have the biggest market share in terms of revenue.
• The global market size stands at US$ 943 billion led by the United States with a market size of US$ 439 billion (47%), followed by Europe (15%), China (8%) and Japan (8%). The export market can be further classified into four segments – Active Pharmaceutical Ingredients (APIs) (branded and generic), Formulations (branded and generic), Contract Research and Manufacturing Services (CRAMS), and Biosimilars.
• India’s ability to manufacture high quality, low priced medicines, presents a huge business opportunity for the domestic industry. India’s cost of production is approximately 33% lower than that of the US.
• Influx of first-time patients into the healthcare ecosystem from the National Health Protection Scheme (NHPS)- a scheme providing free health coverage at the secondary and tertiary level to the poor and vulnerable sections of the population, relaxation of regulations for patented drugs, and increasing spend on preventive healthcare could emerge as major growth drivers for the sector over the next few years.
• In 2017, the Department of Pharmaceuticals released a new National Pharmaceutical Policy. As per the new policy, the department will have control over the National List of Essential Medicines (NLEM), which decides the drugs for which the Government can control the prices.
• The Government of India’s Pharma Vision 2020 is aimed at making India a global leader in end-to-end drug manufacturing. As per Union Budget 2019-20, Rs 19 billion has been set aside for research by the Ministry of Health and Family Welfare. The government also plans to set up an early Rs 1000 billion fund to provide boost to companies to manufacture pharmaceutical ingredients domestically.
• 100% Foreign Direct Investment is allowed under automatic route for greenfield pharma and brownfield pharma each, wherein 74% is allowed under the automatic route and thereafter through government approval route.

• Supply
• Higher for traditional therapeutic segments, this is typical of a developing market. Relatively lower for lifestyle segment.
• Demand
• Very high for certain therapeutic segments. Will grow as life expectancy, literacy increases.
• Barriers to entry
• High, due to economies of scale in manufacturing, R&D, marketing, distribution and capital requirements. Existing companies have a huge advantage in terms of the costs involved in launching new drugs and formulations.
• Bargaining power of suppliers
• Low. The fragmented nature of the industry prevents the suppliers (organic chemical industries and labor force) from having much bargaining power over the manufacturers as the switching cost is low for the manufacturers.
• Bargaining power of buyers
• Low, because of the presence of an influencing element, in this case, i.e the doctor.
  
  However, due to the extremely fragmented nature of the industry and the presence of government policies like Drug Price Control Order (DPCO), 1970 under which the power to control prices is with the National Pharmaceutical Pricing Authority (NPPA), the low power of the buyers does not have much effect on the manufacturers.
  
  Also, except in generic and OTC medicines, the buyer does not normally switch medicines easily.
• Competition
• High, as the sector is extremely fragmented with around 250- 300 manufacturing and formulation units in the organized sector which contribute to only 70% of the market share of total sales in the country.
• Threat of Substitutes
• In a developing country like India, traditional medicine plays a major substituting role. According to industry estimates, around 70% of the Indian population supplements and at times even replaces pharmaceutical medicines with traditional medicines.

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• As per IQVIA, the Indian domestic pharmaceuticals market (IPM) was estimated at Rs 2.2 trillion (tn) in 2023 growing at 9.5% vs 6.6% in 2022. Branded generics dominated the domestic prescription pharmaceutical market, accounting for around 80% of sales by value.
• Several leading Indian pharmaceutical companies acquired brands to consolidate their growth in 2022. M&A in the Indian Pharma space was essentially two-pronged: Active Pharmaceutical Ingredient/CDMO (Contract Development and Manufacturing Organization) space and branded formulations space with focused therapy areas.
• Sun Pharmaceuticals announced the successful completion of its acquisition of Concert Pharmaceuticals, Inc. on 6 March 2023, a late-stage clinical biopharmaceutical company that is developing deuruxolitinib, a novel, deuterated, oral JAK1/2 inhibitor, for the potential treatment of adult patients with moderate to severe alopecia areata.
• Glenmark Pharmaceuticals Ltd. (Glenmark), an innovation-driven, global pharmaceutical company, was the first to launch a unique I.V. injection formulation, Akynzeo I.V., in India for the prevention of chemotherapy-induced nausea and vomiting (CINV), under an exclusive licensing agreement with Helsinn, a Swiss biopharma group company.
• Emcure Pharmaceuticals Limited (EPL) became the first ever company to launch Orofer FCM 750, a new extension of its parenteral iron brand containing Ferric carboxymaltose (FCM). The dose is suitable for the majority of Indian patients with iron deficiency and iron deficiency anemia.
• Abbott India launched nine brands in India, including Cidmus and PrimcyV. Sixteen of the company’s brands are among the top 300 brands of the Indian pharmaceuticals market.

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• With 70% of market share (in terms of revenues) generic drugs form the largest segment of the Indian pharmaceutical sector. Over the Counter (OTC) medicines and patented drugs constitute 21% and 9%, respectively. The competence of Indian pharmaceutical companies in this segment offers a great growth opportunity for the sector.
• With rising patient empowerment and growing willingness to self-medicate, there is a growing demand for the drafting of a well-defined over-the counter (OTC) drug policy. Creation of a regulated OTC market coupled with stricter enforcement of prescribing and dispensing regulations will drive growth in the OTC space.
• Global population is projected to exceed 9.3 billion by 2050, of which 21% will be accounted for by those aged 60 and above. As individuals become increasingly health conscious and medical science continues to advance, life expectancy will increase. Due to this increase in life expectancy, demand for high end (lifestyle) drugs is expected to rise. Growing demand could open up the market for production of high end drugs in India.
• With 70% of India's population residing in rural areas, pharmaceutical companies have immense opportunities to tap into the rural market. Demand for generic medicines in rural markets has seen a sharp growth and various companies have already invested in expanding the distribution network in rural areas.
• Pharmaceutical spending in India is projected to grow 9-12% over the next 5 years, leading India to become one of the top 10 countries in terms of medicine spending. Increasing penetration of the health insurance and pharmacies is expected to drive expenditure on medicine.
• Pharmaceutical spending in developed countries is likely to grow at 2-5% CAGR between 2018-22. While launch of innovative products is likely to drive growth, it is expected to be balanced by patent expiries of existing products.
• Due to a genetically diverse population and availability of skilled doctors, India has the potential to attract huge investments to its clinical trial market.
• The Indian healthcare sector is one of the fastest growing sectors. Remote healthcare, patient empowerment and multichannel engagement are likely to be some of the important emerging trends in the sector due to the pandemic.
• Increasing private sector investment in R&D and acquisitions are also expected to drive the growth of the pharmaceutical sector.
• Contract Research and Manufacturing Services Industry (CRAMS) has more than 1000 players and is expected to bring opportunities to the pharma sector.

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How has the pharmaceutical sector performed in the past decade and when is a good time to invest in the sector?

In the last decade, the pharmaceutical sector has been relatively stable through various periods of peaks and troughs compared to the rest of the stock market. It has been a consistent performer, giving over 150% returns.

As there is a constant demand for pharmaceutical products, stocks from the pharmaceutical sector provide stable earnings regardless of the state of the overall stock market. For this reason, they are often called defensive stocks and can protect your portfolio during bad times.

However, in a sustained bull run, these stocks will underperform the market. The best time to buy such stocks is when there is a gloomy picture on the economic front. Since defensive sectors are less prone to the above mentioned risks, they offer a lot of value in uncertain times.

To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Pharma Index and BSE Healthcare Index.

Where can I find a list of pharmaceutical stocks?

The details of listed pharmaceutical companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of pharmaceutical stocks.

Which pharmaceutical stocks were the top performers over the last 5 years?

Laurus Labs, Gland Pharma and Divi's Lab were the top performers over the last 5 years in terms of sales and profit growth.

Laurus Labs growth can be attributed to its experienced promoters having a long-term presence in the pharma industry, improvement in total operating income during FY23 and a significant increase in the revenue contribution from its Contract Development and Manufacturing Company (CDMO) division.

On the other hand, Aurobindo Pharma's growth can be attributed to its differentiated portfolio and higher sales growth in the injectables business.

Divi's Laboratories has also done well on the back of its established track record in the Contract Research and Manufacturing Services (CRAMS) segment with reputed clientele, its strong research and development capabilities and favourable industry outlook.

To know which other companies performed well over the last 5 years, use Equitymaster's stock screener.

What kind of dividend yields do pharmaceutical stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

For more details, check out our list of top pharmaceutical stocks offering high dividend yields.

Which are the pharmaceutical stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Torrent Pharma, Max Healthcare, and Abbott India are the top pharmaceutical stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other pharmaceutical stocks offer great return on capital employed, you can check out the top pharmaceutical stocks offering the best RoCE here.

Which are the best pharmaceutical stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

• Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

  To find stocks with favorable P/E Ratios, check out our list of pharmaceutical stocks according to their P/E Ratios

• Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

  To find stocks with favorable P/BV Ratios, check out our list of pharmaceutical stocks according to their P/BV Ratios  

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