What is the endgame for the pharmaceutical sector in India?

12 May, 2021

7 min read

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With vaccinations in full swing despite the onset of the COVID pandemic, Indian stock markets seem to be taking a rather relaxed approach to COVID 2.0.

However, the pharmaceutical sector has more than doubled within less than a year since the first lockdowns were announced in India. Moreover, some pharmaceutical stocks have rallied with almost no end in sight. Around the world, some pharma stocks have posted triple digit percentage growth, and yet others continue to post significant gains despite broaching previous record highs every other week. So what is the endgame for the pharmaceutical sector in India? And the more important question is, is there one?

Behind the gains in 2020

In 2020, many pharma stocks in India posted 70%+ gains, and December 2020 was the first time when NIFTY Pharma outran the NIFTY 50 index in terms of gains. In fact, Nifty Pharma clocked 4 times higher gains, at about 55% by the end of the fourth quarter. While the demand for personal protective equipment, COVID related healthcare and in-patient care were some of the biggest drivers of these gains, the stock market was also betting on vaccine discovery, and the growth that was to come from the release of demand for other critical healthcare procedures that patients had been putting off for months. At the same time, the blurring of boundaries between pharma and technology uelled faster drug discovery, new approaches to working, and even higher operational efficiencies -all of which were drivers of growth in 2020. So what’s driving the growth this time around?

Year 2021 so far

The growth of India’s pharmaceutical industry has also been fuelled by rising demand for generic drugs and medical devices across the world - at which India is a pro in delivering, at the least prices. These margins are a major contributor to the rising numbers. While vaccine economics account for a menial portion of growth in the industry, other latent factors have influenced the rise in 2021. In addition, bold research and development investments that drive new drug discoveries are also continuing across the top pharma companies of India, thereby setting it up for success. 

However, some of the factors that threaten the momentum are obvious. A recent roundtable discussion between ET and IBM highlighted the need for faster vaccination in India in order to maintain the stimulus that will ultimately drive the economy towards recovery while reducing the risk of infection and return of the workforce to business as usual. In addition to this, a gloomy active pharmaceutical ingredient manufacturing landscape and an underwhelming rate of vaccine production has left analysts worried of the macro variables that have driven the pharmaceutical industry thirsty for higher growth since the start of the pandemic. 

Up next: will the growth figures hold beyond the pandemic?

According to a 2021 report by EY, India’s pharmaceutical industry has witnessed staggering growth figures due to factors that are not entirely tied down to the pandemic and the response to the pandemic. In fact, the industry even took a 30%+ dip right after the lockdowns were announced, if the Nifty Pharmaceutical index is taken as a benchmark. Industry thought leaders at major consultancies suggest that the pharmaceutical industry has outperformed its previous best records because of a steady merging and enmeshing of cutting edge technology in a variety of pharmaceutical processes - from research and development to logistics, clinical trials and drug discovery. 

Since the start of the pandemic, pharmaceutical companies have been advised to make investments in technology that would allow them to execute touchless manufacturing operations, and consolidate their logistics and supply chain processes. This includes the use of Artificial Intelligence and Internet of Things technologies, leveraging cloud computing to enable anytime, anywhere access to the business operations, and enabling remote work and remote collaboration for a variety of tasks.

So far, the companies that have already made these investments are clocking record figures of growth outside India. In India, a complete digitization is still far away, but estimates suggest that the industry is expected to grow at a compound annual growth rate of 12% between 2021 and 2030 - which establishes a positive outlook for the pharma sector in the years to come. While the growth figures might be nowhere near as aggressive as the 2020 run, the endgame for the pharmaceutical industry seems to encapsulate higher than moderate growth over the coming decade.

In retrospect

If the industry’s performance is analyzed since the beginning of this century - that is, since 2000, it has clocked an astonishing 1000% growth, meaning that it has multiplied 10 times in terms of its size. This has resulted from becoming a major player in the supply of over 40% generic drugs to the US, 25% prescription drugs in the UK, and over 60% of the global non-COVID vaccine demand.

For those that are looking to invest in the industry, the pertinent question will be - whether to shoot a wide arrow, or to target specific companies that have emerged as leaders during the times of a larger economic crisis. While the answer will depend on the investor’s profile and their risk appetite, some strategic measures that have emerged as predictors of growth in the last few years include investments in accelerating research and discovery, and strengthening the supply chain in order to prepare for resilience and risk. Apart from these, a strong track record will definitely play into investment decisions as the leadership equilibrium consolidates in the post-pandemic landscape.

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