What’s behind Nifty Pharma’s recent rally

Last week, the Nifty Pharma index reached an all-time high on 7 August, driven by investor interest in defensive investment themes. As reported by Economic Times, some market analysts noted that the recent surge in pharmaceutical shares is a result of a comeback rally because these stocks hadn’t been doing as well as the overall market for a while.

While the pharma index has outperformed the Nifty in 2023, its outperformance has become more pronounced since July. Foreign portfolio investors (FPIs) purchased pharmaceutical shares worth ₹6,725 crore between May and July. 

During the last three months, Cipla shares gained 32%, while Sun Pharma and Divi’s Lab each saw gains of nearly 19%. Torrent Pharma and Zydus Lifesciences also surged by 25% each over the same period. Several pharmaceutical stocks, including Abbott India, Cipla, Dr Reddy’s Lab, Torrent Pharma, Neuland Lab, Ajanta Pharma, Syngene International, and Alkem Laboratories, reached all-time highs in the past week.

Now, let’s delve into why the pharmaceutical sector is experiencing a recovery.

Improving business outlook

The pharma sector faced challenges in the post-COVID period of FY2022 and FY2023, with intense price erosion in the US pharma sector impacting performance. Price erosion refers to the reduction in the prices of medications or drugs, often due to factors such as increased competition, regulatory changes, patent expirations, or market dynamics. Analysts believe that the phase of price erosion has concluded, potentially restoring pricing power to Indian pharmaceutical companies.

USFDA approvals and cost reduction

The year has seen substantial approvals from the USFDA, reducing operational risks and expanding business demand. Additionally, the cost of raw materials has decreased, leading to improved EBITDA margins for formulation companies.

Good Q1 performances

• Cipla: One of the biggest pharma players, Cipla, displayed an impressive performance in Q1FY24. The company reported a 17.7% YoY increase in consolidated revenue, reaching ₹6,329 crore. Its Indian business saw an 11.6% rise to ₹2,772 crore, while its US business achieved record quarterly revenue of US$222 million, indicating a 43% YoY growth due to strong portfolio momentum. The company’s profit after tax improved 45.1% to ₹996 crore, as compared to last year.

• Gland Pharma: The company’s Q1FY24 earnings exceeded expectations, reporting a 41% QoQ increase in consolidated net profit to ₹194 crore, with a 54% QoQ rise in revenue to ₹1,209 crore. The company is continuing its efforts to not only restore its main business but also expand its product offerings in emerging markets such as China. Additionally, it aims to create a specialised range of products for tightly regulated markets and maximise the benefits gained from the Cenexi acquisition.
• Lupin: During Q1FY24, Lupin turned its fortunes around, achieving a net profit of ₹453.33 crore, a significant improvement from the net loss of ₹86.8 crore in the same quarter last year. The company reported a 28.6% increase in revenue to ₹4,814.06 crore, with North America sales growing by 57.4% to ₹1,590.5 crore.
• Sun Pharma: The company’s Q1FY24 figures surpassed expectations. Sun Pharma reported an 11% YoY increase in revenues to ₹11,941 crore. This growth was primarily driven by higher US generic sales, particularly gRevlimid. Formulation sales in the US reached US$471 million, accounting for over 33% of total consolidated sales in Q1FY24.

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