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The NSE Pharma index has gained about 15 percent so far this fiscal year, higher than Nifty 50 index. The outperformance marks the turn of sentiments about the pharma stocks. Supply chain disruptions and steep pricing pressure in the US suppressed pharma earnings in recent years.
However, as input costs ease and pharma companies get their act together on selling high value drugs that can help mitigate price erosion in the base generic drugs business, earnings are projected to see a sequential improvement in the June 2023 quarter (Q1 FY24). North America, the largest drug market, is seeing an uptick in volumes and stable price erosion,
according to Nuvama Institutional Equities. This should aid earnings of the Indian drug firms, who are the main suppliers. “In the US, we expect sequential improvement for all the major exporters except for Cipla,” analysts at Jefferies India said in a note.
March quarter (Q4 FY23) results had indicated some signs of a recovery in the US business. Even though a strong flu season in the December 2022 quarter had weighed on sequential growth in the March 2023 quarter, companies began to see the benefits of limited competition drug launches.
Analysis of prescription data in recent weeks by local analysts indicate decent traction in high value generic drugs sold by Indian companies. Oncology drug Revlimid is a case in point. Multiple Indian companies are selling a generic version of this drug that is projected to add sizeable sales to drug firms in the June 2023 quarter.
“For most companies in the US, except Sun Pharma, we build in a sequential improvement in sales. For Sun Pharma, we expect a subdued US performance owing to the Mohali consent decree,” analysts at Kotak Institutional Equities said in a note.
The recovery in the US changes the narrative for finished dosage drug manufacturers. India, another large market after the US, is steadily growing. As per IQVIA, the market expanded by 4.5 percent in June. Growth in May and April stood at 9.6 percent and 11 percent respectively. In FY23, the market grew by 7.9 percent on a high base. As sales from the US increases, overall earnings can get a positive momentum.
Of course, analyst projections can miss the mark and earnings are also dependent on final price realisations. Also, investors need to watch out for unforeseen developments such as delays in launching new products and heightened competition. Still, whichever direction earnings swing towards, one can expect a lot of action in pharma stocks this results season.
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