Why are Pharma Stocks Rising?

Pharma stocks continued their strong performance in August, marking the third month in a row of gains. The Nifty Pharma index climbed 6.61% in August, building on its 10.37% rise in July and 5% increase in June.

Out of the 20 companies in the index, 16 ended August with positive results. Mankind Pharma led the way with a 23% jump. Other top performers included Glenmark Pharmaceuticals, Alkem Laboratories, Lupin, Granules India, Natco Pharma, and Aurobindo Pharma, all of which saw increases between 10% and 20.5%.

The recent rally has pushed the Nifty Pharma index up 52% this year, its biggest annual gain since 2020. Six top stocks—Lupin, Zydus Life, Torrent Pharma, Biocon, Sun Pharma, and Aurobindo Pharma—have risen between 40% and 70% over the past eight months.

Several factors are driving this increase. Pharma is considered a stable sector that’s less affected by economic downturns, making it appealing to investors worried about a slowing economy. The sector has also seen a big boost from higher sales and market share in the US generics market, along with strong sales of branded drugs due to growing healthcare needs.

New product launches have helped companies gain more market share and increase sales. Additionally, strong quarterly earnings reports from many pharma companies have supported the sector’s growth.

Driving Forces Behind the Surge in Pharma Stocks

Policy Changes and Legislative Developments Boost Pharma Stocks

Shares of pharmaceutical and contract drug manufacturing companies (CDMOs) saw significant gains in intraday trading on September 10, 2024, due to two key developments. 

First, the 54th GST Council meeting in India announced a reduction in GST rates for certain cancer drugs. The GST on Trastuzumab Deruxtecan, Osimertinib, and Durvalumab has been cut from 12% to 5%. This follows the earlier removal of the 10% basic customs duty on these drugs in the Union Budget of 2024.

These drugs are used to treat various cancers, including breast cancer, non-small cell lung cancer (NSCLC), and others. Following the announcement, AstraZeneca India’s share price surged up to 4.3% to ₹7,069 per share, and Alembic Pharmaceuticals, which also manufactures Osimertinib, saw its stock rise by 2.6% to Rs 1,236.

Additionally, the US House of Representatives passed the BIOSECURE Act, which aims to restrict drug companies from engaging with certain Chinese biotech firms. The bill, moving to the US Senate, targets companies like BGI Genomics and WuXi AppTec and could benefit Indian CDMOs by creating a supply gap. This news boosted the stock prices of Indian CDMOs, with Laurus Labs increasing by 3.22%, Akums Drugs and Pharmaceuticals hitting a 5% upper circuit limit, and Piramal Pharma rising by 3.18%. Divi’s Laboratories and Syngene International also saw gains of 3.91% and 2.99%, respectively.

Strong Q1 Performance 

Pharma companies reported a 28% year-on-year increase in Q1 earnings. Strong earnings from Indian pharma companies drive the growth in the Pharma Index, thanks to strong sales in the US. 

Strong US Growth 

Recent large product launches in the US, the world’s biggest pharma market, have significantly boosted growth for many Indian companies. Firms like Lupin, Sun, Cipla, Dr Reddy’s, Zydus, and Aurobindo have all reported strong earnings thanks to this US market momentum.

These new product launches have increased revenue and improved profit margins. Additionally, the focus on new products has reduced their core business’s competitive pressure and pricing challenges.

Strong Domestic Growth 

This growth is supported by major product launches and less competition in their core business. Domestic sales are also growing well. Notable performers in the domestic market include Sun Pharma, Lupin, Torrent Pharma, Zydus, and Glenmark.

Improved Product Mix and Lower Input Costs Boost Margins

The strong performance in both domestic and US markets has increased the overall earnings of pharma companies. The cumulative EBITDA margins reached 26.3%, thanks to strong results from Zydus and Lupin. Even without these 2 companies, the overall EBITDA margin remained strong at 24.7%.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.