Nifty Pharma returned 37 per cent in the past year which is significantly higher than Nifty 50’s 20 per cent returns. While the one-year forward valuations for key stocks have expanded too, stock returns are in most cases even higher. This implies that earnings expectations from these stocks have expanded as well. A good run in both sentiment and financials is expected for Pharma in 2024, going by the numbers. What’s the situation on ground?

Sectoral outlook

On the positive side, markets in the US and Europe (generics, speciality and biosimilars) and emerging markets (branded generics), cumulatively 60-70 per cent of revenues for top pharma companies, are showing strong growth. US pricing pressure has normalised, and US FDA observations are expected to wane, supporting renewed product launches.

Amongst blockbuster launches, if gRevlimid benefited most companies immensely last year, patent expiry of a leading anti-diabetic molecule can deliver on similar lines in different markets in next few years, but for first filers.

Cash balance is another strong positive for the sector. Driven by inflated cash balances ranging upwards of $500 million to $1 billion (without leverage) for several companies, M&A followed by R&D should be a significant driver in the industry despite high target company valuations.

Companies heavily dependent on Indian generics face a significant challenge. Although India’s branded generics market has consistently seen over 10 per cent growth in the past decade, recent trends indicate a decrease of 100-200 basis points in the past year.

Company specific factors

Sun Pharma anticipates its flagship Ilumya to yield $750-1,000 million annually by 2023. Additionally, two specialty molecules are nearing completion. A Phase-III trial for a melanoma cancer molecule (licensed for Europe, Australia, and New Zealand) and an alopecia areata treatment await approval after clinical trials, with their success crucial for Sun Pharma in 2024. Taro, a historical weak link for Sun Pharma, may see a management turnaround with the recent merger deal announcement. Divi’s witnessed business contraction following Covid as orders for its custom synthesis (CS) business were on hold and currently generics are facing high inventory liquidation. CS projects are now recovering with two big projects and a larger facility.

Torrent Pharma’s US plant clearance in Dahej and expected for Indrad should support better utilisation of plants.

In 2024, Zydus Lifesciences is expected to deliver positive news with the completion of Saroglitazar clinical trials for two diseases, and one major disease in 2025. Cipla, awaiting Advair and Abraxane, might find compensation in three anticipated complex launches in inhalation and peptides in 2024. This year could potentially bridge the gap in Dr. Reddy’s valuation compared to peers due to a limited market share in Indian branded generics.

Overall, while the sector seems poised for growth, with valuations factoring in expectations comprehensively, any slip up in execution can impact stocks.

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