Contrary to popular perception amongst several capital market investors that Covid-19 has been a game-changer for the entire health sciences industry in India, a study says the Indian pharma industry over the last 12 months has been a substantial under-performer.

It says a majority of pharma stocks reported double digit negative returns, while the overall market (BSE Sensex) delivered a 9% plus return. The pharmaceutical large caps have given a negative 7% median return while the mid-caps have given a negative 20% median return. The Active Pharmaceutical Industry (API) segment, which did well during 2019-21, has given a negative 24% median return in the last 12 months, says the study by Candle Partners, an investment banking and consultancy.

The study says except for Sun Pharma and Cipla, all large caps in the study - Dr Reddy's, Torrent, Zydus Lifesciences, Lupin, Biocon, Alkem and Aurobindo - have given negative returns over last 12 months with several of them having declined over 40%, (vis a vis 9% return for BSE Sensex). All mid-caps in the study - Ipca Lab, Alembic, Ajanta, Natco, Glenmark, JB Chemicals, Jubilant Pharmova, FDC, Wockhardt and Indoco Remedies - gave negative returns and overall had a 20% decline in last one year.

The study evaluating a 10-year history of the sector to find reasons for these negative returns, observes that low sales growth is possibly the single biggest factor behind the bearishness of the stock markets. Over the last five years, the sector has reported revenue growth of only 7%. After removing some of the companies from the mix and nullifying the effect of inorganic growth, the growth rates of several larger companies is in low single digits.

Another major factor the study observes is the below par performance in the US, the biggest market for most leading Indian generic pharmaceutical companies. It says the single biggest contributor to these low growth rates has been flat or negative growth for the US businesses of several companies in the last five years. While in every successive year there has been promise and guidance of a better year ahead, these predictions have never come true. For most companies, India and Rest of the World (RoW) business has been growing at 10-12%, which has helped in mitigating the muted US performance.

Another observation is that while EBITDA margins peaked in 2014 at 28%, now it averages only 20-21%, post substantial cost rationalisation and cut in R&D spends in the last few years to protect margins. R&D spends have seen a sharp cut-back from a historical 9% in FY16/FY17 to the current 5-6% levels. It also says there is a substantial reduction in capex spends from 20-25% every year in earlier years to about 10% now - which suggests an over-capacity in the sector, especially in solid dosages. ROCE (Return on Capital Employed) also has been coming down to the 11-13% range for the last 5 years, whereas it peaked at 26% in FY 14.

Contrary to the formulation of generics companies, the Indian Active pharmaceutical Ingredients (API) industry has been growing - 5 year revenue CAGR of 15%, EBITDA margins consistently in the 24-28% bracket and ROCE in the 20% range every year, says Candle Partners.

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