Pharma Stocks Continue To Remain Under Pressure: Time To Accumulate?

  • Market Overview
  • Editors Pick

Pharma stocks have been in the spotlight especially since 2020. With a ~60% increase, S&P BSE Healthcare was able to beat all other sectoral indices last year.

Even the numbers reported for the quarter ending December 2020 showed healthy growth for most pharma stocks. Divi's Laboratories Ltd. (NS: DIVI ), Dr. Reddy’s Laboratories Ltd (NS: REDY ), and Cipla (NS: CIPL ) showed double-digit growth and on average, the top 5 pharma stocks by market capitalization showed ~14% YoY growth in Q3-2020 as shown below:
Returns on Pharma Companies
(Source: Tavaga Research)

In 2020, the phenomenal run in Pharma Stocks could be attributed to the additional opportunities that COVID-19 created.

Aurobindo Pharma (NS: ARBN ) and Cipla Ltd. (NS: CIPL ) were the leaders here, having nearly doubled in a year. With very few exceptions, the entire Pharma space showed amazing 1-year returns as shown below:
Returns on Pharma Companies

Why does the Pharma sector continue to be an attraction?


India has a stronghold in the pharma space because:

  1. DOMINATING GLOBALLY: Our pharma sector caters to half the global vaccine demand, ~25% of all medicines for the UK, and ~40% of generic drug demand in the US. This is also why we are often termed as the “Pharmacy of the world”. IBEF estimates the Indian pharmaceutical sector to grow to $ 100 Bn by 2025.
  2. DOMESTIC DEMAND PICKING UP: Even our domestic market showed roughly ~10% increase in 2019. This could open new doors for our pharma industry. Healthcare penetration in the country would further strengthen because of the increasing government investment and focus here.
  3. LOW COSTS: Low costs of production and R&D helps us further making our exports competitive.
  4. INCREASING FDI: We have seen great FDI inflows in the pharma space, with ~$17 Bn between Apr 2000 and Sep 2020. Also, COVID-19 as well as easing FDI norms makes India even more attractive as a pharma destination.
  5. FAVOURABLE POLICIES: Indian Government has specifically focussed a lot on bringing down healthcare expenses and boosting the domestic healthcare demand through initiatives such as “Aatmanirbhar Health Mission” which could boost generic drug sales for the Indian pharma companies. Even the Union Budget 2021 considered healthcare as one of the 6 pillars in focus and saw a doubling of the sector's allocation. 

How should one invest in pharma?

Despite the pharma stocks falling, this industry carries great advantages and should not be left out of the portfolio. But it is not always easy to pick stocks within an industry especially when it is as volatile as pharma has been lately. So Team Tavaga recommend the investors consider the following options:

Invest in Pharma Index Funds via SIP:

Though India does not have any fund replicating the Nifty Pharma index or S&P BSE Healthcare Index, it could make sense to invest in the "Edelweiss-MSCI India Domestic and World Healthcare 45 Index Fund” that is built up of 45 healthcare stocks listed across the US and India market.

Further, since we are seeing corrections in the sector it would not be a wise decision to invest the entire amount in one go and hence must consider SIPs or invest via the staggered lump sum mode.

Direct Investment in stocks after consulting SEBI RIA

If one does not want to invest in the Index fund or wants to directly invest in a few stocks, it is recommended to do so only after consulting a SEBI registered investment advisor like Tavaga.

It is neither the time to sell the pharma stocks at a loss or to accumulate at one go. Systematic investing through SIPs/staggered lump sum could make sense in the current scenario. No matter whatever route an investor chooses to take the exposure, he/she must keep a long-term horizon given the strategic initiatives playing out in the industry – e.g. APIs, PLI, etc.

Disclaimer - The above analysis is only for educational purposes, shouldn't be substituted as investment advice. 

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  • Nitin Mathur @Nitin Mathur
    Hi Ajit! Thanks for your suggestion. Predominantly, we've been advocates of passive funds due to various reasons. In India, there is no fund that replicates the pharma sector, except the recently launched Edelweiss-MSCI pharma fund having a dearth low expense ratio of 0.38%.
    Like 0
  • Ajit Pardeshi @Ajit Pardeshi
    i like your articles Nitin, very well written. but candidly, this article looks like an ad for Edelweiss and Tavaga.
    Like 4
    • Nitin Mathur @Nitin Mathur
      @Ajit Pardeshi Hi Ajit! Thanks for your suggestion. Predominantly, we've been advocates of passive funds due to various reasons. In India, there is no fund that replicates the pharma sector, except the recently launched Edelweiss-MSCI pharma fund having a dearth low expense ratio of 0.38%.
      Like 0
    • Nitin Mathur @Nitin Mathur
      Moreover, in our previous blog post on IT sector, we had mentioned about ICICI, SBI, and Nippon IT ETF because only these 3 AMCs have funds that replicate the IT index. Would like to inform you here that we don't have any commercial arrangement with Edelweiss when we speak about the specific fund.
      Like 1
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