Pharma stocks shine amid rising coronavirus cases in India

Extending gains for the third straight day, shares of Indian pharma companies were trading as top gainers in early trade amid rising concerns over shortages of generic drugs in India due to coronavirus outbreak in China.

As fears of coronavirus-led economic slowdown mounts, the pharma industry has assured the government that there are enough drugs and medicines to deal with any contingency arising out of the impact of the deadly virus. As of now, 29 people, including 16 foreigners, have been infected by the COVID-19 virus in India.

Barring shares of Piramal Enterprises that fell around 0.3%, all the 9 other healthcare shares were trading higher on Nifty Pharma, that was up 0.78% at 8,200.

On Nifty Pharma, Cadila Healthcare was the top gainer, rising 4.7%, followed by 2% gain in Divi's Laboratories. Biocon gained 1.68%, while Dr Reddy's  and Sun Pharma were up 1%. Aurobindo Pharma, Cipla and Glenmark Pharmaceuticals gained in the range of 0.2% to 0.8%.

Shares of Divi's Laboratories, Biocon and Dr Reddy's Labs were approaching their 52-week highs on NSE today.

Nifty Pharma index has gained 3.68% in one week, 2.7% in one month and 1.68% since the beginning of 2020.

On a similar note, BSE Healthcare traded at 14,194, rising 0.81%, with 20 of 30 scrips trading in the green. On the BSE sector index, IOL Chemical and Shilpa Medicare rose over 5% each, followed by 4-5% gains in Cadila, Marksans Pharma and Panacea Biotec. Albert David, Laurus Labs, and Granules India gained around 3% each.

BSE Healthcare index has gained 1.87% in one week, 1.80% in one month and 5.72% since the beginning of 2020.

While Sun Pharma has risen 8.2% in 5-days, Ajanta Pharma has risen 6.7% and Cipla has gained 6%. Sun Pharma shares also ranked in top turnovers in yesterday's trade, indicating a high volume of shares traded, with total turnover rising 2.2% by Rs 1,100 crore.  

The rise in share price of healthcare stocks is on the back of global trend. The spread of the novel coronavirus has led global investors to rush for pharmaceutical stocks recently, on back of a rise in demand for generics and branded generics leading to shortages and over-pricing for drugs. Globally, the number has climbed to over 95,000 affected and over 3,200 fatalities.

Besides the concerns of adequate supplies for dealing with the virus outbreak within the country, Indian drug companies are likely to face another wave of demand for healthcare supplies from other countries that depend on Chinese supplies, which are affected currently due to the shutdown in Mainland China. Prolonged reduction in supplies from China will also impact the prices offered by these firms.

Further government declaring a ban on active pharmaceutical ingredients (API) also alarmed investors over the impact of coronavirus in the country. India has also put paracetamol, antibiotics, vitamins on export ban list to fight the virus outbreak. As per data by India Brand Equity Foundation, India exported about $19 billion in drugs in 2019. This accounts for about one-fifth of the world's exports of generics by volume, making India one of the top global drug suppliers from Asia.

Additionally, Indian drug manufacturers also source almost 70% of the active pharmaceutical ingredients (API) for their medicines from China.

Speaking on pharma industry trend in India, Vinod Nair, Head of Research at Geojit Financial Services said," 70% imports on raw materials from China could lead to higher raw material prices putting pressure on the margins for at least the next 2 quarters. Earlier, anticipating supply constraints on account of Chinese New year, care was taken by pharma companies to ensure enough stock of inventory till the end of fourth quarter. However, any extension of corona virus issue post the month of February was seen as detrimental to the sector. And now we see these fears coming to reality. If the situation worsens, there could be acute shortages of medicines and higher drug prices."

Experts also suggested that drug costs are likely to stay overpriced worldwide as most countries depend on manufacturing from China, which is mostly focused on generic and over-the-counter drugs.

Supply chains for critical care drugs in the US-all of which are generic are made mostly outside of the US, with a sizable portion made in China. Among global biopharma firms, AstraZeneca (16-21% of total), Novo Nordisk (11%), Pfizer (10%), Sanofi (7%), and Merck (7%) have the largest China sales exposure, the report added further. "We expect to see the greatest impact on companies with large China sales exposure, significant China-based supply", the report added.

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