While 2015 was a dismal year for the stock market, pharma stocks brought cheer to investors. In fact, pharma has been one of the better performing sectors over the past year. While Nifty 50 has plummeted around 20 per cent since the last Budget, the Nifty Pharmaceuticals index capped its losses to 3.8 per cent. This is thanks to a few stocks such as Dishman Pharma and Jubilant Life that have nearly doubled over the year.

A steady growth in profit and revenues for most players has held the sector’s premium valuation, even in a volatile market. The Nifty 50 trades at around 19 times trailing 12 months earnings, while the Nifty Pharma index trades at a hefty 32 times.

For the nine months ended December 2015, sales at all pharma companies grew around 10 per cent. But many companies reported stronger revenue growth. For instance, Alembic Pharma reported sales growth of over 60 per cent while at Torrent Pharma, it was 46 per cent.

For Torrent, the primary driver was new launches in the overseas market. Exports were up 65 per cent for the nine months ended December 2015, when compared to the same period last year. On a lower base, domestic contract manufacturing grew 58 per cent. Alembic also benefited from robust exports that more than doubled to ₹1,587 crore, contributing over 60 per cent of its revenues.

Growth drivers

Dishman Pharma delivered strong growth in sales and margins as business from contract research and manufacturing services grew. Jubilant Life benefited from a healthy growth in business from solid dosage formulations and volume growth in APIs.

However, the cookie crumbled for export-oriented pharma stocks when inspections made by the US Food and Drug Administration (FDA) identified regulatory lapses in manufacturing.

In November 2015, the US FDA issued a warning letter to Dr Reddy’s on the company’s active pharmaceutical ingredient (API) manufacturing facilities at Srikakulam (Andhra Pradesh) and Miryalaguda (Telangana), and oncology formulation facility at Duvvada (Andhra Pradesh). Growth in the December quarter was muted with sales growing around 3 per cent and profits 1 per cent year-on-year. The stock has fallen around 29 per cent since November 2015. Sun Pharma too received a warning letter in December 2015 from the US FDA, citing quality deficiencies at the Halol (Gujarat) facility. The company reported subdued third-quarter results, clocking a 2 per cent sales growth.

In October 2015, Cipla was served with nine FDA observations on its Indore manufacturing unit. The company reported a 12 per cent year-on-year topline growth in the December quarter, while profit growth was subdued at around 5 per cent. Lupin too was not spared. Its Indore facility received six regulatory observations in February 2015. Sales grew 7 per cent, while net profit fell 12 per cent in the December quarter due to rising material, personnel and R&D expenses.