On November 17, 2019, the first case of China in the Hubei Province went unrecognized. In December, eight more reports emerged with investigators pointing to an unknown virus. The virus continued to spread in the next three months via direct and indirect communication with many people in Hubei. Because we live in a global society, it is suspected that foreign travel has brought the virus all over the world. It reached such a scale that by March 2020, WHO declared COVID-19 a pandemic as it reached to 784,794 cases worldwide and caused 37,788 deaths by Mar 30, 2020. The first case was registered in India on 30 January. By March 30, India reported 1251 cases and 32 fatalities.
There were approximately 2,489,956 global cases of COVID-19 as of April 21, 2020. More than 653,188 people had recovered from the outbreak, while 170,552 died. The three countries hit hardest by the pandemic were the United States, Italy, and Spain.
As of 21 April 2020, India recorded 18,658 cases of COVID-19 coronavirus, with over 3,273 recoveries and 592 deaths. Since 2 March 2020, the country has been registering new cases of the virus regularly. Although the number of new cases has risen, some patients who tested positive under quarantine have gone through full recovery.
Since early March the western state of Maharashtra had the largest number of coronavirus cases. The government was making contingency plans to increase the country's COVID-19 research capacities to better cope with the crisis. At the same time, on March 25, the nation went into complete lockdown, making it the world's biggest, with 1.3 billion people confined. This was extended further until May 3, 2020.
Indian Healthcare Sector
India pharma’s global standing:
The Indian pharmaceutical industry has been a world leader in generics, both internationally and in domestic markets, substantially contributing in volume to the global demand for generics. Made-in-India drugs given to industrialized economies like the US, EU, and Japan are known for their protection and efficiency. In recent years, India has seen increasing competition from China, which it has been able to exploit due to its inherent cost advantage, manufacturing intermediates and APIs at a much lower cost than those in India, leading to a steady rise in API imports from China to India, which in turn has resulted in the depletion of domestic production capacity for some main APIs.
Risks from India pharma’s China linkages:
India's high import reliance on China (around 70 percent by value) has become a major threat to India's manufacturing of healthcare and the global supply chain. Although Indian pharmaceutical companies have gradually migrated up the value chain over a period of time to concentrate on higher-margin value-added formulations, this over-reliance on China has increased the threat to the nation's health security as some of these vital APIs are crucial to mitigating India's increasing disease burden.
Supply chain disruption for India pharma:
Any disruption in the supply chain of APIs will lead to significant shortages in India's supply of critical drugs. Some of the vital APIs are specified in the National List of Essential Medicines (NLEM) for categories of high-burden diseases such as cardiovascular diseases, diabetes, and tuberculosis. In addition, for many antibiotic APIs developed via the fermentation process, such as penicillin, cephalosporins, and macrolides, the current demand is largely dependent on China.
The increased reliance on low-cost API is mainly due to China's comprehensive efforts toward developing economies of scale, easing regulations for bulk drug manufacturers, availability of low-cost services, building process efficiencies, and supporting manufacturers in the form of subsidies, low taxes, and fiscal incentives. India has significantly lost its production of APIs due to insufficient government support and API-focused infrastructure combined with the difficulty in obtaining approvals for the establishment of a manufacturing plant, delayed clearances of pollution, high costs with low availability of services, regulatory and price control schemes are some of the main challenges faced by the bulk drug industry.
Major earnings cuts ahead for pharma firms:
Edelweiss Securities says the novel coronavirus, or COVID-19, has triggered significant disruptions to the supply side in various industries, earnings will be reduced by 10-15%. As a business, pharma has emerged as a strong contender to push the next rally leg, whenever it comes. In the last 10 days, pharmaceutical stocks have seen a major upsurge in anticipation. That is not only true for India, but it has also performed well for pharmaceutical firms internationally too. While most companies will come back from the last 5 years of underperformance in the short term, the leader will be special this time around.
Relative stability, reasonable valuations:
According to HDFC Securities, Indian pharmaceuticals have been fairly resilient to the COVID disruption and are likely to gain from favorable currency tailwinds and secure prospects for India and the US. India's growth has increased (as of MAT Mar'20, around 10 percent rise for IPM). It predicts growth of 11 percent over the next two years for covered companies. US pricing remains a stable market and the regulatory issues are well known. The pharmaceutical market is up ~1% YTD, outperforming the Nifty Index by 28%. We favor high exposure stocks in India, as they provide greater visibility of earnings, backed by fair valuations.
- a prolonged lockdown may impact demand and manufacturing
- delay in US FDA travel advisory plant resolution
- currency risk and subdued demand on the EM markets
- delay in main approvals