Could Pharma Stocks Generate The Best Return For Investors?

Pharma stocks have outperformed the indices in the last one month and that too by a distance. Several pharma companies have yielded phenomenal returns in the last few months and the run may end, if a quick solution is found for Covid-19 related infections.

Over the last few years, investors were chasing financials, while most of the pharma stocks were languishing due to US FDA issues and poor pricing. Things seem to be now changing with pharma stocks fast emerging as the favourite investment destination for investors at least in the more short term.

The covid-19 infections may lead to better pricing in the export markets, as well as some ease in restrictions for exports. This may propel the earnings of pharma companies.

Returns from select pharma companies in the last 1 month

Name	Price on April 24	Price on March 24	Returns %
Aurobindo Pharma	Rs 640	326	96.32%
Divis Labs	Rs 2442	Rs 1803	30%
Lupin Labs	Rs 806	Rs 558	44.44%
Cipla	Rs 596	Rs 377	58.09%

Falling rupee to drive export earnings

The rupee has been consistently falling in the last few weeks and has now breached the Rs 76 levels to touch Rs 76.15 This is likely to boost the earnings of pharma companies, most of which are export driven. This include the larger players like Aurobindo Pharma, Dr Reddy's, Sun Pharma and Lupin, which derive significant earnings from abroad.

Better regulatory environment

Given the rising level of infections, the regulatory environment may also be a little speedy and eased, especially for the export markets. Apart from this, for the last few years, there were pricing pressures for many export companies. This may also ease a bit, with the prospects of some margin expansion.

Companies with a large number of ANDAs could benefit. ANDA is nothing but an abbreviated new drug application (ANDA), which also contains data which is submitted to FDA for the review and potential approval of a generic drug product. Such companies with a long list of ANDAs like Aurobindo Pharma could gain in the years to come.

Gains only in the short term

However, we wish to inform readers that some stocks have run-up sharply, thanks to Covid-19 related infections.

Moreover, these stocks are suitable more for investment from a short term period of 1-year, rather than a long-term perspective. It is highly possible that if there is a new cure that is found for Covid-19, we may see a swift fall in the stocks of pharma. With stocks already having run-up, chasing the momentum may not make sense.

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