What Is API In Pharmaceutical Industry and why API Companies are Moving Up?

Pharma is considered to be a defensive sector because when the economy does well, the defensive sectors go unnoticed. However, when the economy declines, the defensive sectors end up outperforming the broader markets. In the recent market volatility that occurred due to the Covid – 19 pandemic, Pharma stocks have given exceptional returns. BSE healthcare index topped the chart of one-year performance. But even in pharma, a specific group of stocks garnered more attention from investors. These stocks are the companies that manufacture APIs in India.

After the Corona Virus pandemic hit India, the Hon. Prime Minister Narendra Modi announced the “Atmanirbhar Bharat” campaign to boost domestic industries and reduce exports from countries like China. One of the biggest beneficiaries of the “Atmanirbhar Bharat” movement has been the Pharma API industry. There has been a significant upside movement in the Pharma API stocks and today we will try to decode this in detail.

What Is API (Active Pharmaceutical Ingredients)?

First, let’s understand what API is. Active Pharmaceutical Ingredients is an active ingredient that is actually used in medicine to cure any ailment. In simple terms, it is the raw material needed for every different type of medicine created by Pharmaceutical companies. Currently, Almost 70% of API i.e. Active Pharmaceutical Ingredients worth $3.5 billion dollars are imported from China. However, due to the worldwide lockdown, the imports from China were halted resulting in a shortfall of the production of generic medicines by domestic companies. Overall, China is also a world leader of API production and export with 20% Of the world’s share In API Production.

To reduce the dependency on China for API, the Indian Government announced an INR 140 Billion fund in March for setting up 3 drug manufacturing hubs and identified 53 key APIs which include paracetamol, antibiotics, penicillin, and ciprofloxacin. On July 22nd, 2020 the Government of India also announced 6,940 Crores of Production linked incentive to encourage domestic API manufacturers and reduce the imports from China. The government notification explaining this incentive states that “The Indian pharmaceutical industry is the third-largest in the world by volume and 14th largest in terms of value. India contributes 3.5 percent of total drugs and medicines exported globally. Despite these achievements, India is significantly dependent on import of some basic raw materials, viz., bulk drugs used to produce finished dosage formulations”.

Hence, with these government initiatives, the stocks of API manufacturing companies are in focus now.

How The Stocks Of API Manufacturing Companies Performed?

On an index level, the BSE Healthcare index has been a top performer over the last year with a return of 52.56% as of 20th August at 10.48 am. The one-month return of the index is 11.77% and a 3-month return is 28.60%. Here are a few pharma stocks that gave phenomenal returns over the last year:

Note: Data is as of 20th August 2020 at 10:49 am. These are the top 10 stocks based on their one-year performance and it is not a recommendation for investment.

Before the pandemic hit India, Pharma stocks were still underperforming as compared to the major indices, and across various time frames, it had delivered subdued returns. However, after the Coronavirus pandemic and due to government various initiatives as mentioned above, the API manufacturing stocks soared in just a matter of 3-4 months.

Looking At This Rally In API Stocks, Does It Make Sense To Invest Now?

As we mentioned earlier, Pharma is a defensive sector that does well during the economic downturn. It also means that following their good performance there is a long period of stagnancy in performance. As most of the quality API stocks have already seen a significant up move, these stocks have become expensive. At this point, entering these stocks can become risky as the return potential over the short term can be limited.

Hence, if one still wants to invest in stocks of API manufacturing companies, it is ideal to enter companies that are fundamentally strong and are market leaders. Additionally, having a longer investment horizon helps reduce the risk. One important thing to keep in mind is instead of investing your entire capital in one go, stagger the entry points and invest at every fall in the market. This will help in reducing the average purchase value of the stock.

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