ET Intelligence Group: With the weekly pandemic death toll reaching the lowest worldwide last week since March 2020, the World Health Organization has indicated the end of Covid-19 may be in sight. However, going by the performance of the pharma sector on the bourses, the pandemic probably ended much before for the sector – a standout straggler on the stock market through the ‘reopening’ trade.The ET Pharma Index is down 14% even as the Sensex has gained 3% over the year-ago level.The pandemic provided a reason to the stock market to be excited about the pharma sector that had been facing lacklustre prospects amid challenges in the US business, USFDA compliance issues, pricing pressure, big-bang acquisitions not working out on expected lines and modest growth in the domestic market.94234187The onset of Covid-19 provided fresh business triggers and brought investor attention back to the sector. With the effect of the pandemic waning and things normalising, the pharma sector is expected to post a modest growth outlook with limited scope for a re-rating.A recent report by Candle Partners analysing the ten-year history of the sector has revealed that for the past five years, the sales growth rate of generic formulations companies in the sector has been low with the US business largely remaining flat.Operating profit (Ebitda) margins peaked in 2014 at 28% and are now averaging at 20-21% after substantial cost rationalisations and cuts in R&D spending. There has been a substantial reduction in capex spends indicating overcapacity in solid dosages. The working capital cycle has deteriorated to 151 days (roughly five months) – becoming an indicator of tepid demand.After peaking at 26% in FY14, the return on capital employed (RoCE) has been in the range of 11-13% for the past five years. On the positive side, companies have increased their focus on India and emerging markets and have managed to deleverage.Unlike the universe of formulations generics companies, the report found companies in the active pharmaceutical ingredient (API) space posting a five-year revenue CAGR of 15%, Ebitda margins consistently in the 24-28% bracket, RoCE in the 20% range, capex maintained at 18-19% of gross block (total value of assets) and debt at 19-21% of the total capital. The working capital cycle at 173 days was the only major cause of worry. Over the next couple of years, factors such as investment in API capabilities, the renewed focus on the Indian and emerging markets and rising PE ownership of pharma companies pushing for growth would determine the scope for improvement of valuations of individual companies. The overall under-performance of the US business vis-a-vis other businesses is likely to continue in the absence of any fresh triggers. Improving R&D investments and increasing R&D productivity is going to be one of the major challenges for the companies in the sector.