ET Intelligence Group: India’s emergence as the biggest supplier of hydroxychloroquine to the US drug market for treating Covid-19 has triggered investor interest in Indian pharma stocks.
The once battered sector saw a relief rally last week, with shares gaining between 15% and 30% with some reaching their 52-week highs or inching to that level. Cipla and Cadila Healthcare were the top gainers while Strides Pharma, Ajanta Pharma and Bliss GVS Pharma gained the least.
The swing in investor sentiment ahead of any change in fundamentals or performance numbers may be surprising, but is justifiable — pharma stocks were oversold and were due for a re-rating.
They had peaked in 2015, with their fortunes taking a gradual beating on the back of a spate of regulatory actions, followed by governance issues and pricing pressure in key markets. The demand for some drugs because of the Covid-19 crisis gave the Street a reason to turn bullish on the sector.
In the backdrop of the extended lockdown, which has caused consumer demand to plunge and is hurting growth projections in several sectors, pharma is among the few sectors that are still providing visibility and hope of growth.
The sector has managed to function during the lockdown and meet local and global demand. Latest data from industry body PharmaTrac shows that apart from an overall seven weeks’ inventory at the distributor level, the inventory at pharma company depots is of 4-6 weeks, and an average 7-8 days’ inventory at the retail level, leading to a cumulative medicine stock of 13 weeks, or almost three months.
With China resuming production of bulk drugs, the supply-chain woes of Indian pharma companies are likely to ease out soon. While the number of analysts turning bullish on pharma stocks has increased, shares are trading near their target prices.
5 pharma stocks that can potentially safeguard your portfolio
Safe Bets
11 Apr, 2020
The novel coronavirus pandemic has caused severe supply-side disruptions in various sectors and earnings will be cut by 10-15%. Pharma as a sector has emerged as a strong contender to drive the next leg of the rally, whenever it comes. In anticipation, pharma stocks have seen a huge run-up in the last 10 days. This is not just true for India, but globally too pharma companies has performed well. While in the short term, most companies will bounce back from the last 5 year of underperformance, this time around, the leader will be different. Hence, you need to choose your stocks carefully. The following are the strong tactical buys with strong catalysts. (Source: Edelweiss Securities)
Ajanta Pharma: A turnaround story
11 Apr, 2020
Revival in the Africa businessAjanta Pharma’s Africa business has been de-growing over the last 3 year (-9% CAGR over FY17-19). For 9MFY20, the company reported 19% growth. The brokerage expects growth to sustain ~10-15% over the next 2 years.US business ramping up sharplyWithin 4 years, the US generics business has ramped up to $70 million from $2 million. The brokerage expects the US business to ramp up to $100 million by FY22, based on market share gains and new launches.India business gradually recoversIndia business saw 23% CAGR from FY12 to FY16. Due to regulatory changes in the dermatology business, the company has seen lower growth (just 6% CAGR) over the last 3 years. But the 11% CAGR in 9MFY20 suggests improvement in the India business. Revival in all 3 geographies will lead to margin expansion and improvement in return ratios. The brokerage expects margin to improve to 31% by FY22 from 27% in FY19.ValuationEdelweiss Securities expects FY20/21/22 EPS of INR 53/70/83, respectively. At its April 8 closing price of Rs 1,367.5, the stock trades at 23/19/16x FY20/21/22E P/E and FY22E RoCE of 20%.What will change the view?Degrowth in the Africa business. The brokerage is quite comfortable with its US/India growth numbers. It expects Africa to grow by 12% over the next 2 years.
Abbott India: A CAGR story
11 Apr, 2020
Strong track recordAbbott India has seen strong sales growth (organic: 15% CAGR; inorganic: 18%) in the last 10 years compared to an average 11% growth by other Indian pharmaceutical players. This has been driven by strong execution and acquisition of Piramal Healthcare’s domestic formulation business in May 2010.Strong product portfolioThe company has a presence in high growth therapeutic categories – gastro, CNS (central nervous system), vaccines, OTC (Digene kind) and gynaecology – which led to better-than-industry growth.Pure play India storyAbbott is pure play domestic story. It does face US Food & Drug Administration (USFDA) related inspection risk, which plagues other pharma players.ValuationThe brokerage expects FY20/21/22E EPS of Rs 313/360/416. At its April 8 closing price of Rs 17,481, the stock trades at 56/49/42x FY20/FY21/FY22E P/E and FY22E RoCE of 23%.What could change the view?The Indian government periodically issues a price cap on certain essential drugs. About 40% of Abbott’s portfolio falls under Drug Price Control Orders (DPCO), so any incremental coverage would pose a risk to earnings.
DRL: New management, new story
11 Apr, 2020
India business is a key focus nowDespite its strong innovation capabilities since inception, Dr Reddy’s Laboratories doesn’t even fall in the top 10 domestic formulation players. Its India business was never a focus area for the management, which led to market share loss over a period of time. But for the new management, India will be a key focus area. It recently acquired a large portfolio from a competitor.US business has some near-term catalystsgNuvaRing ($800 million, sole player post launch) H2FY21, gCopaxone ($4,000 million, 3 player market) H2FY21 and recently acquired portfolio in the US.Change of guard has started bearing fruitsDRL always had the highest SG&A (selling, general and administrative) expense, at 30%, compare to the industry average of 20%. However, in the last 1 year, SG&A expense has fallen to 23-24% levels, which has led to a 300 bps improvement in EBITDA margin on a 9MFY20 versus 9MFY19 basis.ValuationThe brokerage expects FY20/21/FY22 EPS of Rs 120/150/174. At its April 8 closing price of Rs 3,683, the stock trades at 31/25/22x FY20/21/22E P/E and FY22E RoCE of 20%.What could change the view?Any delay in gCopaxone launch can impact FY22E earnings significantly. Also, any USFDA issue with its Bachupally facility.
Biocon: Participant of mega theme – biosimilar, also TINA
11 Apr, 2020
Global biosimilar market will grow 3x in next 5 yearsThe total biosimilar market size was pegged at $20 billion in 2019 by various studies. The same is expected to touch $60 billion by 2025, the highest growth category for pharma companies globally. Biocon has proven its mettle by launching Pegfilgrastim ($4 billion) in the US last year. Last month, it received approval for Lantus ($6 billion).Biosimilar is sticky business unlike genericsHistorical data from Inflectra/Remsima (Remicade), Benepali (Enbrel), which has been launched in the last 4 years, has seen stable to increasing market share with manageable pricing risks.ValuationThe brokerage expects FY20/21/22 EPS of Rs 7.5/10.2/13.4. At its April 8 closing price of Rs 327, the stock trade at 43/32/24x FY20/21/22E P/E and FY22E RoCE of 12%. The lower RoCE is due to its huge Malaysian facility.What will change the view?Any facility-related USFDA action, which is difficult to pre-empt.
This shows that after the initial exuberance — in which all pharma stocks rallied — the rally could sustain for companies with good fundamentals and fair valuations. Those with business uncertainties, regulatory clampdowns, governance issues and litigation risk may fall out of favour, despite the positive sentiment. Stocks of Dr Reddy’s, Cipla, Abbott India, Laurus Labs and Ipca look promising on a longer-term basis.
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