While the sentiments in both US and Indian markets seems to be positive for the sector, it is important to note that pharma companies always come with risks. The stocks of most pharma firms such as Suven Pharma, Abbott, Pfizer, DRL were up. Torrent Pharma also rose despite USFDA warning.
Pharmaceutical stocks have seen some buying over the past two to three days as fears over a big cut in US generic prices recede and opportunities open up. While defensive buying is one of the reasons, the street seems to be getting incrementally positive on fundamentals as well.
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US deflation or price pressure, for instance, is expected to reduce to 5-8 percent in the current year as compared to the double-digit deflation of 10-15 percent in the year-ago period. The price pressure had become so acute that many companies had no option but to exit unprofitable drugs.
Besides the US, the sentiment is also positive in the Indian market.
With the 2022 revision of drugs under price control now announced, the street believes a huge uncertainty is behind them. The Indian pharma market is expected to be aided by a recovery in sales of acute drugs such as cough and cold medicines. The market is estimated to grow 11-12 percent per year for the next 3-4 years.
However, it is important for pharma companies to track individual stories.
For example, the Street is currently bullish on the opportunity emerging from the blockbuster cancer drug Revlimid generic. The cancer drug had $8.5 billion in sales in the US before generic entry.
Estimates are the likes of Dr Reddy's can make up to $500 million from the opportunity as they have exclusivity on two strengths while the likes of Cipla, Zydus Life could also benefit and make $300 million up till January 2026, when it will open up for more generic competition.
Cipla's stock seems to have bucked the trend and was trading at close to a record high on September 29. Besides hopes on how much Revlimid generic could contribute, the Street is bullish on the pipeline of complex generics in their pipeline, for example, Advair generic. The company has guided 2-3 complex generic launches per year for the near term.
The company's stock surged 1.8 percent to Rs 1,116.45 on Thursday, nearly 0.1 percent away from the 52-week high mark.
But, it must be noted that pharma companies always come with risks. One of the biggest risks that seem to be re-emerging post-COVID-19 is the US Food and Drug Administration (USFDA) inspections picking up.
Case in point is observations issued to Biocon’s Malaysian and Bengaluru plants or Cipla’s Goa plant, Glenmark’s Baddi plant or Lupin’s Tarapur plant continuing to face USFDA challenges.
The USFDA also issued a Form 483 with three observations for Torrent Pharma's manufacturing facility at Indrad, Gujarat. The company has, however, clarified that none of these observations were related to data integrity.
Other risks for the sector include the US price deflation and challenges in the launch pipeline, such as queries issued to Lupin for their drug Spiriva generic. Risks to Indian growth are emerging from the possibilities of caps on trade margins and price pressure emerging from online pharmacies.
While stocks have run up, valuations for most are off their two-year peaks
|Company||FY24E PE||52 WH PE (FY24E)|