Following a slew of positive news for the sector, the shares of pharmaceutical companies continued to maintain their stellar rally on Thursday with the Nifty Pharma index surging another 7.35 per cent. While the most important factor is defensive buying at a time of all-round turmoil, a lot of stocks, such as Cadila Healthcare, Cipla, Glenmark Pharmaceuticals, Lupin, Alembic Pharmaceuticals and Ipca Laboratories, attracted individual attention due to positive news.
The Nifty Pharma index surged 19.1 per cent in the last week, and 11.24 per cent year to date (YTD). The main benchmark Nifty, on the other hand, plunged 25.50 per cent YTD while, for the week, it gave a positive return of 6 per cent, mainly on the back of banks and pharma stocks.
After six-seven years of lacklustre performance, the fortune has turned for the pharma sector over the past six months.
The initial trigger came from the government, when it lifted the curbs on exports of 13 active pharmaceutical ingredients (APIs) and their formulations. The key beneficiaries of this move include Cadila Healthcare, IPCA Laboratories, Glenmark and Torrent.
Stocks such as Cadila, Dr Reddy’s Laboratories, Aurobindo Pharma, Cipla, Glenmark, Lupin, Alembic, Laurus Labs, Torrent, Ipca Laboratories and Sun Pharmaceutical have jumped over 20 per cent over the past week.
The good and the risky
However, analysts warn investors not to buy all pharma stocks with a herd mentality. “There are still some headwinds for pharma companies and, for most of them, the risk posed by USFDA (actions) is very high,” a market analyst based in Chennai said. Even a small negative news could trigger a big sell-off on the stocks, he warned.
“Our positive stance on Indian pharma is premised on the sector’s relative resilience to Covid disruption, favourable currency tailwinds and stable outlook for India and US business,” said HDFC Securities.
However, the key risks are an extended lockdown, delay in USFDA plant resolution due to travel advisory, EM markets currency risks and subdued demand, and delay in key approvals, added HDFC Securities, which maintained its buy stance on Cipla but a sell on Dr Reddy’s Laboratories.
According to Emkay Global, there are no rating changes but target prices are adjusted with earnings cuts. “Given the resilience in earnings, we expect the sector to outperform in the near term. Structurally, we continue to prefer stocks that offer growth visibility, such as Cipla, Divi’s Laboratories, IPCA and Granules,” it said.
Cipla makes gains
Cipla has received approval for generic proventil MDI (albuterol sulphate 90mcg/inhalation), making it the first generic approval for the product. Currently, albuterol comes in three brands — Proair, Proventil and Ventolin. There are six players across these three brands, including Innovator, AG and Generics. The Cipla stock on Thursday is the biggest gainer at 13.4 per cent.
There will be a gradual ramp-up (press release states it will be staggered shipments), as probably Cipla wasn’t ready for the approval, Emkay said, adding that, nevertheless, assuming 20 per cent erosion and about 15 per cent market share, it can be a $70-75 million annual run-rate for the pharma major. Emkay maintains a buy on Cipla with a target price of ₹522.
Aurobindo withstands Sadoz move
Shares of Aurobindo Pharmaceuticals jumped even after it pulled out of the Sandoz deal. However, analysts remained cautious on the stock, downgrading it.
Novartis and Aurobindo Pharma last week announced the mutual termination of the agreement to sell the Sandoz US generic oral solid brands and dermatological business portfolio to Aurobindo. The primary reason identified was failure to obtain the required transaction approval from the US Federal Trade Commission (FTC) within anticipated timelines. The deal meant revenues of nearly $ 750-850 million with operating profit at 27 per cent (as disclosed by Novartis AG).
Credit Suisse has downgraded the stock to underperformer from neutral stance and reduced the price target to ₹345 from the current ₹450. According to it, the Sandoz deal was EPS accretive and an important catalyst for Aurobindo Pharma. With the Sandoz deal being called off, the company is now exposed to USFDA risks, CS said, and added the probability of further escalation of unit VII OAI flag still exists.
JP Morgan too downgraded Aurobindo Pharma stock to neutral from overweight with a reduced target of ₹450 from its earlier target of ₹730. Similarly, Citi too cut the price target, but was somewhat liberal at ₹690. It had earlier fixed a target of ₹820.
Emkay Global believes that investors' focus will now shift back to Aurobindo's own portfolio, which is currently grappling with regulatory challenges in the US and likely to see moderate single-digit growth in the interim. USFDA flag for Unit IV is a key monitorable in the near term, said Emkay, which retained its hold rating on the stock with a revised price target of ₹420.