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US product pipeline to drive pharma rally

Source : BUSINESS_STANDARD
Last Updated: Wed, Sep 25, 2013 20:41 hrs

The secular bull run in pharmaceutical stocks, which brief paused in August, is again gaining strength. While defensives remain strong bets in the current scenario, the prospects of top pharma — Sun Pharma, Lupin, Dr Reddy’s Laboratories and Cipla — look good. Led by robust outlook in their international business; the existing product range is doing well and the pipeline of new products is strong. The rupee’s depreciation versus the dollar, euro and pound will add to their gain,s since the companies derive a large chunk of revenues from developed markets.


What’s more, a majority of pharma stocks had corrected during July-August due to implementation of the new domestic pharma policy, which saw the wholesale trade (distributors, chemists) de-stock inventories, thereby hurting sales of most companies. Cipla and Sun Pharma, however, managed to buck the trend and report double-digit growth. Here, while domestic sales are likely to see muted growth in the September quarter as well, analysts expect this to pick up. In this context, experts believe pharma’s bull run will continue, rewarding the shareholders.

Cipla
Unlike earlier, when Cipla primarily marketed its products globally only through partners, it is now undertaking filings for drug launches and aiming for its own presence in key markets. Recently, Cipla created its own front-end in South Africa, a market which has grown by six times in the past seven years for the company. The share of African business is expected to grow from the current 18 per cent to 25 per cent by FY15.

The consolidation of the South Africa-based Medpro business is likely to drive Cipla’s consolidated revenues, believes Ranjit Kapadia, analyst at Centrum Broking. Analysts at CIMB have raised their FY15 earnings per share (EPS) estimate for Cipla by five per cent, due to recovery in the Indian business and upsides from the recent Rs 2,700-crore acquisition of Medpro. Analysts at ICICI Direct observe the acquisition of Medpro is testimony to adoption of the front-end model. Given Cipla’s endeavour to launch own products in the US, they expect incremental traction from the world’s largest healthcare market. Nine of the 13 analysts polled by Bloomberg during September have a Buy’ rating on Cipla, with a consensus target price of Rs 484.

Dr Reddy’s
The limited competition product launches by Dr Reddy’s (DRL) earlier (including for treatment of asthma, prostate, acne, osteoporosis and hypertension) continue to do well, thereby driving US sales. The company’s injectibles business is also growing and the recent launch of injectibles of cancer drug Azacitidine and MDS treatment Decitabine will strengthen DRL’s limited competition products, as well as the niche injectibles range.

DRL’s share price, which made an all-time high of Rs 2,444 on Wednesday before closing at Rs 2,431, has seen Kotak Institutional Equities and Motilal Oswal Securities upgrade their target price to Rs 2,700 and Rs 2,728 recently (the consensus target price is Rs 2,614). Kotak’s analysts observe a spurt in US approvals for DRL in recent months and view the recent approvals of Azacitidine and Decitabine as the start of the next wave of limited-competition launches in the US. “We remain positive on the transition to a complex generic portfolio in the US and reiterate DRL as our top pick,” they have said. Analysts at CLSA have an Outperformer’ rating on DRL and see revenues clocking a 16 per cent compounded annual growth rate (CAGR) during FY13-16.

Lupin
The domestic and Japanese markets (24 per cent and 12 per cent of consolidated revenues) saw revenues decline five per cent and 12 per cent year-on-year, respectively, in the June quarter. Analysts expect the pressure to continue in the September quarter, too. Thereafter, the Japanese business should fare better in the second half of FY14, aided by a pick-up in the contract manufacturing business of I’rom, Lupin’s Japanese subsidiary.

There are similar expectations for the India business. Importantly, the prospects of the US and Europe (46 per cent of revenues) markets, which had grown 29 per cent year-on-year in the June quarter, remain good. Given Lupin’s cumulative ANDA (abbreviated new drug applications) filings of 177 with the Food and Drug Administration in the US as of end-June (86 approvals received to date), the pipeline is strong.

Apart from generics, Lupin is also concentrating on branded businesses, given its recent tie-ups. Analysts at Edelweiss observe its branded franchise in the US is $150 million, primarily led by Suprax (anti-bacterial) and its line extensions. Brand extensions and additions in this segment would add to growth over the next two to three years. They say, “We remain positive on best-in-class pipeline of products in the US among peers and maintain a Buy’ rating.” Seven of 12 analysts polled by Bloomberg during September have a Buy’ rating, with a consensus target price of Rs 922. One may buy on correction.

Sun Pharma
Even after a 50-plus per cent return in one year, Sun Pharma’s stock continues to hold promise. While domestic revenues are growing well, US sales growth has been phenomenal, driven by a strong product pipeline and the acquisitions of Taro, DUSA, URL generics and Caraco.

Although Taro is now facing some competition and might see some pressure in the near term, growth from URL and DUSA (both acquired in 2013) will compensate. Arvind Bothra at Religare Securities estimates a 21 per cent CAGR in sales during FY13-16, led by a 22 per cent CAGR in the domestic business (versus 12-14 per cent for the industry) and a 19 per cent CAGR in the US business, supported by niche launches (Taro and Sun) and integration of URL and DUSA. Plus, a rest of the world ramp-up through new launches/market entry.

At Rs 569, the stock seems fairly valued, given the consensus target price of Rs 589 of 14 analysts polled by Bloomberg in September. Nevertheless, Sun has surprised many often through acquisitions and higher growth. The cash-rich company is already scouting for inorganic opportunities. While trade data show the domestic market growing by 1.1 per cent in August, Sun had outperformed, with growth of 14.9 per cent. Hence, Ranjit Kapadia’s target price of Rs 685 or Bothra’s Target prices of Rs 635 are possible to achieve.

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