Published on 28/02/2017 5:10:52 PM | Source: Kotak Securities Ltd
Pharma Sector Update - Kotak Sec
We are suspending coverage on the Pharmaceutical sector for the time being. We will re-instate coverage on the same in due course. In the meantime, please treat all our existing recommendations (given in the table below) as closed.
A brief write-up on our covered stocks is as under:
Alembic Pharma Ltd (ALPM)
Alembic is incurring a huge capex (to add injectables to its portfolio/expand its existing facilities) as well as R&D towards building a strong pipeline of complex products for the US markets. While we have always maintained that ALPM is one of the best bets in the mid-cap pharma space given its focused approach as well as R&D capabilities, we believe the coming 1-2 quarters may be a phase of consolidation for the company but over the longer run, we expect the company to come out as a strong growth company with stable margins and revenue visibility. ALPM is currently trading at 19x its FY18E EPS.
Cadila Healthcare Ltd (CDH)
Cadila Healthcare has recently resolved its most awaited compliance issues at Moraiya plant, the most critical plant for US operations. This will lead to number of pending ANDA approvals (CDH has 100+ ANDAs pending for approval) which should results in 20+% CAGR in US revenues for CDH. We believe the stock will remain in momentum for the next few months as we see approvals flow in. Over the longer run though, the critical approvals of products like transdermals, will drive the stock. The stock currently trades at 24.3x FY18E EPS.
We have always been cautious on Cipla due to lack of visibility on launches, changing strategies every few years and lower return ratios. However, the recent changes in the management team, strong focus towards US pipeline and clarity on MDI/DPI filings/launches, do give some cushion. However, we believe one has to wait to see the benefits to flow to the top line/bottom line (for UK inhalers) given the disappointments in the past. The stock is trading at 23.8x FY18E EPS.
Dr Reddy's Labs (DRL)
We have been cautious on DRL due to increasing competition in its key injectable products (40% of US revenues) and lack of big ticket launches. US, which is the largest revenue contributor at 48% of revenues, has been a key driver in the past few years but going ahead the outlook looks weak. Moreover, the impending compliance issues at its plants will further delay the launch pipeline for DRL. Hence, we believe that the stock will continue to remain in a range. DRL is currently trading at 20.6x FY18E EPS.
Lupin Ltd (LPC)
Though the near term headwinds will keep LPC's US revenues under pressure, the pipeline awaiting to unfold looks interesting. Lupin has been investing in the inhaler as well as derma space and believes it will start rolling out products from next year (in the derma space especially). With over 100+ ANDAs awaiting approval, it also makes LPC well poised for the pricing pressures currently seen in the US market. LPC is currently trading at 18.5x FY18E EPS.
Natco Pharma (Natco)
Natco's two key businesses, India and US both look poised for strong growth going ahead. Domestic is expected to post ~40% CAGR purely led by Hep C portfolio. On US front, we see Copaxone 20mg approval to come in near term (as indicated by Mylan). We see US revenues growing ~10x+ from US$ 12mn to US$140mn in next two years (FY16 to FY18e), mainly led by Copaoxne 20mg. We continue to believe that Natco is set to witness a robust expansion in revenues as well as profitability and is on the verge of entering the league of mid pharma companies in terms of size and profitability over the coming years. Natco is currently trading at 26.4x FY18E EPS.
Sun Pharma (SUN)
Sun has many catalyst going ahead ranging from its benefits and synergies from Ranbaxy integration to its novel drug launches (MK3222, Odmozo) apart from strong growth in base business, but the coming 1-2 quarters would remain challenging due to receding limited competition revenues. Sun has been under pressure ever since the Halol issues cropped up. The key trigger for Sun would remian Halol clearance, post which we expect ANDA approvals to pick up. The stock is the most attractively priced amongst its peers and trades at 18.4x FY18E EPS.
Torrent Pharma (TRP)
We have been of the view that Torrent would be facing headwinds in US revenues in FY17E due to pricing pressure and beyond FY17E due to lack of launches given a slim pipeline (mere 21 ANDAs awaiting approval). TRP has also been filing at a slower pace (filed 1 in 1QFY17 and 5 in 2QFY17, none in 3QFY17). This will remain a key concern for Torrent and will continue to weigh on valuations. The stock is currently trading at 20.8x FY18E EPS.
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