The miseries for pharma stocks just does not seem to end. We now have several stocks hitting 52-week lows with Lupin Ltd and Aurobindo Pharma, joining the likes of Dr Reddy's at 52-week lows. Other stocks like Sun Pharma and Divis are not very far from their 52-week lows. So, what do we do with pharma stocks?
If you want to go by valuations, pharma stocks are still not very cheap. Stocks like Dr Reddys, Divis Labs etc., are still pretty much expensive. The only stocks that still looks realistically priced is the stock of Lupin Ltd, which is trading at around 15 times one year forward earnings. We wish to clarify that the earnings could change dramatically on either side, which makes some of these stocks a good as well as a bad bet.
A lot depends on the US FDA
We mentioned that results could change dramatically and here are the reasons. Indian pharma companies get a substantial part of their revenues from the United States. Now, the United States, does not allow you to freely export to the US, unless they do a thorough quality check. So, the US FDA comes to India and examines the quality compliance of Indian pharma plants exporting to the US. If the quality of the drugs exported to the US, is not as per their stringent quality requirements a warning is issued and if rectification does not take place, an import alert is issued. This means a particular company cannot export to the US from that plant or facility.
Many top companies have faced import alerts
Many top pharma companies have either been issued warnings or import alerts in the past on select plants. Among these include names like Wockhardt, Sun Pharma, Divis Labs, Lupin, IPCA, Cadilla etc.
The trend has got worse in the recent past and recently Divis Labs received an import alert for its plant in South India. Of course, one can take remedial action and the import alert gets lifted and this has happened many times in the past. However, the process is long and does take time, so as to ensure that the import alert is lifted.
Stocks that you can still buy
Lupin is one stock that could still be a good bet at the current levels. The company recently received an approval from the US FDA to market Olmesartan medomoxil tablets in the US. This is for the treatment of hypertension and this opens up a new avenue for the company. The company has made good progress on complex generics and biosimilars. It has several ANDAs with the US FDA, which could boost revenues in the coming years. A growth in the Japanese markets also leave tremendous potential.
Valuations of Lupin
Lupin is among the few stocks that is not very expensive. The stock trades at a p/e of 15 times one year forward earnings. The stock recently has fallen from levels of Rs 1700 to the current levels of Rs 1264. At around the Rs 1200 levels, the stock would be an excellent long-term bet.
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