Why pharma?

Things have gotten bad to worse for the pharma sector. First, there were price erosions in the US and to compound problems were US FDA warning letters and import alert for some companies.

To add to the misery, the rupee has also been gaining ground against the US dollar, which is impacting margins. Clearly, all this has not played out well for the pharma sector.

Competition from new and existing players could add to the worries in the coming years. However, the sector remains an interesting player as we believe that the rupee could depreciate and also for the following reasons. 

Why bet on pharma?

The pharma sector has worries no doubt. But, take the fact that stock prices have almost halved in most cases. Stocks like Lupin and Sun Pharma have seen steep erosion in their share prices. This means most of the bad news may already have been factored into the stock prices.

Most of the companies in the sector also have high promoter holding and low equity base which tends to push prices higher faster. One of the key factors that could push growth higher for these companies is the number of ANDA filings in the US, which when approved would mean more product launches.

Which pharma stocks to buy?

Aurobindo Pharma shares have been very much resilient to sharp drop in prices, because it has a very diversified product range. What this also means is that it does not depend on a few products to push growth.

However, the stock has barely fallen. Sun Pharma shares remain attractive because of the push towards speciality products and less dependence on generics. It has taken over a few companies across the world, to largely push revenues in speciality products.

The company In-licensed Tildrakizumab (a monoclonal antibody targeting IL-23) from MSD for treating chronic plaque psoriasis- Filed with US FDA and EMA for European market. It also acquired Oncular Technologies, which now gives the company access to global rights for Seciera - for treating Dry Eye Disease.

This may hold the company in good stead in the coming years. One will also have to closely watch the Halol plant resolution, which may further provide impetus to the stock.

Lupin too looks attractive

The Lupin share price has almost halved from levels of Rs 1600 to Rs 870 for a number of reasons, including issues with the US FDA. However, the stock is now available at a p/e of just about 18 times one year forward earnings.

Large number of ANDAs and negligible debt on its books, is what makes the stock an attractive proposition. The company recently received warning letters from teh US FDA for its manufacturing facilities at Goa and Indore (Pithampur Unit II). We believe that once there is a resolution for the same, the stock should trend higher. A good bet at the current levels.

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