Nifty Pharma has outperformed the Nifty-50 by 50% since the start of 2020, stretching Nifty Pharma's 1-yr forward P/E to 29x vs. 10-year avg. of 24x, Emkay Global has said in a report.
"As Covid tailwinds recede, we expect outperformance to continue for a few select companies with exposure to high-performance segments in US and India. US generics market growth will remain constrained at ~3% CAGR despite a moderation in price erosion. Though most complex generics eventually get commoditized, we argue that specific subsegments such as respiratory inhalers/injectables offer a high-growth, high-margin window for the next few years," the brokerage has said.
According to Emkay Global, the India formulations business offers multi-decade double-digit growth as higher per capita income, awareness and health insurance penetration will increase pharmaceutical consumption. Companies with higher chronic exposure are expected to benefit immensely.
"Having the best of both the markets, Cipla, Dr. Reddy's and Lupin are in a sweet spot, in our view. We reiterate our Buy rating on Cipla and Dr. Reddy's and upgrade Lupin to Buy. We also upgrade Aurobindo to Buy as we believe that its business restructuring could unlock meaningful value," the brokerage has said.
Complex generic also get commoditized as developers and the US FDA move up the learning curve for a particular type of product (e.g., Topicals and Ophthalmics). However, the companies which entered these segments early benefited immensely from faster growth and higher profitability, Emkay Global has noted.