Investors Prefer Mid Caps Over Large Caps In Indian Pharma Sector, Macquarie Says
Brokerage house Macquarie said Asian investors prefer mid-cap pharma companies over their larger counterparts where they remain cautious.
Most investors are wary of investing in the U.S. centric large-cap stocks after the massive stock price correction over the last one-and-a-half to two years, the Australia-based broking firm said in a report.
It said investors agreed with their view that the U.S. business of large caps still lacks triggers and further shocks cannot be ruled out, especially due to continued faster pace of approvals under Generic Drug User Fee Amendments II. GDUFA enables the U.S. Food and Drug Administration to assess industry user fees to bring greater predictability and timeliness to the review of generic drug applications.
Amongst the large caps, there is interest in Cipla; however, valuations remain elevated. Amongst the midcaps/small caps, Jubilant Lifesciences has been the most discussed name, followed by Strides Shasun and Ajanta, Alkem and Divi’s Labs.Alankar Garude, Pharma Analyst, Macquarie
The interesting observation that investors are making now is that they are looking at companies which will benefit from the GDUFA II norms and companies which have a high exposure to Indian business. A few investors also argued that even 20-22 times financial year 2018-19 earnings multiples are not justified, given the compressed margin profiles, return ratios and uncertainty around the timeline of specialty/complex pipeline.
On stock specific choices, there are only a few investors that are finding value in U.S.-centric large-cap pharma stocks such as Sun Pharmaceutical Industries Ltd., Lupin Ltd. and Dr. Reddy’s Laboratories Ltd. The general investor opinion is that facility clearance issues can crop up any time like it did with Lupin and Glenmark Pharmaceutical Ltd. For Sun Pharma, the overall perception is that resolution of Halol plant has already been baked into Sun Pharma’s stock price to a large extent.
On the U.S. FDA, the Increasing oversight is a worry for investors. Relentless focus of the FDA on indirectly bringing down drug prices by increasing competition is a concern. The data also suggests that pace of abbreviated new drug application approvals continues unabated.
Macquarie believes that challengers with smaller U.S. business and higher contribution from India are better placed than the incumbents. They recommend investors to be selective and focus mainly on mid caps like Jubilant Life Sciences Ltd. and Strides Shasun Ltd. Cipla Ltd. would be an attractive play, as 39 percent revenues come in from India and there is improving U.S. growth, the report said.