Nithya Balasubramanian's top 3 pharma stock picks

Sun Pharma, Cipla and Gland Pharma are the three largecap pharma stocks on which Nithya Balasubramanian of Sanford Bernstein is bullish on. Edited excerpts from an interview:

What are your top picks in the pharma pack? Which stocks do you think can get rerated?
We cover mostly largecap names. Our top picks right now are Sun Pharma, Cipla and Gland Pharma. The valuations are slightly at an elevated level, but we believe that there is a possibility of continued growth and momentum in earnings. This will be appreciated by the market as well. Sun Pharma's potential in the specialty business is undervalued.

When it comes to Cipla, the market is watching what will happen because of the second wave and the higher revenues that the company is going to enjoy because of that. We believe that the strength in the base business in India will start showing up in the later quarters. There is now increasing visibility in their respiratory generics pipeline.

Gland Pharma is a very different name. It is a B2B company. They are sitting on a very strong and resilient business model with very little exposure to pricing risk.

Can you elaborate on the base thesis for Sun Pharma?
The potential in their specialty assets is under appreciated. I am not saying that these are going to be blockbuster assets, but they can reach a respectable revenue level to a point where they can more than justify the costs that are already going into the P&L. When it comes to operational cost, most of it is in the P&L. You might see a slight increase because of D2C spends for Cequa, but other than that it is broadly stable when it comes to expenses. So any incremental revenue that you see from these assets is only going to give operating leverage and improved margins from here on.

Do you think that the India business of these stocks are under-appreciated?
I would not say a blanket statement that the India business is under-appreciated because a lot of companies with largely domestic exposure are commanding a premium valuation. It is justified because of the higher growth, higher profitability and rosy metrics. When it comes to Sun Pharma, I think their commercial muscle in India is under-appreciated. They are No. 1 across a lot of chronic therapeutic categories. Even if you look through Covid, Sun has been able to deliver 100 to 200 bps higher growth than the market.

Of course, they did not participate in the Covid therapeutics growth. If you remove the impact of Covid therapeutics, Sun has performed really well. It shows the kind of resilience that they have in their business.