Nithya Balasubramanian on 2 pharma names to bet on besides Sun & Cipla

"Outside Sun Pharma and Cipla, Gland has had a relatively much better compliance track record and we think this will play out as an opportunity for them and that is why we remain optimistic about the stock. The second one we are warming up to is the whole biosimilar story and Biocon, given their exposure in that space. I am seeing multiple product opportunities playing out positively," says Nithya Balasubramanian, Director, Sanford Bernstein

For pharma stocks, ex of Sun Pharma and Cipla, valuations are really out of whack. People do not have any confidence in the pharma stocks apart from these two. What would you make of this? What are the few things to watch out for?
Honestly I do not see much changing other than Sun and Cipla which have already separated from the pack. In terms of the structural story, it is hard to come by if I look at the rest of the sector. There are two names that we are watching beyond Sun and Cipla. One is Gland. It has obviously corrected meaningfully since the peaks of last year. There are concerns around more competition in injectable generics and a far more subdued outlook from the management themselves.

However, we continue to believe that the injectable generics will not become as competitive as small molecule generics. There is some resilience in this business and as we are seeing more FTA inspections happen, we are seeing multiple injectable facilities come under the scanner. Gland has had a relatively much better compliance track record and we think this will play out as an opportunity for them and that is why we remain optimistic about the stock.

The second one we are warming up to is the whole biosimilar story and Biocon, given their exposure in that space. Fortunately, there are not enough earnings catalysts to play out in 2023. In 2024, ‘25, ‘26, I am seeing multiple product opportunities which should play out positively.

But costs have gone up and that is reflected in the margins and somehow there has been no pick up in the US generics. Where are we in terms of the nature of the business of the companies. It is always cyclical, whether it is US generic or costings that companies work on?
US is unfortunately not a secular growth story unless you are participating in the Revlimid market which will be a limited time opportunity. Dr Reddy’s, Cipla, Sun, Aurobindo, Lupin are companies which will enjoy good margins in Revlimid and therefore we will see an uptick in the US business.

Other than that, unless there are complex generics in the pipeline like Cipla or to some extent Lupin, or if they are going after a specialty like Sun is doing, we do not really see a secular growth story in the US market.

One change we do see and we are hoping to see more of is hopefully higher investments in biosimilars and we are hoping that three to four years from now, the investments that go into today will create biosimilars as the next growth peg. But that is some time away and other than that, we do not really see a structural change in the growth story when it comes to the US market. However, on the margins front I have a different view. I think margins will look up. In the first and second quarter, people were sitting on high priced API inventory but when we look at data coming out of China, they have corrected quite a bit in terms of API prices.

So as companies have consumed the higher priced inventory and have now bought cheaper inventory, gross margins will look healthier in Q3 and Q4 and companies like Cipla, Alkem will benefit from their higher exposure where they have been able to take a 10% price hike. I believe margins will look up. Of course, the evolving Covid situation in China needs to be monitored. We do not know if we will go back to the scenario where we had higher API prices, but so far it is looking like the company should benefit from a reduction in API prices.

One thing that has surprised the Street over the last couple of years has been specialty pharma. The success over there, especially of Sun Pharma, on the complex side of the market. Will that be the key driver of value?
Sun Pharma is the only name in the Street which has meaningful exposure in this space. We do not call complex generics specialty because they are generics at the end of the day. When we are talking about specialty business, at least I am referring to branded assets in the US and Sun Pharma is the only one which has the exposure. Zydus also, to some extent but we do not cover the name.

We believe that at least in FY24 and FY25, Sun should be able to continue their growth trajectory. Ilumya has more to come and we are noticing some improvement in coverage for Winlevi which is a newer asset for acne in the US market. We believe a meaningful growth runway is left and the back of these two assets, we are hoping to see top line growth as well as operating leverage in the specialty business.

Beyond that, coming to the complex generics opportunity, Cipla and Lupin are most exposed. We like Cipla more than Lupin because at least in the near term, there are multiple assets waiting to play out. For Cipla this year, we are hoping to see generic Advair, generic Abraxane which is most likely in the price but beyond that, there will be a generic Qvar, there will be a generic Teriparatide and potentially a generic Flovent as well. As these products are approved, we believe that earnings upgrades will play out for Cipla.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)