Cipla, Sun Pharma among top pharma picks for Motilal Oswal as US sales to help boost growth | Mint
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Business News/ Markets / Stock Markets/  Cipla, Sun Pharma among top pharma picks for Motilal Oswal as US sales to help boost growth

Cipla, Sun Pharma among top pharma picks for Motilal Oswal as US sales to help boost growth

Motilal Oswal upgrades Cipla's rating to 'Buy', while Dr Reddy's, Zydus Lifesciences, Lupin, Aurobindo Pharma, and Torrent Pharma maintain their ratings. Sun Pharma retains 'Buy' rating.

Motilal Oswal has upgraded Cipla's rating to ‘Buy’ with a target price of ₹1,420. Premium
Motilal Oswal has upgraded Cipla's rating to ‘Buy’ with a target price of 1,420.

In its research on the healthcare industry, brokerage firm Motilal Oswal Financial Services questions whether US generics will reverse the tide for the pharmaceutical companies given that the market's prospects have recently improved.

According to the brokerage in the report, from the perspective of incremental business, the US generics market continues to be a product-specific play. This would effectively deliver growth while also offsetting the deterioration in the base portfolio.

However, a look at of industry-level approvals reveals a cautious stance towards this optimism. In contrast to the pre-Covid yearly run-rate of 670 products each year (CY17-CY19), the USFDA has approved roughly 420 products in 7MCY23 (about 725 annualised). Although it hasn't yet reached pre-Covid levels, the speed of inspection is picking up, suggesting rising regulatory risk.

The brokerage in its report noted that filings of coverage companies has reduced but approvals have recovered smartly. The number of filings by pharma companies covered by its coverage has fallen over the past seven years from 295 in FY17 to 183 in FY23 as companies reexamined the economic viability of particular products in light of increased competition and the high cost of filings.

"Sun Pharmaceutical Industries Ltd, Dr Reddy's Laboratories Ltd, Alkem Laboratories Ltd, and Ajanta Pharma Ltd have reduced filings in the US generics space over the past two years. However, Aurobindo Pharma Ltd, Zydus Lifesciences Ltd, Lupin Ltd and Cipla Ltd have witnessed a stable-to-increasing filing pace during the same period. Aurobindo Pharma has the highest filings in the US among pharma companies under our coverage with ~50 filings per year.

Interestingly, the approval rates have improved to 191 in FY23 from 115 in FY22, partly due to clearance of backlog by the United States Food and Drug Administration (USFDA). With reduced aggregate filings, we expect subsequent aggregate approvals to be on a downtrend eventually. Zydus Lifesciences and Aurobindo Pharma have seen a spike in approval rate in FY23 with 58 and 60 final approvals, respectively," the brokerage said. 

Players under this backdrop

Although the market environment is likely to remain competitive, the brokerage anticipates that over the next three to four years, product-specific opportunities will be the primary growth drivers.

Under this backdrop, Motilal Oswal has upgraded Cipla's rating to ‘Buy’ with a target price of 1,420. 

"Cipla’s robust ANDA pipeline with complex products (inhalers, peptides, injectable, etc.) should drive consistent growth in the US generics segment. This along with a steady outperformance in branded generics market (of India/SA) would enable 16% earnings CAGR over FY23-25.

Accordingly, we raise our P/E multiple to 25x (from 22x earlier; in line with its three year/five-year average) on 12M forward earnings and add g-Revlimid’s NPV ( 30) to arrive at our target price of 1,420. Upgrade to BUY," the brokerage said. 

Thr brokerage has a retained 'Neutral' stance for Dr Reddy's with a target price of 5,240.

"We expect 15% sales CAGR for Dr Reddy's over FY23-25 to reach USD1.7b, driven by market share gain in g-Revlimid and new approvals. We value Dr Reddy at 22x 12M forward earnings and add NPV of 140 related to g-Revlimid," the brokerage said.

The brokerage maintains its 'Neutral' recommendation on Zydus Lifesciences since the company's present valuation appropriately accounts for the potential for future earnings growth.

The brokerage reiterate  its "Sell" rating on Lupin with a target price of 830.

The brokerage reaffirms its 'Neutral' recommendation on Aurobindo Pharma on the back of acceptable valuation and its return ratio of 10% in each of FY24 and FY25.

Motilal Oswal reiterate 'Neutral' stance on Torrent Pharma due to limited upside from current levels. Further, reiterates 'buy' rating with a target price of 1,310 for Sun Pharma.

"Overall, we project 15% earnings CAGR fueled by a steady traction in specialty portfolio, superior execution across branded generics market, and 160bp margin expansion. We reiterate our 'buy' rating with a target price of 1,310 for Sun Pharma, " the brokerage explained.

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Published: 20 Sep 2023, 01:24 PM IST
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