Pharma shares in focus; Dr Reddy's, Divi's, Granules hit 52-week highs

Pharma stocks were in focus on Friday with the Nifty Pharma index gaining nearly 2 per cent on report that brokerage firm Citi has upgraded Dr Reddy's to 'buy' from 'sell' and Lupin to 'neutral' from 'sell'. The foreign brokerage also said that valuations of pharma companies look reasonable.

At 10:05 am, Nifty Pharma index was the top gainer among sectoral indices and was trading 1.6 per cent up as compared to 0.44 per cent rise in the benchmark Nifty50 index.

Dr Reddy’s Laboratories, Divi’s Laboratories, Granules India, Alkem Laboratories and Ipca Laboratories hit their respective 52-week highs today. Lupin, Sun Pharmaceutical, Cadila Healthcare, Aarti Drugs and Aurobindo Pharma were up in the range of 2 per cent to 3 per cent.

As earnings cuts continued for the fourth year (albeit moderating versus the past few years), Nifty Pharma fell 4 per cent in calendar year 2019 as compared to 12 per cent gain for Nifty during the period.

“While expectations have been reset lower, we see consensus earnings building in strong margin improvement in FY21-22 based on the execution of product launches in the US (generic and specialty), a turnaround of acquired assets and India growth sustaining,” analysts at JP Morgan said in pharma sector report.

“While the generic pricing environment has normalized (mid- to-high single-digit price erosion), the risks on the regulatory front increased through CY19. Outcomes from increased USFDA scrutiny and risks of pricing reforms in India could dictate stock performance in CY20. Besides regulatory risk, news on the Department of Justice (DoJ)/AG price fixing litigation are also headwinds for certain large-caps in the sector”, it added.

Meanwhile analysts at Emkay Global Financial Services expect October-December quarter (Q3) is likely to be another weak quarter for pharma companies.

“Revenues are expected to grow 5 per cent, while EBITDA to decline 6 per cent, the weakest in six quarters. With the US likely to remain under pressure given a sharp slowdown in new approvals and pickup in R&D spends, we expect margins to decline 40bps qoq, negating the positive impact from strong India growth,” the brokerage firm said in sector update.

The US continues to remain the primary earnings driver for Indian pharma companies and a full-fledged recovery still seems far as companies grapple with compliance-related issues, competition in base portfolios and a lack of meaningful approvals/launches. Further, the ramp-up in specialty portfolios has also been slower than anticipated, squeezing margins in the interim due to huge upfront costs. A meaningful recovery in overall earnings thus still remains elusive, the brokerage firm said.