Why are pharma stocks rallying? Surajit Pal explains

Investors should look at companies with US business along with growing domestic firms, says analyst at Prabhudas Lilladher.

What do you make of the rally in the pharma space?
Pharma stocks are being favoured because investors’ risk appetite has become lower and lower. There is a dearth of any other sector which can provide proper hope in terms of earnings growth; not necessarily price growth. Third point is that the pharma sector is also seeing some improvement of their businesses in the US market. It may not be that great but the US market provides good revenue in US dollars which will be a bonus.

Let us talk about this entire development that has come by in the United States where state attorney generals have sued generic drug makers for inflating prices. Taro is one of them that has an Indian connection but Mylan and Teva are among those that have been accused of price fixing. In such a time when pharma has taken so much priority, how do you see it essentially pan out for pharma players?
It has happened many times but I think majority of the times what Indian companies have got is that given the track record, it is not a very big thing to regulate it. It is mainly some $20-30-40 million max and then those things are very much taken in stride given the size of the Indian companies over there. Overall I do not think it is something really very concerning because it keeps on coming for many companies including Indian companies for the last 15-20 years and ultimately at the end of the day you go for out of court settlement. I have not seen where it really broke somebody’s back. It is a maximum of $20-40 million that could be taken as a one-time thing and go ahead.

How would you approach the market or these pharma stocks after the run up that you have seen?
I would suggest companies with US business which have been beaten black and blue for the last three-four years along with domestic companies which have been growing and have taken good initiatives and have given them a good base to grow. I will bet on some of the companies which have a mid to lower level price level of the brand as well as good exposure to generic products in the domestic market. So I think these are the guys who will be best among the lot and it will be the guys who have a diverse portfolio across the world. So I think there will be a risk return perspective safest followed by the guy who will have mostly domestic exposure.

How would you essentially look at the rerating because till now earnings upgrades have not come. How would you look at the earnings now?
PE multiple is basically your perception of risk. So in pharma companies, if you go buy Lupin, for example, people are mainly going by FY22 numbers; FY21 everybody knows is a washout and the first half will be the worst. So FY22, everybody is assuming that globally the demand will better off than in FY21 and from that multiple perspective, you can expect 22 to 24 multiples for the large Indian majors in the pharma space.