Warren Buffett's firm buying big into drug stocks. Should you too?

NEW DELHI: Legendary investor Warren Buffett's Berkshire Hathaway has invested in four large drugmakers in the recent months.

Latest investment data showed the Nebraska-based company bought into Merck & Co, Pfizer, Abbvie and Bristol-Myers Squibb during the September quarter. This has made domestic investors wonder whether domestic pharma stocks can still more returns on the back of the recent strong rally.

While there are concerns as to whether pharma stocks are fully pricing in a Covid windfall, analysts suggest Indian pharma isn’t just a Covid theme, but beyond that. They still find many pharma stocks that can be bought at current levels.

Nomura India has cut its weightage on the pharma sector, but still holds an overweight rating on it. In its latest equity strategy report, the brokerage said the earnings upcycle in frontline pharma companies -- after a significant downcycle over last 4-5 years -- is here to stay.

The brokerage said the market would attribute higher valuation multiples to the pharma stocks, as there is further earnings visibility over next 12 months.

The brokerage has limited its top picks to the frontline companies with sustained earnings recovery, such as Dr Reddy’s Labs, Lupin and Sun Pharma. It has removed Jubilant Life Sciences and Glenmark Pharma from its portfolio.

Data showed the Sun Pharma stock has gained 63 per cent from its 52-week low of Rs 315 hit on March 23, but is still down 57 per cent from its April 2015 highs, as per the adjusted price data available with AceEquity.

In the broader market, equity benchmarks Sensex and Nifty have been hitting new highs every other day.

Lupin shares have climbed 79 per cent since March 19 but are down 57.4 per cent from its October 2015 levels.

The stock of Dr Reddy’s, meanwhile, hit a fresh record of Rs 5,514.65 but is still trading 11 per cent below those levels. Jubilant Life Sciences has recovered 206 per cent from its 52-week lows, while Glenmark has gained 189 per cent. The two stocks are down 30-60 per cent from their lifetime highs.

“Covid-19 might have given pharma an additional tailwind, which got reflected over the past quarters and might even show up in a couple of quarters more to come, but that will normalise going forward. The domestic pharma companies have done a wonderful job in cutting costs. There might be some bunching up of orders partially due to Covid, but the undeniable fact is India is fast emerging as a generic powerhouse,” he said.

Dharamshi said the pharma pack may see some consolidation rather than a steep correction in the pharma sector, until the story starts picking up again. “We are not very sure what percentage of growth that we have witnessed in the past couple of quarters will sustain. Once the market gets a better sense of that, there will be more to come. Pharma can give very good returns even from here on,” he said.

Credit Suisse said India aims to administer 40-50 crore vaccine doses by July-2021. The key vaccines India is banking on are from Oxford/AstraZeneca, Novavax and J&J (temperature range is 2-8°C) and the earliest efficacy data is expected by end of November 2020 and December 2020, while vaccines can be rolled out in January in the best-case scenario.

The global brokerage said Aurobindo’s large viral vector vaccine facility (30 crore doses) should be ready by March-April next year. “The pricing could be higher in the export markets than in India, and profitability could be at Rs 20-25 per dose. Therefore, on a 30 crore dose capacity, Aurobindo could benefit from a potential Ebitda of Rs 600-750 crore, which would be 12-15 per cent of FY22 Ebitda,” it said. This brokerage has upgraded Aurobindo stock to ‘outperform’ from ‘neutral’.

It said Cadila also has a facility to make 10 crore doses, but it is for DNA vaccine and, therefore, it would not be able to manufacture vaccine from global players in the near term. “Cipla and Cadila have benefitted the most from the sale of Covid-19 treatment drugs (especially Remdesivir) during the September quarter and volume should drop substantially in FY22 on rise in vaccination,” CS said.

Ajay Srivastava, CEO, Dimensions Corporate Finance, wants to play the M&A theme in the pharma space with Tier-II stocks.

“You will not find the kind of returns coming from Sun and Dr Reddy’s; they will disappoint you. Shift your portfolio down to tier-II pharma companies more on the manufacturing side, which are going to get a major boost including the PLI. Do not lose hope on pharma. It is there to stay and you will get lots of good surprises from takeovers. PE players are gunning for those companies. Buy and keep, and you will get an offer very soon in the mail,” he said.