5 Best Pharma Stocks To Buy Now For 38% Upside

The Silver Lining in Pharma Cloud

The Indian pharma sector has been facing tough business environment in domestic as well as overseas markets over the past few years. This includes higher competition, pricing pressure, channel consolidation in the US, increased regulatory scrutiny by global drug regulators and rupee appreciation over the past 18 months. The environment in the Indian pharma sector (IPM) has also been challenging due to price controls announced by Drugs Price Control Orders (DPCO). Due to these challenges, valuations in the sector have come down from the highs of two years. While several companies remain impacted on regulatory fronts and have concerns over their growth, there is an opportunity for investors to cherry pick stocks in the sector having strong compliance record and earnings visibility.

Complex drugs and Biosimilars offer great value

As the plain vanilla generics continue to face high competition, companies with complex drug portfolio offer long term growth opportunity. Companies with specialty pipeline – (1) Natco Pharma (Copaxone, Revlimid) and (2) Strides Shasun (most filings in GDUFA regime) and Biosimilar portfolio of Biocon (Trastuzumab, Pegfilgrastim, Glargine, etc.) offer strong growth visibility going ahead.

Diversified geographical revenue mix will be favored

Companies with the diversified revenue streams are likely to perform much better going ahead. The Australian market is attractive considering positive industry macros, favorable for Strides Shasun. The domestic market is likely to grow at 12.5% over FY18-20E and it remains attractive for Alkem. The drug research outsourcing industry appears to be appealing due to various tailwinds in the sector, positive for Syngene International.

While earnings growth is vital, it is dependent upon strong compliance and product portfolio in pharma sector. We favor businesses which are less affected by the pricing pressure or regulatory challenges. The rupee depreciation will bring additional upside lever.

We prefer (1) Alkem Laboratories – solid domestic franchisee, clear facilities (20.3x FY20E EPS), (2) Biocon – Biosimilar play (20.8x FY20E EPS), (3) Natco Pharma – complex pipeline and clear earnings trajectory (16.4x FY20E EPS), (4) Strides Shasun – diversified business (14.0x FY20E EPS), and (5) Syngene International – innovative research model (23.4x FY20E EPS).