Top Three Pharma Stocks To Buy Now: HDFC Sec Research Report

Robust India drives Q3

Q3 results reaffirms stable base business outlook for the US (for last 6 quarters) and strong trends for domestic formulations business (double digit growth at 11% for covered companies vs 9.5% for IPM).

R&D spends remain calibrated at 7.8% of sales (vs 9%+ in FY17/18) and EBIDTA margins improved 30bps QoQ. We forecast revenue/EPS CAGR of 9%/15% over FY20-22e for our covered universe. Torrent and Cipla are preferred Buys.

Key visible trends: a) aggressive push towards India business via acquisition/in-licensing/field force expansion, b) calibration of R&D spend – targeted towards specialty/key pipeline assets, c) increased compliance cost for US FDA plants.

Covid-19 outbreak – Immediate risk is limited but prolonged shutdown will have implications:

Indian Pharma Industry’s dependence on China for key starting material (KSM)/intermediates/ API is very high. Share of China in bulk drug and intermediates imports was ~67% at USD2.4bn in FY19 (source:DGCIS). In the event of extended shutdown, the industry faces risk of supply disruption and increased input cost.

Most companies have inventory of 3-4 months and are closely monitoring the situation. It is difficult to ascertain specific impact at this stage but a prolonged shutdown will impact the entire supply chain which could have knock on effect on the cost of goods produced globally.

We believe over a longer term the Indian API industry would stand to benefit as regulators encourage investments and incentivise the API industry to reduce dependence on China. Also, the cost arbitrage has narrowed between Indian and Chinese manufacturers given stricter environmental and compliance regulations in addition to increased labour cost in China.

Q3FY20 Review

§ Domestic biz of large cap pharma outperformed IPM and posted revenue growth of 11% YoY in Q3 (vs 9.5% for IPM).

§ US revenues largely reflected stable base business performance (+6% YoY and +4% QoQ).

§ Gross margins were flat YoY and QoQ at 66%.

§ EBIDTA growth was at -2.4% YoY and +1% QoQ and margins declined by 160bps YoY and improved 30bps QoQ for covered companies.

§ R&D expense were flat YoY and increased 30bps QoQ at 7.8% of sales.