Earnings watch: Which pharma co is in pink of its health?

In an interview to CNBC-TV18 Bino Pathiparampil of IIFL shared his expectation from various pharmaceutical companies ahead of their earnings. 

He expects Ranbaxy to report a reasonably good quarter on back of benefits from Lipitor one-off exclusivity in the US. However, he cautions that the company might take longer to boost its margins and operations. Sun Pharma is seen posting 30% plus growth quarter partly aided by a strong earnings of its US subsidiary Taro Pharma. Further, if one considers the headline numbers of Wockhardt, the valuation of the stock is cheap and there could be material upside if there are no major issues left on the balance sheet side, he added. Meanwhile, Pathiparampil is bullish on Divis Labs, Dr. Reddy’s and Glenmark. Below is the edited transcript of Pathiparampil’s interview with CNBC-TV18. Q: What is your expectation from Ranbaxy and Sun Pharma? A: Ranbaxy should possibly see one more quarter of benefits spilling over from the Lipitor one-off exclusivity in the US. It should be a reasonably good quarter, but apart from that I don’t expect a significant improvement in the base business because it’s going to take some more time to improve margins, operations etc. Sun Pharma should have another very big quarter continuing in a sequence of about eight quarters. They should have a great 30% plus growth quarter partly aided by a strong set of numbers that have already been reported by their US subsidiary Taro Pharma. Taro Pharma reported about 47% top-line growth and 52% EBITDA margin. This should support Sun’s numbers in this quarter as well. Q: What about Ranbaxy, you think the good news is in the price? A: In case of Ranbaxy there are a lot of moving parts. The good news was that they were able to monetize the Lipitor opportunity at least to some extent. But still there are questions being raised about whether they will be able to monetize the Diovan opportunity, actos opportunity and all these are big one-off opportunities in the US. They have already given up another big opportunity provigil this year and plus the issues on the base business side. The EBITDA margins of the company excluding these one-offs in the US are still in single digits versus other companies that is anywhere between 20-35%. All these moving parts need to fall in place for Ranbaxy to be a comfortable buy at these levels. Q: Wockhardt, strong numbers even fundamentally and has seen a strong run in terms of stock price from this year itself. A lot of analysts had stopped covering this stock. Would it be something which you all would possibly consider again or you in particular would consider again? A: There are a lot of things that are changing, their business per se has improved plus the reason for the run up was also that the stock was priced to the level of bankruptcy for the company if you go a year back. But apparently the company has come out of a lot of those issues on the balance sheet side. A lot of debt issues have been resolved, but yet the complete details of these are yet to be out. As more and more clarity emerges from the company regarding the issues being sorted out on the balance sheet side, I am sure interest on that name will go up. All these details are required for a proper valuation of the company. I would think that majority of the investment crowd would wait for more details as the annual report releases from the company combined. Q: From what is known about the company do you think it has priced that positive? A: If you look at headline numbers, the valuation of the stock really is cheap and there could be material upside provided there are no major issues left on the balance sheet side. _PAGEBREAK_ Q: Do you have a call on any of these stocks Aurobindo, Ipca Labs as well as Divis Labs? A: Among these I would strongly recommend Divis Labs where I believe the growth visibility is at its best. Their first quarter numbers are out. They had a good revenue growth, but more importantly, margins were better in the quarter and EBITDA line growth was 43%. Even if you adjust for any kind of benefit from rupee depreciation still those numbers were great. Management continues to be very confident of a 25% growth at constant currency rate. At current level of rupee that should transform to more than 30% growth. Given the company’s history of maintaining strong return on invested capital and given that the company is investing heavily into building of new facilities, I believe similar growth rate that is 25-30% growth rate can be sustained for next 2-3 years. While the stock is actually richly valued the growth outlook can provide more upside to the stock over the next 1-2 years. Q: Cipla surprised the street positively this quarter. Do you cover that stock? Would you have a view on its current price? A: Cipla’s numbers in the quarter were very good, but I would rather wait for one more quarter or maybe two to figure out if there was a major one-off element in the numbers. The company has confirmed that it contained a one-off element of Lexapro supply to Teva in the US under 180 day exclusivity. But the extent of contribution that has come in from there is yet to be clear. Having said that, their domestic growth numbers were very good - 30% YoY which obviously is not a sustainable rate of growth, but still shows a strong growth momentum that is picking up in the company’s domestic business which is a positive. That positive is likely to stay in the medium-term. Q: Dr. Reddy’s, post the Mexican facility coming back on track or getting that US FDA nod, how would you rate it? A: Among all the large cap pharma stocks I believe that Dr. Reddy’s stock is probably the best positioned as of now because it is trading at a 25-30% discount to most of its peers. If you compare it to Sun Pharma it may be at a 50% discount. This discount is unjustified and based on certain assumptions of the company’s growth, which may not be true. The company’s growth potential is not worse than any of its peers. As more product launches pickup in the US, as we see more sustained growth coming in from markets like India, Russia and other emerging markets, we will see a closing in of this valuation gap, which should give good returns. The clearance of the warning letter to Mexican facility is an add-up positive. It means that it can resume supply to the US and contribute to growth in the near term. Q: Do you cover Glenmark? A: Yes. The numbers were pretty good. They had a very strong quarter, very good growth in the US market. Domestic market growth also surprised. Overall it’s a very good period going on. The EBITDA margins were really strong. For the full year EBITDA margins may not see that kind of expansion, but if they maintain this kind of performance and at the same time maintain their focus on continuous improvement on the balance sheet then we could see some upside in the stock price.