Three pharma stocks heal the pain with up to 16% returns, boost hopes for more

Representative Image

At a time when pharmaceutical companies have failed to attract investors due to weakening financials, three drugmakers — Aurobindo Pharma, Alkem Laboratories, and Zydus Lifesciences — have managed to achieve significant returns of 10-16 percent in the current year. This is noteworthy considering that the Nifty Pharma index has nosedived 15.5 percent in 2023.

However, when investors are on the hunt for sell-on-rise opportunities across the market amid expectations of muted returns in 2023, can these counters manage to fight the tide?

Let's examine what drove the strong outperformance of these stocks before we unlock their untapped potential for growth.

Analysts have identified a common factor among the three companies that prompted investors to lap up their shares — their relatively low valuations over the past few months.

Zydus Lifesciences also benefitted from the impact of the sales of Revlimid in the US, which supported its earnings in the third quarter. Furthermore, the company's management expressed optimism about increased sales of the drug in 2023, further bolstering investor sentiment.

Aurobindo Pharma's stock also benefited from declining trends in price erosion in the US market, as the company has the largest share of the US market in terms of the molecules and sales. According to Vishal Manchanda, a research analyst at Systematix Shares and Stocks (India), Aurobindo Pharma is positioned to become a key beneficiary of the easing price erosion in the US market, thanks to its strong presence.

Aurobindo Pharma and Zydus Lifesciences have delivered the highest returns in the pharmaceutical sector so far this year, about 16 percent each, vastly outperforming the rest of the pack. On the other hand, easing raw material prices and cheaper valuations helped Alkem Laboratories deliver nearly 11 percent returns in the year so far.

What's the way ahead?

Analysts seem to maintain a more bullish stance on Aurobindo Pharma and suggest that investors hold on to the stock. Manchanda anticipates further outperformance in the short term. Another analyst at a domestic brokerage who did not wish to be named highlighted that the potential launch of a generic version of Revlimid in FY23 will also act as a major positive trigger for the company.

In addition, Manchanda expects strong results from Zydus Lifesciences in the fourth quarter, attributed to its strong traction in the US market and seasonally strong period for its consumer business. Although most brokerages are positive on Zydus Lifesciences, some analysts are waiting for further clarity on Revlimid sales, new launches, and earnings in the fourth quarter to assess its potential upside.

The aforementioned unnamed analyst expects to see consistent returns from the two counters instead of another strong rally. Nonetheless, he believes that both Zydus Lifesciences and Aurobindo Pharma have multiple abbreviated new drug application (ANDA) applications in their pipelines, which could help them navigate any headwinds in the US market.

An ANDA application is submitted to the US Food and Drug Administration for the approval of a generic drug product.

Regarding Alkem Laboratories, analysts have maintained a neutral stance as they see no significant upside trigger in the near term.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.