Citi view: How pharma sector is looking post Q4 debacle

In times when the market has been volatile, pharma sector has been a safe haven for investors.

Speaking to CNBC-TV18, Prashant Nair, director and deputy head of research at Citi India said that valuations in the sector have held up well barring a few short-term swings.

Nair said that re-rating could be seen for small and midcap pharma stocks like Ipca Laboratories and Glenmark.

Commenting on Wockhardt, he said that the stock valuation has been largely affected due to the USFDA issue. He expects no re-rating for a few quarters until their plant was back to full steam. However, he sees no downside to the stock post the re-rating.

For Ranbaxy, he said that the worst was over for the company but will take time for the noise (regarding Indian drug authorities probing their plants) to settle down.

Also read: Mkt focus on exports; bet on IT, pharma: Dipan Mehta

Below is the edited transcript of his interview to CNBC-TV18.

Q: This (pharmaceutical stocks) seems to be a safe haven for the market, in times of the downturn. What are the current valuations within this space? Have you seen a shave off on premium with negative sentiment on individual stocks?

A: Barring very short-term swings, valuations have generally held up well for the sector.

There are the odd stocks where valuations have come off due to some stock-specific news flows like (in the case of) Wockhardt recently. But other than that the sector has held up quite well in terms of valuations.

Q: Do you see any upside to the current valuations?

A: Re-rating is difficult; especially in the larger names. Some rerating or upside to valuation for small and midcap pharma stocks like Ipca Laboratories, Glenmark Pharma can be seen.

They have been executing well while the gap with the larger names has widened off-late.

Q: What is your call on Wockhardt? Do you expect the US Food and Drug Administration (USFDA) news and the follow-through in India to be a big overhang?

A: The news will be an overhang for sometime on valuations. This will be at least till some clarity on the actual impact in a couple of quarters come through and we can gauge whether the actual impact is inline with our expectations.

The decline in the stock over last month has been factored in by the hit from the FDA issue. It could take some time for the plant to come back on stream, but our valuations now build at it.

We may take a few quarters before we see a re-rating. But there won’t be too much downside from here.

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Q: Dr Reddy’s Laboratories and Lupin have seen strong run up. What is your call on those two stocks?

A: We like both stocks but prefer Lupin more than Dr Reddy’s Laboratories. Lupin has a well balanced business model. They are strong, not just in the US but also in the other markets that they exist.

On Dr Reddy’s Lab; the US will continue to throw up very strong drivers of growth. We expect chunky product approvals (for Dr. Reddy’s) to come through over the next 18-24 months.

Their businesses in Germany and in India are a bit of a concern. They seem to be lagging behind their peers. But, on the whole we like Dr. Reddy’s too.

Q: What about Ranbaxy Laboratories? After they were fined USD 500 million for felony charges, it was a wake-up call for the pharma space. The news continues to be negative since then. What is your opinion on the stock?

A: All the noise around the FDA issues post the settlement with the US Department of Justice (DoJ) has not helped the stock. It also has led to a lot of questioning among regulators around the world.

We need to give it sometime to see how this settles down and see how it manages the equations with their various regulators, convince them on drug safety and whether there is any impact on business at all.

The worst is behind them. We see no reason to change that. Some more clarity on the pace of the turnaround is needed. The noise currently (regarding Indian regulators probing their plants) does not help.

For some time in the near-term, this may be an overhang on the stock.

Q: You have downgraded Cipla. What is your call on their future prospects? What would be the big trigger of concern for you?

A: The firm is doing the right thing by front-ending more in their target markets overseas. Our downgrade is a combination of both valuations and that any significant growth is not seen over the next fiscal, unlike their peers.

Our issue with front-ending is; while this is definitely positive from a longer term perspective; its execution will take some time.

The gestation period will be long and probably a bit expensive as they now file abbreviated new drug applications (ANDAs) or registrations. It will probably hit their overheads a bit upfront before the benefits starts coming through.