Here‘s why Deutsche Bank is upbeat on pharmaceutical sector

Moneycontrol News Deutsche Bank is hopeful of better health of pharma stocks going forward due to easing regulatory concerns as well as actions by the US Food and Drug Administration (FDA). The brokerage remains constructive on stocks with superior earnings growth trajectory and strong execution track record. “We forecast the sector to post an 18% CAGR in FY16- 18 (20% CAGR over FY13-16), led by Sun Pharmaceuticals (32%), Aurobindo Pharma (21%) and Glenmark (45%),” the report said. Its top bets are Aurobindo and Sun Pharma, while it has a sell call on Dr. Reddy’s. The pharma sector had seen a de-rating of 30 percent from its peak in mid-2015 due to regulatory issues pertaining to Indian plants, Deutsche Bank said. “This phase comes after a difficult period of unresolved regulatory concerns, which led to delay in approvals and thereby impacted the outlook of the US business. While regulatory risks will always persist, the inspection outcomes seem to be less severe, thus allaying investor concerns around any US FDA inspections,” analysts at the firm wrote in a report. Deutsche Bank feels that large Indian companies have fared better during the recent inspections. Lupin, Cadila, Aurobindo, Glenmark and Cipla, on the other hand, have received lesser observations and have successfully resolved outstanding issues with the US FDA, it added. Going forward, the brokerage sees significant upside in Sun Pharma and Aurobindo on superior earnings growth expectations and low price earnings ratio (PER). “Lupin and Cipla have limited upside, despite healthy earnings growth forecasts, given their expensive valuations, while Dr Reddy’s (weak US business outlook) and Torrent Pharma (high base on account of gAbilify) have weak earnings growth trajectories.”On valuations, it said that Sun Pharmaceuticals and Aurobindo Pharma are trading at 18x/14x FY18E earnings per share (EPS) with strong earnings growth expectations of 30 percent/21 percent over FY16-18E, respectively.