Moneycontrol Pro Panorama | Cipla, Dr Reddy’s deliver a pep pill for pharma stocks  

The rebound in pharma shares is not being driven by the US alone. India, the other large market, is seeing a steady uptick.

The US market may be giving a difficult time to IT services companies, but pharmaceutical companies are seeing a gradual rebound in the market.

Take the case of Cipla and Dr Reddy’s Laboratories. Their June quarter results exceeded Street estimates, thanks to a healthy expansion in North America revenues. Importantly, managements of both companies expect the US business to maintain the positive momentum.

Cipla has raised the quarterly revenue outlook for the US base-business to $210-215 million from $190-195 million given in May. Dr Reddy’s, which reported a 25 percent sequential expansion in US sales, expects to maintain and grow revenues.

Their results and commentary have not only lifted shares of Cipla and Dr Reddy’s, but other pharma companies as well. The NSE pharma, healthcare indices were among leading gainers in Thursday trading. Sun Pharma, Aurobindo Pharma and Lupin, which have a sizeable US business, gained 2-5 percent.

The US drug market has seen a notable change in the past couple of months. The intensity of price erosion in the generic drug business has reduced. Drug shortages and supply chain readjustments are driving increased volume offtake by customers, said the managements of Cipla and Dr Reddy’s. Glenmark Life Sciences has also indicated improved demand and visibility for FY24.

More importantly, companies that are able to build a complex drug pipeline and can overcome regulatory hurdles are seeing good success in high value limited competition drugs. Generic Revlimid, used in the treatment of multiple myeloma, is contributing sizeable revenues to Dr Reddy’s. Similarly, Lanreotide injection, used in treating tumours, is aiding Cipla’s US sales.

The improving outlook for the US business is driving earnings upgrades. Cipla expects better profit margins in FY24 compared to FY23. Jefferies India and Nuvama Institutional Equities have raised earnings estimates of both companies for FY24 and FY25.

“(Cipla’s) chronic portfolio continues to gain strength and the US base business has moved to a new orbit. This is supportive for medium-term earnings growth, which makes us constructive on the business,” writes Anubhav Sahu in his Q1 results analysis. Do read.

The rebound in pharma shares is not being driven by the US alone. India, the other large market, is seeing a steady uptick. Companies are focusing on the branded generic drug business and licensed products to drive growth. While industry data points to subdued volume growth, as our Chart of the Day explains, easing raw material costs and sustained price hikes augur well for pharma companies.

Yet, the earnings outlook for large finished-dosage pharma companies are firmly anchored to the US market, the largest and most profitable drug market in the world. With the market seeing incremental improvement, investors have a solid reason to cheer.

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