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    API developers, complex generic makers best bets in pharma: Ravi Dharamshi

    Synopsis

    ‘Pharma which started as a valuation and under allocation story, has graduated to US generic revival and reduced regulatory issues theme.’

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    Suddenly drug shortages are developing and opportunities are suddenly coming up for Indian players who are well positioned to take advantage of these opportunities, says CIO, ValueQuest Investment Advisors.

    How should one read the news that has come out for Dr Reddy’s and Lupin last night and a couple of days ago for Cipla?
    Good news comes, stock prices rally, good news follows, stock prices rally some more and we keep building on what has happened earlier. Pharma which started as a valuation and under allocation story, quickly graduated to US generic revival and reduced regulatory issues. There is an opportunity thrown in with most of the corporates around the world adopting a China plus one strategy. Now the story has moved on to the next phase where suddenly drug shortages are developing and opportunities suddenly coming up for Indian players who are well positioned to take advantage of these opportunities.

    Even a year back, people were not willing to look at this space and suddenly now analysts are behind the curve and we are in an upgrade cycle. There will constantly be an upgrade cycle in the foreseeable future.

    What according to you is the right PE multiple for pharma? Every company has a different sectoral growth, unlike IT. What is the threshold PE multiple for pharma now?
    We should not get fixated on a number. I empathise with the analysts but I do not sympathise with them. Unfortunately they are trapped in an institutional imperative. But you should not get trapped in the imperative that I will buy at 10 multiples and sell at 20 multiples. That is not how the real world works. We work in an uncertain and imperfect world while analysts take an opinion only when everything is clear to them as to what is going to happen but that is not how the real world works. There are potentials and there are probabilities.

    I have no idea how strong this rally is going to be. I have no idea how large this opportunity can pan out to be. It all remains on delivery. I do not think a year back this China plus one strategy was such a thing. Now API CDMO is witnessing one of the strongest tailwinds. Some of the companies are growing at 50% CAGR. Even the smaller ones will start growing at 20-30% CAGR. I do not know how long this opportunity lasts and how strong this opportunity will be. So PE multiple will hold you back and it will stop you from investing in an opportunity where even from this point on there is opportunity.

    You have to look at your risk and your returns from this point on. Nobody can rule out a 10-15% correction. But if the potential over a longer term period is still above 50%, then your risk reward is still favourable and that is how I would be looking at it and let things pan out rather than put a number and try to pre-decide that this is where I am going to sell.

    Pharma is a complex sector with biogenerics, injectables, APIs and diagnostics. Where within the pharma space do you see a growth runway of the next two or three years?
    There are so many buckets and there are so many opportunities in this sector and at this juncture I feel the strongest tailwind is in the CDMO API sector. But from a longer term point of view, the juiciest story still remains in the complex generics. We do not know what opportunity will come up tomorrow. We are still working with the information that some inquiries have started; corporates all over the world are looking for an alternate supplier and people are moving to put one plant in India. It looks like this story has at least a few years of run way ahead of it. This definitely is a sector to look at from the longer term point of view. No doubt markets have recognised it, at least few people have and which has made the stocks rally in a crazy way.

    You can probably wait for an opportunity to enter or you can take a bet right now. If you can wait for a correction or consolidation, you can add to it if the story has improved further. The way to go about taking stock is to make a basket out of it. There is no way to say this will do better or that will do better. Make a basket out of it and see how things pan out and you can adjust along the way.

    Would there be a calibrated approach in terms of where you are seeing more opportunities or specific picks that you would be looking at? Would you be realigning those views given all the action that we have already seen?
    The story has just graduated to drug shortages and limited competition opportunities which were being factored in as optionality have suddenly now come to fore. So look at companies where these optionalities are present at this point of time and the market is not giving it value. Those should be the stories where if you had assigned a probability of this is not going to happen, it is time to assign a little bit of probability -- what if this happens and if that happens then? Most of the analysts look at Revlimid as one such opportunity which Dr Reddy’s has settled. It is a huge opportunity and there is now a possibility that it will not be an all-out competition but it will be an orderly gentrification of the opportunity and if that is the case, there will be enough and more for all the people to have a share of the pie. One has to figure out where that will be maximum and that is the company to buy.

    If a client sends you a big fat cheque and wants you to invest in pharma, would you invest that into pharma stocks which you own right now or will you wait for a 10-15% decline?
    Clearly, the stocks have run up and one has to be a little more calibrated and consider which stocks to buy and how much to buy. We follow a very concentrated portfolio approach and I can have 10-15-20% kind of weightage in one stock and I am not going to give that kind of weightage to a new portfolio that comes. But at the same time, do I believe that the opportunity has further leg to run? Yes and so I might give a smaller weightage and still continue holding on to these stocks and maybe wait for a correction, consolidation or some event to happen which might provide a better opportunity.

    So yes, I would calibrate, I would have presence in pharma for sure because that is where the bull market is but at the same time I would reduce the weightage to the story that we have been holding on the stocks that have already doubled and trebled for us there.

    Our understanding is that the USFDA right now is not coming up with any updates. What are the chances that when the US inspection and USFDA scrutiny start again. we could be in for some dismissive action and those FDA manufacturing concerns could come back?
    You are absolutely right. At this point of time, it seems that we have at least a clear pathway, if not six months, it could be 12 months also and we think at any point of time soon, that USFDA inspectors are going to start coming to India and start inspecting. Now at the same time. I do not remember the exact number but I think most of the 400 odd plants in India have undergone multiple rounds of inspections and most of them have been cleared. There are few that are remaining to be cleared but those companies have cleared the inspection elsewhere. Now it is not no longer an uncertain playbook. The companies know how to respond and they have gone through the experience in some other plant.

    So I think it is business as usual and Indians have adapted to it and more likely than not there will be positive news coming out once the USFDA starts coming and these plants are later in their cycle and they will probably get clearances. And the number of warning letters and all will reduce progressively going forward.
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    4 Comments on this Story

    Binu Pillai37 days ago
    In the pharma world, only those companies with USFDA, & those are debt-free, counts .. There are so many other FAILED companies also in the name of Pharma.. During bull market, all these bubble together (Venus remedies, Mangalam Drugs, Aarey Drugs, Parabolic, Morepen, etc.. long list ) and the investor fall in the trap..
    Prakash D37 days ago
    Fake recommendations and targets...
    Dhir Bhateja37 days ago
    In-depth analysis, I feel Cipla and Biocon should be on investors radar
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