TIME TO BUY PHARMA? 3 STOCKS FORUM PAREKH IS BETTING ON

Foram Parekh, Associate V-P, Sharekhan By BNP Paribas, says from the domestic pharma side, he likes Torrent and from the US side, Lupin and Sun Pharma. Zydus Life is also there. They like Sun because despite all the plant problems that this company is facing, its US specialty drug is doing good and it will continue to do good. Even it has new product launches coming up next month in the specialty side.

Zydus got the US FDA approval for an Edarbi drug. The stock is sitting at a one-month high level. The updates that we have got concerning the Q1 domestic as well as the import data suggest that this quarter is going to be strong. What are your expectations concerning Zydus Life and the stock movement going forward?

Foram Parekh: We like Zydus Life and we also believe that this quarter is going to be healthy for Zydus because its US business is doing good. Also, it has launched Mirabegron in the US market which is a very big product and almost has a market size of $1 billion. Zydus has launched it in two strengths – 25 and 50 mg and it is the sole player to launch in 50 mg.

So, this will reap the benefits in the US market and will lead to an increase in the margins. Also, it has many specialty products and novel products which are in the advanced stage of its clinical trials, which are expected to be launched in the near quarters. So, led by specialty and mirabegron sales in the US market, we feel that Zydus Life's US business is going to report a good set of numbers. Also, in India, wellness products are doing good, and other new product launches in higher MR productivity are expected to lead to above IPM growth for domestic sales. Therefore, overall Zydus Life will tend to report some 25% EBITDA margin. Therefore, we have a buy call on Zydus Life with a price target of almost Rs 1200.

What according to you is acting as a trigger for Lupin? The stock is on a tear today. It is a good 7% move. Many believe that there is a strong US trajectory that one could foresee for not just this financial year but even the next. But what is it that you are penciling in as triggers for Lupin?

Foram Parekh: We upgraded the stock a couple of quarters back and we continue to remain bullish on the stock. We have a target price of almost Rs 1868 on the stock because of a slew of new product launches that Lupin has got. Last year's earnings were backed by Spiriva. This year again it is going to be backed by Mirabegron which is almost a billion-dollar market size. Next year it will also have good ophthalmic products where it has exclusivity. Tolvaptan is one drug that is going to have exclusivity in a billion-dollar market size for next year.

So, because of the slew of product launches the plants have got clearance. These products are on the specialty side where they will not face much price erosion pressure and therefore EBITDA margin is expected to increase by almost 100 bps every year. And on a quarterly run rate, it will sustain a $200 million run rate and can even go north of a $10-20 million run rate. So, we believe that Lupin is a good buy with 1868 as a target price.

I know you do not actively track Wockhardt but it really kind of begs to ask this question given the fact that stock has run up 80-90% within a matter of a month. This, 5222 drug, what is the significance of this if you would want to talk about that? And any call if at all on Wockhardt as a share or what is happening in that company at the moment which could be a turnaround story perhaps?

Foram Parekh: We do not have the stock under our coverage. But yes, I read the updates and it is again a very good positive clinical trial for them which has led to a direct jump into phase three clinical trial for Wockhardt. So, because the results were very successful I think again it is the sole player in this drug with a large market size. So, the fact that US FDA has allowed to skip phase two and directly jump into phase three will lead to early commercialisation of the sales and therefore Wockhardt is on the tear.

But in your coverage universe other than the stocks that we have talked about, where else do you think there is value on the table and you would recommend a buy right now in any of the pharma names?

Foram Parekh: Lupin is one that we have been pitching buy on. Zydus Life is there. We also like Sun because despite all the plant problems that this company is facing, its US specialty drug is doing good and it will continue to do good. Even it has new product launches coming up next month in the specialty side. Deuruxolitinib is one drug that will be launched in a couple of months and it has exclusivity there which will lead to a global specialty portfolio going from almost 18% to north of 20%. So, as the specialty portfolio increases, the gross margin will also increase. Right now gross margin is at 80% which we feel can increase by 50-100 bps as more and more specialty product comes in and no company in the industry has almost 80% kind of gross margin.

We like Sun and we also like Torrent Pharma from the domestic side because the US will start contributing to Torrent Pharma as the Dahej plant has got clearance and Q-ratio is doing good which will lead to an increase in the domestic sales above the IPM numbers and also Torrent is one company which has almost 32% kind of EBITDA margin which no company in the industry has and sustaining such higher run rate is also commendable. Q-ratio is picking up and all its brands like Shelcal, Tedibar, and Unienzyme will now be sold over the counter in pan-India. That will also lead to the sustenance of higher margins. So, from the domestic side, we like Torrent and from the US side, we like Lupin and Sun.