Healthcare stocks have outperformed the benchmark indices since the start of the current financial year.
The BSE Healthcare Index is up 19 per cent as compared to BSE Sensex returns of 11 per cent during this period.
Nitin Agarwal of DAM Capital highlighted this trend in a report last month.
“After a sustained period of underperformance over FY21-23, the BSE Healthcare Index has once again captured the spotlight.
"The recent uptick in performance has been driven by hospitals and emerging green shoots in pharmaceutical exports, particularly to the US, along with sustaining momentum in domestic branded formulations,” he said.
Within this space, pharma players with major exposure to the US market such as Sun Pharma, Lupin, Zydus Life, Dr Reddy’s, Aurobindo Pharma, Torrent Pharma have been outperformers hitting their 52-week highs over the last couple of weeks.
The gains for this group of stocks are on the back of expectations that ongoing approvals including those for niche products, lower price erosion, and growth prospects in the US generic market.
The steady growth in the domestic formulations, too, is expected to benefit the companies given their enhanced focus on this market.
Elara Capital has turned positive on the prospects of these companies with a presence in the US generics market.
Analysts at the brokerage, led by Bino Pathiparampil, believe that the US market is witnessing the build-up to a major upcycle post a 7-8-year long downcycle. Key indicators – bunching-up of large, new product opportunities, withdrawal of players from low-priced contracts, rising incidences of product shortage, and underinvestment by players in future growth – have all congregated, says the brokerage.
They expect Zydus Lifesciences, Sun Pharma, Dr Reddy’s, Lupin, Aurobindo and Cipla to be the biggest beneficiaries.
Among key triggers are recent product approvals, which are expected to provide an incremental boost to revenues.
Last month, Lupin announced that it got approval for the generic version of dry powder inhaler Spiriva, which has a market of about $500 million.
Nomura Research expects the company to remain the only approved generic in the market for the next two years with the peak sales of the product in FY25-26 at $100-$120 million.
The brokerage revised the earnings and target multiple upwards for the stock.
Another example is that of Zydus Lifesciences, which got the approval for the generic version of the smoke cessation drug Chantix.
The drug has a market of $300 million and could be a $30 million drug for Zydus. The company also got the approval for breast cancer drug Palbociclib which has an estimated market size of over $3 billion.
The company is expected to launch about 10 high-value products, including two launches in the first half of FY24 and three transdermal products among others this year.
The medium-term also offers a $75 billion opportunity for major players as multiple drugs go off-patent in the FY23-26 period.
The market for these drugs is much larger than the FY19-21 patent-to-generic cycle, estimate analysts.
Relief on the pricing front in the current portfolio is another positive.
Brokerages believe strict action by the US Food and Drug Administration, or USFDA, following inspections has led to product shortages and price hikes.
Active drug shortages at 301 are at multi-year highs. Consolidation among drug makers in the US market has also helped support generics' prices.
While FY23 witnessed unprecedented levels of price erosion in the wake of consolidation in buyer channels and a decline in shortage opportunities, pricing pressures have begun to moderate even as volume dynamics remain unaltered, says DAM Capital.
The brokerage believes that companies with large US generic portfolios such as Aurobindo, Zydus, and Lupin among others are best placed to benefit.
Dr Reddy’s, however, believes that the US market remains price sensitive. Erez Israeli, CEO of Dr Reddy’s, according to JM Financial Research, points out that the nature of the US market has not changed dramatically as barriers to entry remain low and price sensitivity high.
Given the stock price run-up and mixed views on the price trajectory, investors should await firm trends before taking exposure to these stocks.
