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Like Torrent, Cadila, Dr Reddy’s in pharma space: Prakash Agarwal

Prefer pharma names with high earnings visibility, says Deputy Head of Research at Axis Capital.

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Last Updated: Apr 03, 2020, 06.06 PM IST
Prakash Agarwal Axis
What we have actually recommended in our recent report is that incrementally buy into largecaps, given the price correction that has happened.
Looking at what really is going on with the pharmaceutical universe. While clearly there were some demand-supply issues there as well, but largely the sector does have intrinsic value at a time when we are dealing with a pandemic like this?
Yes, we clearly believe that the demand side continues to be robust; be it the domestic market or exports market, especially the US. The near-term supply challenges have been there given the lockdown but industry participants are taking that extra initiative to continue the supply situation although at a lower pace.

Plus there are some tailwinds to the sector. We are seeing depreciating currency benefits coming in shape; then you have some supply opportunities in the US like the hydroxychloroquine (HCQS) and other products. So our view is, given the tailwinds and the demand scenario being strong, we would see relatively much lesser earnings cut versus what you could see in other sectors.

How does one judge what will be the reaction from USFDA post this crisis? Will they get more stringent? Will they get more open? As of now, our understanding is that the USFDA is clearly prioritising other medical approvals; no one's going to get any immediate approvals. So don’t you think this is going to be a challenge for Indian pharma companies who are exporting outside because the local Food and Drug Administration Authority in this case has different priorities for the next couple of months and quarters?
Yes. So there are two parts to it. One is clearly, local authorities require the drugs and some part of HCQS was banned and is still banned. But if you see, FDA is taking extra initiative; you saw them clearing the ban on HCQS for Ipca; so that was positive. A couple of days back you saw Biocon getting Malaysia plant clearance despite the lockdown; so that is positive. You also saw Cipla getting the phase-3 and they are looking for filing; so things are moving in the right direction.

In fact, for Lupin, you saw in the last two to three days; today they got the Aurangabad EIR and two days back they got this Florida inhalation unit EIR; so I think FDA is taking cognisance that there could be shortages and being lighter on some of the stringent measures that they might have had earlier.

Would you prioritise companies which currently are manufacturing chloroquine or the malaria drug, which the USFDA and other FDA feel has some scope when it comes to fighting the COVID crisis? Does it make sense for investors to buy into some stocks because in the next 10-15 days, if the world discovers that this is the real cure for coronavirus, then these stocks and these companies perhaps could hit the roof?
No, so without going into company specifics, clearly there are a couple of companies which have HCQS capabilities in India and globally, be it the US, Spain, China, these are used as preventive medicine by the healthcare workers; so this is the best shot available currently. So this is just a preventive medicine as of now.

How would you differentiate within the pharma space? You have got companies which essentially are in the business of contract research, you have got companies like Cipla which are in the business of emerging markets and pure generics, and you have got companies like Glenmark which are migrating towards R&D? So pharma is a very large space. When you say you are bullish on pharma, would you like to be specific in terms of what area of pharmaceutical or what supply chain of pharmaceutical you are slightly bullish on?
We continue to prefer high earnings visibility pharma stocks which I have divided into three buckets; one is domestic-focussed stocks where we have buy ideas on Alchemist and Torrent. The second one is diversified plays, which has a mix of India, US, rest of the world (ROW) markets where our top pick is Cadila followed by Dr Reddy’s. And then we have a high entry barrier business where we have Biocon as the top buy. What we have actually recommended in our recent report is that incrementally buy into largecaps, given the price correction that has happened. So we have recently upgraded Sun Pharma and Lupin to buy. This is more from a valuation perspective.

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