Nithya Balasubramanian, pharma and healthcare analyst, Sanford Bernstein, lists out his top picks in the pharma basket — Cipla, Dr Reddy’s, Sun and Lupin. She says that there is still room in these names as they have a strong pipeline in the US. Edited excerpts from an interview.
What are your thoughts on Gland Pharma IPO listing? Do you think that the strong return ratios are likely to continue?
Aspects like tech transfer ability, their ability to absorb a new technology and scale it up very quickly, the wide range of capabilities in injectables, the extremely reliable supply and fairly blemishless compliance track record are very important for their customers. Gland Pharma scores very well on all these fronts. It is an extremely strong company operationally. In injectables, there are enough opportunities in the developed markets as well as China. I think that 15-16 per cent growth in the next 4-5 years is possible. Backward integration has helped them drive operating leverage. The operating metrics should sustain in the near future.
Investors were expecting a market cap of just Rs 18,000-20,000 crore for Gland.
The IPO has been a bit of yoyo. I think investors were expecting it to list around the Rs 18,000-19,000 crore mark and then when the pricing was finally revealed it ended up being at Rs 23,000 crore valuation. There were reports that the grey market premium has gone down and the last week was also not the greatest one for pharma in general. It got listed at around 15x post money EV/EBITDA. If you look at the peer set and if you look at what they bring to the table, 16-17x is a fair number.
What are your top recommendations in the pharma basket?
From here on, it is about fundamentals. You need to pick companies which have a great pipeline in the US, strong commercial capabilities and leadership in the India market. My top picks remain Cipla, Dr Reddy’s, Sun and Lupin, in that order. There is still room in these names given that these companies have a very strong pipeline in the US. Thecomplex generic opportunities that a lot of us have been talking about for the last 3-4 years are now materialising. Those products have now hit the market, and companies are scaling up market share. These are extremely profitable opportunities as well. When it comes to the India market, both September and October had double-digit growth rates, a testament to the fundamental demand.
Companies with very strong leadership like Abbott, Sun and Cipla have done really well because of their exposure in Covid drugs. I expect them to continue doing well in the future as well.