Outlook 2024: The Indian pharmaceutical companies saw a favorable 2023 as their earnings were aided by growth in the Domestic and US markets catching pace. The headwinds on pricing pressure in the US markets did see some respite. With large product launches driving the earnings growth, the pharma companies also did see significant rerating.
With significant part of rerating having already taken place analysts don’t see similar rerating trend to continue in 2024.
Analysts at Jefferies India Pvt Ltd in their report on outlook for 2024 say that Pharma index outperformed Nifty by 14% in CY23 mainly led by valuation rerating. For US generics stocks, the long-term industry dynamics and growth expected from current drug pipeline do not support this rerating.
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With decreasing margin of safety, they have downgraded Dr Reddy’s to Underperform Ratings. They have upgraded Torrent to Buy from Hold on attractive valuations relative to peers. Lack of positive earnings surprise may keep pharma returns subdued in CY24 versus recent past, they said
2 Key reasons for the same as per Jefferies are
US generics market dynamics is unlikely to see any structural changes which justify higher valuations– Jefferies analysts believe that the lower price erosion witnessed by generic firms in the US in 2023 is mainly due to transient issues and not structural changes in the market. They believe companies that are seeing a resolution of manufacturing issues with the US FDA will return to the market sometime in 2HCY24
Underlying US growth from current pipeline does not support rerating- The implied FY26 estimated Enterprise Value to Ebitda valuation for core US generic businesses stands at an elevated 17-20 times for Dr Reddy’s, Lupin and Zydus as per Jefferies and this can only be justified through big ticket launches.
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Various large ticket size launches as those of oncology drug Revlimid (market size $8.7 billion) had benefitted many Indian Pharma manufacturers. Nevertheless competition is now creeping into the space. Also such large launces do not take place very often though product launch pipeline remains impressive for Indian pharma
Jefferies analysts have cut FY25-26 EPS by 3-7% for Dr Reddy’s mainly from lower US sales and weak traction in India.
With high visibility of 14% Ebitda CAGR over FY24-26, Torrent’s EV to Ebitda valuations have become attractive versus peers after its recent underperformance, sid anlysts at Jefferies
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions
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Published: 12 Jan 2024, 05:24 PM IST