Domestic pharmaceutical companies made a smart comeback this month with NSEs Nifty index soaring over 13 per cent in June so far. The sector was underperforming for last three years amid pricing policy in the US generics markets, patent protection and regulatory overdrive, among others.
The recent rally in pharma stocks is different, says CLSA. The global brokerage firm believes the stocks outperformed on the back of improving fundamentals in the US, which include recent good approvals for select companies and early signs of monetisation of R&D initiatives taken over the last 3-4 years.
Sun Pharma recently said the US Food and Drug Administration (FDA) cleared its Halol drug plant, which had been under supply restrictions due to quality control failures.
The company will now be able to restart supplies to its largest market, the US, from the Halol facility in western India, which contributed around 15 per cent to the company's US revenue in 2015.
Shares of Dr Reddys Laboratories and Sun Pharma have rallied more than 20 per cent in June so far. Other pharma majors including Cipla, Lupin, Cadila Healthcare, Glenmark Pharmaceuticals and Aurobindo Pharma have jumped between 10 and 18 per cent in the same period.
“Stocks that are well positioned include Sun Pharma for its specialty pipeline in US, Torrent for its India positioning and Dr Reddy's as a high risk/high reward trade,” said CLSA.
During May 2015-2018, Nifty Pharma index plunged 35 per cent with stocks falling up to 45 per cent. Limited new product launches in the generics space, GST introduction and higher costs associated with regulatory compliance also affected the sector during the period.
Some analysts see pharma as a good contra play in the current environment. Siddhartha Khemka, VP, Head of Research, MOSL, told ET Now, “If someone is looking from a contra perspective, pharma fits in that place perfectly well. The only challenge here is when they would start performing. We have seen bouts of performance from news flows coming in. But it is very difficult for an analyst to predict as and when the sector would come out of the woods.”