Prakash Agarwal, Equity Analyst - India Pharma, RBS is positive on Lupin and advises investor to buy on dips. In the largecap space, Cipla is his top pick He has a target price of Rs 371 on the stock. In the midcap space, he likes Glenmark Pharma .
However, he is bearish on Dr Reddy’s . He has a 'sell' rating on the stock.
Below is the transcript of his interview Latha Venkatesh and Anuj Singhal. Also watch the accompanying video.
Q: You have a ‘sell’ rating on Dr Reddy’s, could you take us through a view on that?
A: Our sell rating is based on two-three main parameters. First, we have been underweight on the stock due to its weak business mix. If I look at business mix, 34% of the business revenues come from PSAI (Pharmaceuticals Services and Active Ingredients) and Betapharm business, which is a German business. Now these two businesses have been de-growing year-on-year. The outlook is also muted because of extreme price competition.
What we have seen incrementally that these headwinds are now getting extended to the US markets where Dr Reddy’s has a strong foothold due to its robust US pipeline. Why I say the headwinds are reaching out because the USFDA actions have been very adverse. If we look at generic Arixtra, which is the Fondaparinox, the approval was due in January 2011, but it has been two quarters of delays. We as analysts keep on shifting the product launch quarter by quarter. So, there is no idea as to when the product will launch. It being a significant product and annuity based products being a part of its core earnings, so it is a big negative for the stock.
Secondly, the PSAI segment continues to be weak, incrementally due to warning letter received early June and now that warning letter converting into import alert. This would again lead to risk to our earnings and revenue estimates because we have factored in 7-12% recovery. But with this input alert, the production will stop and then you would see these earnings estimate at a risk.
Q: And how much might that reduce the earnings by? What is your price target? What is your earnings target as well?
A: We are looking at a one year price target at Rs 1,360. For this particular facility, if we look at the sales number is around USD 60 million, of which around 50% is for the US markets and 25-30% margin is what Dr Reddy’s get from this API-CRAMS piece. It boils down to 2% earnings decline from this facility.
Q: Let us talk about Lupin. That has clearly been one of the outperformers. We have been off-late getting good news also about Lupin, especially in the US market. What is the view on the stock and price target?
A: We have a ‘buy’ rating on the stock, price target is Rs 465. However, if you look at the recent outperformance, it is reaching our price target. The reason being there are couple of news flows, which are also backended. The recent news flow that came in today was the generic approval for 40 mg capsule. So, incrementally it adds on to the US portfolio.
However, the big ticket items which would come in the second half would be the oral contraceptive launch as well as the addition to the branded portfolio which is Allegra. So, put together there are newsflows, but execution has to be shown which we had seen some slippages in the past.
Q: What is the view on Lupin itself?
A: Lupin, we are positive. But we are saying to buy on dips as it is nearing our target price.
Q: What really is your best buy in the pharma space?
A: In the largecaps, we have Cipla as our top pick with a buy rating and target price of Rs 371. Its domestic franchise is very strong and it is sustainable where we are positive from the pharma outlook perspective which gives you consistent growth.
The second is the inhaler upside is now catching up with its 11 filings in the European market and two approvals in the combination space and South African and Russia. Wth that I think the inhaler upside,which I believe the street is not factoring in, ould give a positive surprise.
.
Thirdly, the M&A play, if you look at Abott buying Piramal at 7.7 times, if you look at domestic franchise of Cipla, if you do similar multiples, it itself is around Rs 290 a stock, only a domestic franchise which is 48% of the total revenues. There could be multiple triggers for the stock, either from the M&A side or from the organic growth side.
Q: What about Sun Pharma ?
A: We like the stock. We upgraded the stock sometime back to hold. We like the stock, but it is little expensive.
Q: What would be your best pick in the midcap pharmaceutical space?
A: We like Glenmark in the midcap space. I think there is a re-rating happening with the stock, both in terms of the core business as well as the R&D initiatives.
However, he is bearish on Dr Reddy’s . He has a 'sell' rating on the stock.
Below is the transcript of his interview Latha Venkatesh and Anuj Singhal. Also watch the accompanying video.
Q: You have a ‘sell’ rating on Dr Reddy’s, could you take us through a view on that?
A: Our sell rating is based on two-three main parameters. First, we have been underweight on the stock due to its weak business mix. If I look at business mix, 34% of the business revenues come from PSAI (Pharmaceuticals Services and Active Ingredients) and Betapharm business, which is a German business. Now these two businesses have been de-growing year-on-year. The outlook is also muted because of extreme price competition.
What we have seen incrementally that these headwinds are now getting extended to the US markets where Dr Reddy’s has a strong foothold due to its robust US pipeline. Why I say the headwinds are reaching out because the USFDA actions have been very adverse. If we look at generic Arixtra, which is the Fondaparinox, the approval was due in January 2011, but it has been two quarters of delays. We as analysts keep on shifting the product launch quarter by quarter. So, there is no idea as to when the product will launch. It being a significant product and annuity based products being a part of its core earnings, so it is a big negative for the stock.
Secondly, the PSAI segment continues to be weak, incrementally due to warning letter received early June and now that warning letter converting into import alert. This would again lead to risk to our earnings and revenue estimates because we have factored in 7-12% recovery. But with this input alert, the production will stop and then you would see these earnings estimate at a risk.
A: We are looking at a one year price target at Rs 1,360. For this particular facility, if we look at the sales number is around USD 60 million, of which around 50% is for the US markets and 25-30% margin is what Dr Reddy’s get from this API-CRAMS piece. It boils down to 2% earnings decline from this facility.
Q: Let us talk about Lupin. That has clearly been one of the outperformers. We have been off-late getting good news also about Lupin, especially in the US market. What is the view on the stock and price target?
A: We have a ‘buy’ rating on the stock, price target is Rs 465. However, if you look at the recent outperformance, it is reaching our price target. The reason being there are couple of news flows, which are also backended. The recent news flow that came in today was the generic approval for 40 mg capsule. So, incrementally it adds on to the US portfolio.
However, the big ticket items which would come in the second half would be the oral contraceptive launch as well as the addition to the branded portfolio which is Allegra. So, put together there are newsflows, but execution has to be shown which we had seen some slippages in the past.
Q: What is the view on Lupin itself?
A: Lupin, we are positive. But we are saying to buy on dips as it is nearing our target price.
Q: What really is your best buy in the pharma space?
A: In the largecaps, we have Cipla as our top pick with a buy rating and target price of Rs 371. Its domestic franchise is very strong and it is sustainable where we are positive from the pharma outlook perspective which gives you consistent growth.
The second is the inhaler upside is now catching up with its 11 filings in the European market and two approvals in the combination space and South African and Russia. Wth that I think the inhaler upside,which I believe the street is not factoring in, ould give a positive surprise.
.
Thirdly, the M&A play, if you look at Abott buying Piramal at 7.7 times, if you look at domestic franchise of Cipla, if you do similar multiples, it itself is around Rs 290 a stock, only a domestic franchise which is 48% of the total revenues. There could be multiple triggers for the stock, either from the M&A side or from the organic growth side.
Q: What about Sun Pharma ?
A: We like the stock. We upgraded the stock sometime back to hold. We like the stock, but it is little expensive.
Q: What would be your best pick in the midcap pharmaceutical space?
A: We like Glenmark in the midcap space. I think there is a re-rating happening with the stock, both in terms of the core business as well as the R&D initiatives.
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