In its recent analysis of the healthcare sector, renowned brokerage firm Motilal Oswal Financial Services has raised questions about the potential for US generics to drive growth for pharmaceutical companies, given the recent improvements in the market’s outlook.
According to Motilal Oswal’s report, the US generics market’s growth remains product-specific, offering opportunities for growth while offsetting declines in the existing product portfolio.
However, a closer look at industry-level approvals reveals a degree of caution. In the period leading up to the COVID-19 pandemic (CY17-CY19), the US Food and Drug Administration (USFDA) approved an average of 670 products annually. In contrast, there have been approximately 420 approvals in the first seven months of CY23, although this is on pace to reach around 725 on an annualized basis. While not yet back to pre-pandemic levels, the pace of inspections is increasing, signaling a rise in regulatory risks.
Motilal Oswal’s report also notes that while the number of filings by pharmaceutical companies under its coverage has decreased over the past seven years (from 295 in FY17 to 183 in FY23), approvals have rebounded significantly. Companies have been reevaluating the economic feasibility of specific products due to heightened competition and the high costs associated with filings.
The report highlights that Sun Pharmaceutical Industries Ltd, Dr. Reddy’s Laboratories Ltd, Alkem Laboratories Ltd, and Ajanta Pharma Ltd have reduced their filings in the US generics sector in recent years. In contrast, Aurobindo Pharma Ltd, Zydus Lifesciences Ltd, Lupin Ltd, and Cipla Ltd have maintained or increased their filing activities during the same period. Aurobindo Pharma leads in filings with approximately 50 per year.
Interestingly, approval rates have improved from 115 in FY22 to 191 in FY23, partly due to the USFDA clearing its backlog. With reduced aggregate filings, Motilal Oswal expects future aggregate approvals to decline. Zydus Lifesciences and Aurobindo Pharma have seen a surge in approval rates in FY23, with 58 and 60 final approvals, respectively.
Considering this market landscape, Motilal Oswal predicts that product-specific opportunities will be the primary growth drivers over the next three to four years. In line with this perspective, they have upgraded Cipla’s rating to ‘Buy’ with a target price of ₹1,420. Cipla’s strong ANDA pipeline, featuring complex products like inhalers and injectables, is expected to drive consistent growth in the US generics segment. Additionally, their performance in the branded generics market in India and South Africa is projected to contribute to a 16% earnings CAGR from FY23 to FY25.
Motilal Oswal has adjusted Cipla’s P/E multiple to 25x (up from 22x previously), aligning it with its three-year and five-year averages. The target price of ₹1,420 also factors in g-Revlimid’s NPV (₹30). This reclassification to a ‘Buy’ rating reflects their positive outlook.
For Dr. Reddy’s, the brokerage has retained a ‘Neutral’ stance with a target price of ₹5,240. They anticipate a 15% sales CAGR from FY23 to FY25, driven by market share gains in g-Revlimid and new approvals. Dr. Reddy’s is valued at 22x 12M forward earnings, with an additional NPV of ₹140 related to g-Revlimid.
Motilal Oswal maintains a ‘Neutral’ recommendation for Zydus Lifesciences, as they believe the current valuation adequately accounts for potential future earnings growth.
Lupin, on the other hand, retains a ‘Sell’ rating with a target price of ₹830, reflecting the brokerage’s bearish outlook.
Aurobindo Pharma maintains a ‘Neutral’ recommendation due to acceptable valuation and a return ratio of 10% expected in both FY24 and FY25.
For Torrent Pharma, Motilal Oswal suggests a ‘Neutral’ stance due to limited upside potential at current levels.
Lastly, Sun Pharma retains a ‘Buy’ rating with a target price of ₹1,310. Motilal Oswal projects a 15% earnings CAGR driven by strong performance in the specialty portfolio, effective execution in the branded generics market, and a 160bp margin expansion.
In conclusion, Motilal Oswal’s analysis points to a dynamic pharmaceutical market where product-specific opportunities are set to drive growth, with Cipla and Sun Pharma emerging as top picks in this evolving landscape.