What has changed for the markets between the last day of 2020 and the first day of 2021? Hardly anything; except for the calendar.
Nonetheless, releasing a list of winners and losers at the end of every calendar year is a customary practice for many publications. And it’s a routine for market experts to pick stocks and sectors for the New Year. While there’s nothing wrong with this approach; over-information without adequate analysis often leads to confusion and decision-making paralysis.
Yet, it’s important at this juncture to analyze how many of the prominent trends observed in 2020 will become more relevant for investors in 2021. And it’s also crucial to evaluate how many of them will have a bearing on the portfolio of investors and to what extent.
In 2020, markets witnessed some crucial trends such as growing digitization of businesses at a large scale, emergence of WFH culture and reinvigorated hopes about domestic manufacturing, amongst others. However, the most crucial of all these remains the growing awareness about healthcare, on the backdrop of COVID-19.
Although affordability of drugs is a more sensitive issue across all economies—developed and developing alike—striking the balance between innovation and drug affordability has become the need of the hour.
Isn’t the whole world waiting for a vaccine?
And as you would appreciate, markets do sense shifts before they become prominently visible to people at large. Looking at yearly charts of a few large pharmaceutical companies, it appears that something is changing fundamentally for pharmaceutical companies and the sector is likely to remain in the limelight even in 2021 and beyond.
In 2020, Sun Pharma has witnessed the highest ever yearly volume (on NSE) since its listing? True, the price environment for generics may not have softened in the US but the company seems to be banking on new growth levers. Interestingly, it has reported the highest ever quarterly revenue in Q2FY21.
US and India revenue accounts for 30% each in the company’s top line while emerging markets contribute 18% and the remaining comes from the rest of the world. ILUMYA, one of the key products Sun has been focusing on, has been in the investment phase. According to the company, biologics for psoriasis is a USD 10 billion market in the US. In 2020, the company launched ILUMYA in Japan which is a much smaller market (~USD 500 million) at present but it’s growing at 20%-25%.
Sun Pharma has a strong product pipeline for the US business which includes 92 ANDAs (Abbreviated New Drug Applications) and 6 NDAs (New Drug Applications) awaiting approval from the USFDA. High value First-to-File (FTF) products offer unparalleled mileage. The company’s investment in R&D was a staggering Rs 613 crore—7.2% of revenue in Q2FY21. If Sun Pharma does well on these fronts in 2021, the stock may have tailwinds behind it.
Similar is the case of Alembic Pharmaceuticals. After depicting a range-bound stock price movement over the past few years, the stock market performance of the company has been stellar in 2020. Alembic Pharmaceuticals too witnessed the highest ever yearly volumes in 2020. Importantly, such market action was supported by spectacular quarterly numbers. In HYFY21 Alembic Pharma reported 28% growth in its top line and 72% growth in bottom line.
Given a significant jump in quarterly numbers, many investors had started questioning the sustainability of its revenue and profit growth. To address their concerns, the management deviated from its normal practice of not providing any guidance and hinted at it potentially achieving an EPS of Rs 60 in FY21. In H1FY21, the company had an EPS of Rs 31.9. In other words, Alembic Pharma expects H2 to be more or less a replica of H1.
The cumulative ANDAs filed by the company stood at 198 in Q2FY21 of which 131 have already received approval from USFDA on a cumulative basis. In H1FY21, the company has incurred ~Rs 335 crore of R&D cost, which is ~12% of its top line.
Further, it has guided that the EPS would fall to Rs 50 in FY22 but that would be on account of the scheduled commencement of new facilities, which would require the operating cost of Rs 450 crore. In other words, the company has hinted that there will be a big jump in the top line and bottom line in FY23, which will then become a new base.
Cadila Healthcare is one more pharma company that has seen huge investor interest (as reveled by the yearly trade volumes) in 2020.
Innovation has been the growth theme for the company. It employs approximately 1,400 research scientists and has 8 modern R&D facilities. In FY20, the company received an approval from the Drug Controller General of India (DCGI) for its New Drug Application (NDA) to treat Non-Cirrhotic Non-Alcoholic SteatoHepatitis (NASH). This is going to be the first-of-its-kind to be launched anywhere in the world.
Moreover, Cadila has one of the most comprehensive and diverse biologics portfolios. Its pipeline comprises 6 novel biologics and 21 biosimilars catering to critical therapeutic areas such as autoimmune diseases, oncology, nephrology, ophthalmology, rheumatology and hepatology, amongst others.
Pharma stocks have done well in 2020. But that doesn’t mean they won’t advance in 2021. In a world awash with liquidity, growth has become hard to come by. Companies delivering superior performance may continue to remain favourites with investors. Being on the right side of manufacturing compliance is the key for Indian pharma companies having a substantial presence in the developed markets. A complex product portfolio and cost effectiveness would matter too. But potential drug discoveries may have a joker-in-the-pack effect.
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
You may also like to read: Should you say Goodbye 2020 with GoodKnight?
Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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