GR Exclusive: Pharma Companies May Generate Mid-Teen Growth In 2024; Which Healthcare Stocks To Buy?

The outlook for the Indian pharma sector is positive for the year 2024. In the recent quarter, pharmaceutical companies have registered improvement owing to several factors such as improved performance in the US generics market, robust performance in branded markets, moderation in raw material costs, and market share gains in recently launched products. StoxBox analysts said these factors have recently contributed to the strong earnings of domestic pharma companies.

As we advanced in 2024, Prathamesh Masdekar Research Analyst at Stoxbox in an exclusive interview with GoodReturns.In said that many domestic-focused companies are expected to generate mid-teen growth in CY24 amid a focus on new product launches, pick-up in volume growth and improved demand for generics and branded products. Further, IPM data provides comfort on the outlook for the domestic formulations business, which accounts for ~50% of the revenue of large-cap pharma companies.

He also believes that the Acute segment growth rate is expected to grow mid-to-high single-digit growth and gain momentum going ahead, while the Chronic segment is expected to grow mid-teen growth, which is higher than the market on the back of large patent expiries, aiding support to IPM growth visibility.

To take advantage, he mentioned that pharma companies (Cipla, Torrent Pharma, Eris Lifesciences, and JB Chemicals, among others) have increased their chronic presence, focused on new product launches, and entered into new therapies. API companies are undergoing capex, which will aid in further top-line growth; a healthy product mix and softening input costs will sustain higher operating margins of ~20-30% in CY24.

In the interview, he said, "We expect India's business to report higher single-digit growth in CY24 driven by deferred acute demand, an uptick in the chronic segment, higher MR productivity, new product launches, and the expectation of a healthy flu season. The US market will continue to grow strongly due to the normalization of base business prices, field force expansion, continuous acceleration of gRevlimid, and the introduction of new products (gSpiriva, gPrezista) despite pricing challenges, intense competition, and stricter regulatory compliance requirements."

The analyst also sheds light that due to supply limitations, most business executives in the US have noted a sharp decline in price erosion, which is predicted to stay low for the remainder of CY24. Many companies are unlocking value for the shareholders. Sanofi is undergoing a demerger of its OTC segment, and Strides is expected to demerge its CDMO business in CY24.

Thus, Masdekar added, "We remain optimistic about the growth outlook of Indian pharma companies."

Masdekar has selected a few pharma stocks that are expected to sail positive in 2024. Here's what he said told to GoodReturns.In:

Domestic Formulation Business:

Indian pharma companies, such as Torrent Pharma, Alkem Lab, Eris Life Sciences, and JB Chemicals, are our top picks in the domestic formulation business. As we advance, Torrent's focus will include cost optimization to improve the tender segment's competitiveness, launch new products, and develop its OTC business. The Company expects mid-teen growth in the domestic region, ~12% growth in the Brazil market, ~10% growth in the German business and ~6-7% growth in the US region in CY24. Management expects to maintain gross margin at 70-72% and EBITDA margin at ~30% for the upcoming quarters. Going ahead, a strong presence in highly profitable branded business in domestic, Brazil, Germany and ROW markets and its completion of the Curatio acquisition will provide strong growth visibility. Moreover, the US business growth outlook is improving due to better scope for resolving regulatory issues.

On the other hand, Alkem's domestic and international businesses are likely to witness better trends, led by improving demand, increasing market share, and softening raw material costs. With India's business expected to grow at ~15% CAGR over the FY23-25E period, we expect margins to improve towards 18% by CY24 gradually. We also expect the US generics revenue to see near double-digit growth in CY24.

Moreover, we continue to be constructive on Eris Lifescience's plans to continue its strategic priorities for CY24, including successfully commercializing its new product pipeline. In addition to its core anti-diabetes, cardiology and VMN therapies, Eris has enhanced its presence in dermatology and nephrology through acquisitions, expanding its overall offering in the branded formulation space. The company has guided for a 33% EBITDA margin and a 20% PAT margin for CY24.

Additionally, JB Chemicals looks to continue its growth momentum, driven by the geographical expansion of legacy brands, scale-up in Sanzyme, Azmarda, and Razel franchises, MR productivity improvement, scale-up of contract manufacturing business and new product launches across markets. The company strongly focuses on the domestic chronic portfolio, CMO segment, and traction in export formulations, providing strong earnings visibility for CY24.

US-focused Business:

US-focused pharma companies such as Sun Pharma, Lupin, and Dr Reddy's are our preferred picks as they witnessed normalcy in demand, new launches (particularly gRevlimid, gSpiriva, and gPrezista) and stabilizing pricing pressure in the US base business.

The analyst expects Cipla to work towards establishing a strong foundation for growth in upcoming quarters led by continuing leadership in chronic therapies in the branded prescription business in India, expanding the differentiated pipeline in the US business and planning to launch one peptide product in FY24 and 3-4 peptide products in FY25. The company expects solid growth across geographies to continue and increased overall EBITDA margin guidance from 23% earlier to 23-25% in CY24. Despite the regulatory setbacks, Cipla will post a robust ~15-20% PAT CAGR over FY23-25E.

Meanwhile, Dr Reddy continues to strengthen the pipeline organically and through business development to drive growth and create differentiation. Management retains its strong guidance of over 25% EBITDA margin in the near term, driven by settled product agreements like gRevlimid and ~15-20% growth in the India business. The company is also actively looking for other new investment avenues for growth across all the business segments.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.