Plan to invest in pharma stocks? Remember minesweeper game

The sun is yet to pierce the veil of brooding regulatory clouds and shine on India’s biggest pharma company, leaving investors with only a handful of alternative investment choices in a sector that theoretically holds great promise.

As a regulatory investigation continues into Sun Pharma over whistleblower complaints, the stock’s revival from multi-year lows seems rather distant. Regardless of the fundamentals, the Street might not be keen to bottom-fish until clarity were to emerge on the outcome of the investigation. So, if not the Sun, what else under it?

Aurobindo Pharma, Torrent Pharma, and Cadila Healthcare do look promising — although none are devoid of specific concerns.

Aurobindo Pharma, with its success in backward integration and acquisitions, holds growth potential. Its acquisition of the generic business of Novartis is strategic, as is its foray into the Chinese market. At 2.6 times the sales and 20 times its trailing four quarters earnings, the Aurobindo stock is fairly priced.

There are, however, concerns over the outcome of class-action suits, acquisitions not ramping up on expected lines and challenging conditions in the US market. Nevertheless, 87 per cent of the analysts tracking the stock have a buy recommendation.

Torrent Pharma, trading at valuations richer than Sun Pharma, is another company with encouraging prospects.

Its acquisition of Unichem Labs in the domestic market, and growing business in the US, Germany and Brazil, burnish its allure. The company fully redeemed its nonconvertible debentures worth Rs 500 crore last month.

Issues in integrating the acquisition, changing dynamics in the US business and future regulatory scrutiny are the likely risks.

A strong pipeline of products, an acquisition in the US market, and the foray into biologics and vaccines should underpin growth at Cadila Healthcare. While the move to part-finance its subsidiary Zydus Wellness to acquire brands of Heinz India did raise concerns, the company’s sound balance sheet provides sufficient confidence. About 70 per cent of the analysts tracking the stocks of Torrent and Cadila have buy recommendations on them.

While there are company-specific issues, pharma companies are generally facing headwinds in the form of price erosion, increased litigation and competition, FDA scrutiny in the US, domestic price controls, and the gradual shift locally to generic drugs. Companies are responding by increasing cost efficiencies, making strategic acquisitions, and investing in limited competition products – bets that may work or fail.

So, investing in pharma stocks now may seem similar to playing the mine-sweeper game.