Pharma stocks have regained their momentum.(Representational)
Shrugging off the nervousness in the market, pharma stocks have once again become the top buzzing stocks of Dalal Street.
There was a phase in 2022 when pharma stocks became underdogs and moved in a tight range.
The reason? Many believed that the pharma stocks boom which happened during the initial Covid phase was behind them and all the positives are priced in.
Pharma stocks did very well during 2020-21. The BSE Healthcare index went up from around 11,000 to 26,800 in eighteen months. That's right. The index soared nearly 2.5 times.
Individual stocks turned into multibaggers. But the boom did not last.
The BSE Healthcare index fell more than 20% within nine months between September 2021 and June 2022. This bear market in pharma stocks ended the narrative driven rally.
Now, the sentiment has changed. There's fear all around amid renewed fears of Covid outbreaks.
Pharma stocks have once again caught investor's fancy and have rallied between 5%-15% in the past couple of days.
One pharma stock from the lot which has gained considerably is Cipla.
Yesterday, the stock rallied 4% to touch a high of Rs 1,130. The company has a 52-week high of Rs 1,185.2.
Let's find out why Cipla share price has rallied recently.
Why Cipla share price is going up
#1 Renewed Covid-19 fears
You would remember the announcement of the lockdown in March 2020 and the feeling of depression that came along with it.
The first wave of Covid was just starting out and countries across the globe announced lockdowns to contain the deadly virus.
The world had changed forever…and not in a good way. It was a disruptive event like no other.
A similar situation could unfold in the coming days, at least in some countries if not in India because a fresh wave of coronavirus cases has returned in China.
Mind you, the recent surge of infections in China has prompted warnings that the country could witness over a million deaths in the coming months.
After following a zero-Covid policy for the past three years, China is seeing a surge in cases. This is happening ever since it relaxed the restrictions last month following public protests.
Now, during a pandemic, the companies that make medicines seem to be a natural choice.
Investors usually invest in defensive stocks such as FMCG and pharma, which tend to do well.
Pharma stocks, after losing momentum have regained their mojo. Investors are placing bets on pharma stocks once again amid brighter prospects due to the Covid scare.
Cipla resultantly, has seen a decent up move.
#2 Optimism over new launches
Apart from the above, industry experts have turned bullish on the Mumbai-based drug company amid optimism over its new launches and the end of a period of uncertainty around a list of medicines.
According to reports, the company's less dependence on the US market, where regulatory pricing pressure is higher than back home, is one of the primary reasons behind Cipla's rally in recent months.
On the launches, Cipla's management has guided of launching 2-3 complex generic launches a year.
In the second half of this year, Cipla will launch a generic version of the respiratory drug Advair Diskus.
Last month, the drug maker launched an injection for advanced prostate cancer in the US.
The company's Q2 was strong on the back of successful launch of a generic version of the immunomodulatory drug Revlimid.
USFDA approvals and their random inspections have remained a dampener for pharma stocks over the years.
For Cipla, currently, its Goa unit is under official action indicated (OAI) classification.
The USFDA has withheld product approvals from Cipla's Goa facility until the outstanding observations are resolved.
This could be a cause of concern for its generic anti-cancer drug launch for Abraxane. Cipla initially planned to launch Abraxane in the first half, which was filed from the Goa facility.
Cipla's Goa unit was inspected between 16 and 26 August this year, post which the US health regulator issued six observations.
The facility also has a warning letter that the USFDA issued in February 2020.
Apart from this, the company recently witnessed a fallout of a big deal. Cipla was in final talks to acquire Mumbai-based Medley Pharma.
The deal, however, was called off by Medley due to valuation concerns and differences over some agreement terms.
There's also the concern of rising raw material costs. The war in Ukraine resulted in freight prices going up and oil and gas prices also went up.
If there are possible lockdowns in the near term, it could affect movement of raw materials which would mean that costs could rise as we move into 2023.
The road ahead
Cipla is banking on growth in the US market in the coming years. Some key product launches are expected towards the end of 2023.
The company is aiming to double its revenue in the US over the next five years.
A key focus area for Cipla currently is its respiratory segment. Cipla has a huge respiratory portfolio. 7 out of top 10 brands for Cipla are respiratory.
In its earnings call, the company disclosed five respiratory generic assets.
The respiratory segment is interesting because the products involved are complex in nature and have higher entry barriers. Cipla could enjoy a monopoly in this segment and cushion the price erosion.
Also, while declaring its Q2 results, the company guided for operating profit of 21-22% for the rest of the year, led by US generics sales momentum and a resilient India business.
This guidance was despite the absence of Covid drug sales.
Over the past five years, the company has done quite well across metrics. In 2022 it reported highest ever revenues.
The ball is now in Cipla's court to deliver good earnings and continue the momentum.
How Cipla share price has performed recently
In the past one year, Cipla share price has gained over 27%. Yesterday the stock rallied 4%.
Cipla has a 52-week high of Rs 1,185 touched on 1 November 2022 and a 52-week low of Rs 860 touched on 21 January 2021.
At the current price, the company trades at a PE multiple of 35.5 and a price to book value of 4.2x.
Here's a table comparing Cipla with its peers on some important metrics.
Cipla is a global pharmaceutical company with presence in more than 80 countries with 46 manufacturing plants producing over 1,500 products. Its product portfolio comprises generics and drugs in key therapeutic segments.
In India, Cipla is one of the largest pharmaceutical companies and the largest Indian exporter to emerging markets.
During the pandemic, Cipla rolled out 7 products as a part of their Covid-19 portfolio. These include drugs, sanitisers, and antigen and anti-body testing kits.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com