Healthcare I U.S. Generics - Turning The Tide? Motilal Oswal's Thematic View

Motilal Oswal Report

Resurgence in optimism:

The prospect of the U.S. generics market has experienced a revival in the recent past. This has been driven by price stability in the base portfolio and lesser competition due to financial and/or regulatory constraints of some companies.

Though restrained:

However, our analysis of industry-level approvals showcases a cautious stance on this optimism. The U.S. Food and Drug Administration has approved ~420 products in seven months-CY23 (~725 annualised) versus pre-Covid annual run-rate of 670 (CY17-CY19). The pace of inspection – while yet to reach pre-Covid levels – is on the rise, implying mounting regulatory risk.

Would propel growth contingent on product-specific executions:

We believe that the U.S. generics market remains a product-specific play from the incremental business perspective. This would not only offset the erosion in base portfolio but also deliver growth effectively.

Upgrade Cipla Ltd. to 'Buy' under this backdrop:

Cipla’s robust abbreviated new drug application pipeline with complex products (inhalers, peptides, injectable, etc.) should drive consistent growth in the U.S. generics segment. This along with a steady outperformance in branded generics market (of India/South America) would enable 16% earnings compound annual growth rate over FY23-25.

Accordingly, we raise our price/earning multiple to 25 times (from 22 times earlier; in line with its threeyear/five-year average) on 12 months forward earnings and add g-Revlimid’s net present value (Rs 30) to arrive at our target price of Rs 1,420. Upgrade to 'Buy'.

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