Where are healthcare companies headed? What's in store for the sector?
DAM Capital's Nitin Agarwal shares views.
DAM Capital's Nitin Agarwal shares views.
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TVTranscript
00:00 [MUSIC PLAYING]
00:03 Hello.
00:11 Welcome to Talking Point.
00:12 I'm your host, Neelad Shah.
00:13 The Talking Point today focuses on health care, predominantly.
00:17 We'll talk to the management of Loris Labs
00:19 in the second segment.
00:20 The first segment, we're getting somebody
00:22 who tracks this very closely, amongst other things
00:24 that DAM Capital.
00:25 But Nitin tracks health care very closely as well.
00:27 And we get him in on the show to try and understand
00:29 how he thinks about what's happening in this pocket
00:32 currently.
00:32 Nitin, great having you.
00:33 Thanks for taking the time out.
00:34 This is Neeraj here.
00:35 Good morning.
00:36 Good morning, Neeraj.
00:38 Nitin, what's your sense?
00:39 I mean, we've had select companies come out thus far.
00:42 The larger bunch is yet to come.
00:45 Are we looking at a bit of a transition period
00:47 for health care companies?
00:49 Because some sects of health care and pharma
00:53 have done very well.
00:54 Some have not over the last 12 months.
00:57 So I think we're going through a little bit of a golden phase
01:01 for the sector from an earnings perspective,
01:03 largely because domestic continues to be OK.
01:05 And exports have come back very strongly,
01:08 partly because the earning erosion, pricing erosion,
01:11 which was hurting the businesses in the US, has stabilized.
01:16 And more importantly, there are a lot of big ticket
01:18 opportunities like Revolibid, which
01:21 are beginning to crystallize for a bunch of companies,
01:24 especially for most of the large cap companies
01:26 over the last few quarters.
01:28 And I think this will continue.
01:29 The Revolibid tailwinds will continue at least
01:31 for the next four to five quarters.
01:33 So at least for the next four to five quarters,
01:35 the sector is in a very healthy shape
01:36 from a reported earnings perspective, especially the ones
01:40 which have got the US tailwind.
01:42 Got it.
01:43 Sorry, just on that, before we move on
01:45 to the other aspects, Nitin, typically
01:47 because the markets tend to discount three, six months,
01:49 nine months in advance, you still
01:51 think that time is some time away.
01:52 I heard you say four or five quarters of tailwinds
01:54 still exist.
01:55 Yes, I mean, specifically on Revolibid,
01:58 because this is an unusual opportunity.
01:59 I mean, we haven't seen an opportunity of this size
02:02 coming simultaneously for so many players at the same time.
02:05 And my sense is by Q2, F26, it will be behind us.
02:10 I mean, it probably won't be there, meaningful beyond that.
02:14 So I guess another six quarters are left for the reported
02:17 earnings to look good.
02:18 At some stage during the year, a market
02:20 will start to get worried about the poor,
02:23 see Revolibid light for a lot of the companies
02:25 where the Revolibid tailwinds are there.
02:28 OK, so that's the US exporters, a clutch of these companies,
02:31 Dr. Reddy's and the likes have this Revolibid benefits coming
02:35 in, and that's to be kept in mind.
02:37 Nitin, from amongst the pharma companies,
02:39 US FD action was very hot in the last 12 months.
02:43 We've seen a number of companies get observations as well.
02:45 Maybe one or two like Lupin have largely remained unscathed.
02:49 Just trying to understand, what's
02:51 the pecking order at DAM Capital when
02:53 it comes to at least the US generic exporting companies?
02:58 So from a pure generic exporters,
03:00 and I keep the specialty companies like Sun Pharma out
03:03 of it, the strongest businesses on generic exports
03:06 are--
03:07 I mean, we like Aurobindo.
03:08 Aurobindo is a top pick in the generic export businesses,
03:10 the most strongest generic franchise.
03:12 And then we also like companies like Lupin and Zyrus,
03:16 which have got finally--
03:18 which have got a lot of things falling in place for them
03:21 in terms of very decent approvals,
03:23 good quality approvals coming through.
03:24 And as you mentioned, and a reasonably clean track
03:27 record on the regulatory side over the last few quarters,
03:30 which gives them significant clarity
03:31 on the new product launches also on a going forward basis.
03:34 So the pecking order would be Aurobindo or Lupin Zyrus
03:37 as the relatively preferred names among the large caps.
03:41 Got it.
03:41 OK.
03:42 Nitin, before I go, I'll come to CDMO at the end
03:45 because we've got the management of Loras Labs post that.
03:48 But before I come on CDMO, the other aspects of health care.
03:54 We've seen hospital companies having--
04:01 how do I say?
04:02 For lack of a better word, caught
04:04 between a rock and a hard place in certain times
04:07 in terms of regulatory moves.
04:09 But the earnings and the stock price performance
04:12 hasn't been too bad.
04:14 What's your sense about how to play this theme?
04:19 So you're right.
04:19 On hospital, I think structurally,
04:21 from earnings perspective, the business
04:23 is in a very, very good shape.
04:24 The uncertainty which has come in
04:25 is because of the potential regulatory activity which
04:28 can happen in this space.
04:30 At this point of time, we don't have any clarity
04:32 on what can happen and in which shape and form it can happen.
04:35 I mean, if I keep that out, because we
04:37 don't know what could be the contours of any regulatory
04:40 action, assuming it comes through.
04:42 I think businesses are--
04:43 earnings perspective, they are fine.
04:45 I think our view is that health care in India
04:48 is a structural story because the demand supply gap
04:51 essentially is in favor of the suppliers.
04:53 The country is aging.
04:54 The country is becoming richer.
04:56 And only as many hospital beds are there,
04:58 quality hospital beds are out there.
05:00 So structurally, it's a brilliant story.
05:02 Earnings will keep coming through the sector,
05:04 barring anything which happens on the regulatory side.
05:08 So if we just keep that aside--
05:09 and the other part which you mentioned
05:11 has already happened is earnings have-- multiples
05:14 have got re-rated meaningfully for the hospital
05:16 business over the last 12 to 18 months, especially post-COVID.
05:19 So there are relatively limited upside
05:21 possible on the multiple re-rating.
05:24 But I guess we are looking at compounding stories
05:26 from here on, unless and until something really dramatic
05:28 happens on the regulatory front.
05:29 I mean, that's the way we look at it.
05:31 No more running upgrades, no more
05:33 be re-rating, but consistent earnings stories from here on.
05:36 Got it.
05:38 Nitin, then I come to CDMO.
05:40 And we've seen a couple of companies come out with numbers.
05:43 They are not just pure CDMO companies,
05:46 Singene and Loras.
05:47 But there is this whole promise that a lot of people
05:50 are baking it around that CDMO opportunity
05:52 because it may move from China to some of the other countries.
05:55 India is well-placed, et cetera.
05:58 What are your thoughts on that longer-term aspect, of course?
06:00 And then couple that up with how did you
06:03 view the earnings and the commentary of both Loras
06:07 and Singene, if you cover them?
06:10 So I'm personally pretty positive on the CDMO space.
06:15 And I guess this tailwind, which is coming from the Biosecure
06:18 Act implementation, is going to help the sector.
06:21 But in general, I guess companies
06:24 have been working in CDMO, or select companies
06:26 have been working in CDMO for quite some time.
06:28 I think we're getting to a point where--
06:30 and we've seen news flow across companies.
06:31 It started with--
06:33 DVs was the flag bearer for the CDMO story in India.
06:36 And we've seen other companies coming through and having
06:39 meaningful accretion to the CDMO businesses, franchises
06:42 coming through.
06:43 And we're probably seeing--
06:44 my sense is we're probably seeing more and more of it
06:46 as we go along.
06:48 More companies are getting commercial contracts
06:50 from innovators, both on small molecule
06:53 as well as the biologics.
06:55 And I guess the Chinese--
06:57 and any sort of disruption to China,
06:59 so Chinese partnerships, because of the Biosecure Act,
07:02 will be for the tailwind.
07:04 So the point here is in pharma, incrementally, companies
07:08 need to-- incremental value, barring domestic and generic
07:11 exports, will get created from participating
07:14 in the innovation value chain.
07:16 Either companies do innovation on their own,
07:20 like somebody like Sun Pharma, or some people
07:23 doing innovation, their own NC proprietary research.
07:26 Or the other way out is you partner
07:27 with innovators who are doing the proprietary R&D.
07:31 And I guess we see a lot of opportunities
07:35 incrementally building up in this space as we go along.
07:39 OK.
07:39 Do you have coverage on the ones that have come out
07:42 with the results thus far?
07:43 That is, Syngene, again, not necessarily just CDMO,
07:46 but came out with numbers and the guidance.
07:48 Loras yesterday came out with numbers and guidance.
07:50 Do you have individual coverage on any of these?
07:52 So we cover Loras and Syngene.
07:54 We sort of track it as part of Biocon.
07:57 And these are very different business models.
07:59 Syngene is still a CRO-heavy business,
08:01 while Loras is predominantly a CMO.
08:04 I mean, there are some challenges which
08:05 have been there in the last few quarters
08:08 around lack of funding or reduced funding for biotech,
08:11 which has impacted the CRO part of the business
08:14 across the landscape.
08:15 But CMO continues to be in good shape.
08:18 And I guess that's reflected in the way Syngene was reported.
08:22 Even Loras, they were a relatively late starter
08:26 in the business.
08:27 And they have a long way to go from here on.
08:29 And they are, from whatever the guidance management has put
08:32 out, whatever commentary is there,
08:34 it seems a pretty promising road ahead for Loras
08:38 on the CMO front.
08:39 OK.
08:40 And valuations, just last question, Nitin, here.
08:43 Valuations, do they worry you, or do you
08:46 reckon earnings growth could take care of it?
08:48 What's the call out there on both Syngene and Loras
08:51 in particular?
08:53 I mean, my sense is there's a lot of expectation
08:55 around earnings pickup coming through.
08:57 The opportunity space is very large.
08:59 Earnings can really grow meaningfully to the extent
09:02 management can deliver on the promise which
09:05 is there in these businesses.
09:07 So as you said, earnings multiples are high.
09:09 But the expectation is earnings should take care of them
09:11 as we go along over the next two or three years.
09:13 Got it.
09:14 Nitin, this was lovely.
09:15 I look forward to a longer conversation
09:17 at some point of time in the next couple of months,
09:19 maybe post the earnings season is over.
09:21 But thank you for taking the time out and speaking to us
09:23 today on this particular aspect.
09:25 Thank you so much, Ira.
09:26 Pleasure talking to you.
09:27 The pleasure is ours.
09:28 We need to take into a quick break.
09:30 Nitin Agarwal spoke about how earnings growth could take care
09:33 of the steep valuations in Loras.
09:35 We speak to Dr. Satyanarayan Chawla as is the norm
09:37 that we do every quarter.
09:39 On the other side of this break, stay tuned.
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