Jefferies sees big pharma firms getting bigger, lists Sun Pharma, Syngene as top picks

The USD 27 billion domestic pharma industry has structural growth drivers in place and well-placed to achieve low double-digit growth in the coming years.

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Jefferies has listed Sun Pharmaceuticals and Syngene as its top picks and downgraded Biocon, Cipla and Laurus Labs in its latest report on the pharma sector.

The global brokerage firm believes that domestic formulation and Contract Research Organizations (CRO) and Contract Development and Manufacturing Organizations (CDMO) have structural growth drivers while generics is tactical. It rates Sun Pharma and Syngene with the ‘buy’ tags.

Indian pharma industry: Big gets bigger

The $27 billion domestic pharma industry has structural growth drivers in place and well-placed to achieve low double-digit growth in the coming years. Increased spend on medicines as the population starts to age in the coming decade and a rising share of chronic ailments such as cardiac, diabetes, and cancer should help sustain double-digit growth.

Jefferies expects big companies and big brands to become bigger as consolidation gathers pace in this sector. For chronic focused companies, it expects Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) margins to improve gradually.

Outsourcing theme is a multi-decade opportunity

“The CRO/ CDMO outsourcing market has high entry barriers, and is estimated to reach a size of $200 billion by 2025 (11 percent CAGR). As Western firms look to diversify their supply chains, we believe Indian companies with global capabilities stand to gain. Such companies have the potential to achieve mid-teens revenue growth on a sustained basis with an improving margin profile,” it said.

Sun Pharma, Syngene International are other top picks

Among generics, Sun Pharma’s specialty pipeline ramp-up along with strong positioning in India and emerging markets ensures sustainable double-digit revenue growth and margin profile. “We lower our ratings on Cipla (non-consensus) and Biocon from ‘buy’ to ‘hold’. While US pipeline for Cipla and Biocon provide sustainable revenue stream, delays in key approvals for FY24 poses downside risk to earnings, and leaves limited upside for these stocks from a 12-month perspective,” it said.

The report said that Dr Reddy’s Laboratories was in the process of rebuilding its US pipeline, and while its evolution was a little away, valuations had left limited downside potential. “Among the outsourcing names, we believe Syngene is at an inflexion point. Capex of $400 million-plus incurred over the last four-five years is starting to bear fruit with recent big contract wins.”

Jefferries expects Syngene’s EBITDA to double to Rs 14 billion over FY22-25E. It has cut the FY24-25 EPS for Laurus Labs by 14-22 percent, and downgraded the stock from ‘buy’ to ‘hold’ under margin pressure in FY24 due to lower CDMO sales. “Our price targets for covered companies are rolled forward to March 2025,” it said.

Alkem Labs | Rating: Underperform

“We expect double-digit revenue growth in India, but EBITDA margins to remain under pressure due to higher SG&A or Gross Profit – Operating Income (EBIT) and weak US sales,” the brokerage said in its report.

Biocon | Rating: Downgraded to ‘hold’ from ‘buy’

Recent acquisition of Viatris front-end and vaccine partnership with Serum Institute to push revenue growth. However, increasing competitive landscape for biosimilars and delays in upcoming launches to impact the core business earnings. Approvals for bBevacizumab, bAspart, market formation around launch of bHumira and US FDA action on Bangalore and Malaysia plants to watch out.

Cipla | Rating: Downgraded to ‘hold’ from ‘buy’

Delay in key US approvals leads to 5-6 percent EPS cut for FY24-25. Solid US pipeline, but timely approval key to sustaining current valuations.

Dr Reddy’s Labs | Rating: Buy

Many long-term catalysts and reasonable valuations makes Dr Reddy’s Labs an attractive long-term bet.

Lupin | Rating: Underperform

Lupin will need to address its cost structure for a sustainable improvement in Ebitda margins.

Sun Pharma | Rating: Buy

Specialty pipeline ramp-up should drive positive margin surprise. Our top pick in the sector. In-licensing deals for specialty products to be monitored

Torrent Pharma| Rating: Hold

Current valuations adequately factor the earnings growth over the next two years. Synergy benefits from the recent acquisition of Curatio to be monitored.

Zydus Lifesciences | Rating: Hold

Limited near-term catalyst, near-term earnings yet to feel the impact of competition in top-selling US products (~16-20 percent of FY23 EPS as per our estimate).

Divi’s Labs | Rating: Underperform

Near-term outlook remains subdued and valuations lofty. Capex outlay to be monitored.

Laurus Labs | Rating: Downgrade to hold

High price erosion in ARV business and uncertainty regarding new contract wins leads to near to challenges in ARV business. Lower paxlovid sales are likely to put pressure on margins for the company in FY24E.

Piramal Pharma | Rating: Buy

Recovery in CDMO revenue starting 2HFY23 (a seasonally strong period anyways) should drive operating leverage benefit. Valuations at a steep discount to peers. Turnaround in CDMO operations is the key catalyst.

Syngene International | Rating: Buy

At an inflexion point, capex of USD400m+ incurred over the last four-five years is starting to bear fruit with recent big contract win. This is a testimony to Syngene’s capabilities, and provides visibility on improved asset utilization. We expect Syngene’s Ebitda to double over FY22-25E, and it is our top mid-cap pick.

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