Dr Reddy's, Cadila, Cipla, IPCA to Biocon, Jefferies initiates coverage on 11 pharma stocks | all investors need to know

Jefferies initiation report takes a fresh look at Indian pharma companies, combining several approaches. An exhaustive top down analysis indicates that the U.S. generics profitability is behind us. Jefferies coverage is winning the long term pharma manufacturing game, as shown by new data presented here. E-pharmacies headline emerging risks in India. Dr Reddy's and Cipla are our top picks in the pharma sector.

Jefferies initiates buy rating on Dr Reddy's with a target of Rs 5932 (18% potential upside).

Jefferies initiates buy rating on Cadila Healthcare with a target of Rs 512 (21% potential upside).  

Jefferies initiates buy rating on Cipla with a target of Rs 913 (21% potential upside).

Jefferies initiates buy rating on Alkem Labs with a target of Rs 3205 (23% potential upside). 

Jefferies initiates buy rating on IPCA with a target of Rs 2516 (20% potential upside).

Jefferies initiates hold rating on Lupin with a target of Rs 1023.

Jefferies initiates hold rating on Divi’s Labs with a target of Rs 3159.

Jefferies initiates hold rating on Biocon with a target of Rs 392.

Jefferies initiates a sell rating on Sun Pharma with a target of Rs 440 (9% potential downside).

Jefferies initiates a sell rating on Alembic Pharma with a target of Rs 3205 (11% potential downside).

Jefferies initiates a sell rating on Torrent Pharma with a target of Rs 2397 (12% potential downside).

Main theme is U.S. generic revival:

The competitive intensity in the U.S. generics has peaked, having been through a hyper competitive phase. This protects the base and enhances revenue per launch. A more sustainable growth will come from complex launches rather than shortage/ price hike products. Jefferies prefer companies such as Dr. Reddy's and Cipla where earnings growth will be driven by complex launches.

Winning the manufacturing game, more gradually:

Jefferies coverage companies have gained share in API and finished dosage facilities servicing the U.S. market since 2013. India's share of all Drug Master Files/generic products for the U.S. market is 38%/32%, highest among all regions. Since capex led revenue accretion will be a gradual process, Jefferies are flagging exuberance in API companies like Divi's Labs.

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Established superiority of chronic therapies over acute is under threat in India:

Within Indian business, chronic therapies have been preferred over acute for better growth and profitability. E-pharmacies may dent the ability of companies to take price hikes in chronic portfolios. Covid has driven adoption of e-pharmacies. For India theme, Jefferies likes companies with volume driven growth like IPCA and Alkem Labs.

Jefferies proprietary framework identifies Dr. Reddy's and Cipla as top picks:

Since Jan-2020, FY22 EPS estimates for Jefferies coverage have increased by 25%. While the street has played catch up, there is juice left in U.S. generics. Their framework attempts to identify stocks offering low risk growth at reasonable prices. They are projecting 25%/28% EPS CAGR for Dr. Reddy's / Cipla over FY20-22E. Jefferies have lowest estimates vs street FY22E EPS on Sun Pharma  / Torrent Pharma by 14%/18% and highest on Cadila by 8%.