Eyeing Beaten Down Indian Pharma Stocks? Macquarie Has A List For You

Brokerage house Macquarie initiated coverage on the Indian pharmaceuticals sector with a 'cautious stance'. It believes the drug makers remain exposed to price erosion and increased margin pressures on research and development costs.

While the brokerage expects sales to recover by 10-13 percent year-on-year, it said that is unlikely to fill the void in core businesses for the industry over the next two years.

Macquarie's top picks in the sector are Jubilant Life Sciences Ltd., Strides Shasun Ltd. and Glenmark Pharmaceuticals Ltd., while it considers Cipla Ltd. to be an ‘attractive play’. The brokerage maintains its 'Underperform' rating on Sun Pharmaceutical Industries Ltd. and Cadila Healthcare Ltd.

Here are the stock-specific key takeaways from Macquarie's note:

Sun Pharma

• The U.S. business is likely to remain depressed due to delay in Halol facility resolution and increasing pricing pressures on organic portfolio
• Supply constraints and increasing competition have been impacting the sales of Sun Pharma's key products like Doxil, Sumatriptan and Decitabine
• Taro Pharmaceutical Industries' portfolio continues to suffer from pricing pressure, led by incremental competition as the U.S. FDA approval rate accelerates
• Maintained 'Underperform' on the stock with target price of Rs 440

Lupin Ltd.

• The next two years are likely to be challenging for Lupin, with financial year 2019-20 expected to observe an uptick in sales
• Pressures on Glumetza /Fortamet in the U.S., absence of blockbuster molecules and pricing issues in Japan have been weighing upon the stock
• Management's commitment to invest in complex generics, biosimilars and speciality business will drive business FY20 onward
• Eye recovery in the U.S. sales and margins to result in stock upgradation. It maintains its 'Neutral' stance on Lupin with target price of Rs 1,022

Dr. Reddy’s Laboratories

• The company’s outlook looks promising from the second half of FY19 with three key medium-term opportunities, Copaxone, NuvaRing and Suboxone, even as uncertainty prevails over the exact timing of the launches
• Expect the stock to remain range-bound till some clarity emerges on the launch timelines of key molecules and resolution of the U.S. FDA issues
• In addition to increased competitive intensity, enhanced customer erosion led to price erosion beyond company’s earlier estimates, maintained the brokerage
• Retained its ‘Neutral’ stance on the stock with target price of Rs 2,500

Cipla

• Positive on Cipla's long-term potential, driven by the U.S. market and resultant operating leverage
• Cipla's focus on innovation and providing greater impetus to Specialty and Respiratory is likely to benefit the drugmaker
• With the company targeting at least one competitive launch almost every quarter starting third quarter of current fiscal adding to the list of positives, adelay in limited competition products could be a setback
• Maintained its 'Neutral' stance on the stock with target price of Rs 632

Cadila Healthcare

• The U.S., India and Emerging markets like Brazil and Mexico are expected to be the key growth drivers for Cadila going forward
• Recent launch of Lialda authorised generic by Shire to restrict the Lialda upside for CDH, said Macquarie
• In the absence of big-ticket molecules, the U.S. growth momentum is likely to remain subdued post FY19
• Expensive valuations and an unsustainable outlook lead Macquarie to maintain 'Underperform' on the stock with target price of Rs 415

Glenmark Pharmaceuticals

• Drugmaker's relatively better U.S. FDA inspection track record holds it in good stead, coupled with limited product concentration risk
• Key launches in the near-term and out-licensing deals from its innovative portfolio have put Glenmark in a comfortable space
• Glenmark's growth in India is expected to be around 12 percent year-on-year in FY18 and FY19
• concerns are likely to emerge from high cash tax payout, elevated working capital, high R&D spends
• Maintained its 'Outperform' rating with target price of Rs 728

Jubilant Life

• Jubilant differentiated U.S. business model makes it relatively better placed to tackle pricing erosion as compared to its Indian pharmaceuticals peers
• With a focus on specialty like Radiopharma, CMO and allergy, tailwinds from its Life Science Ingredients business, and lower interest costs, the drugmaker is well poised to deliver a strong growth
• Triad acquisition, increased visibility for launch of new products, improving free cash flow generation make Jubilant a top pick for Macquarie
• Maintained its 'Outperform' rating with target price of Rs 900

Strides Shasun

• Sharpened focus on the B2C business, market share gains in the regulated markets and a robust compliance track record make Strides a top-pick in the mid-cap space
• Strides’ U.S. business is expected to double until FY20 from its current modest base of $100 million with anticipated key approvals like Lovaza and Potassium Citrate ER tablets
• The company has adopted best-in-class technology, which leads to superior control on final products
• Maintained its 'Outperform' rating with target price of Rs 1,100.