Sell Dr Reddy's, Lupin, Zydus Life, Auro Pharma shares, says UBS, sees up to 20% downside

Global brokerage firm UBS has initiated coverage on as many as half dozen Indian Pharma counters and has suggested to sell four out of them including Dr Reddy's Laboratories, Lupin Ltd, Zydus Lifesciences Ltd and Aurobindo Pharma Ltd. However, it has suggested to buy Sun Pharma and Cipla Ltd.

Summing up the reports, UBS said that the trends for pharma business in India is slowing down and the trends are even slower in the US pharma business. Also, the oversea broker said that the pharma companies whose balance sheets are healthy to invest for new growth drivers are likely to outperform in the coming months.

The US generic market has been declining and the pace is likely to worsen. In India also, the growth of the India pharma market has been slowing and recent trends of sharp increase in unbranded generics is a concern. These two markets account for 70-80 per cent of sector profits and would imply lower growth, said UBS.

The high penetration of unbranded generics in India is driven by scale-up of the government's Jan Aushadhi (JA) drug stores and trade generics. The government targets doubling the number of JA stores over next two years and eased loan sanctions and also giving back the capex for new stores in form of incentives, said UBS.

"Our interaction with industry suggests that more JA stores also result in more trade generics being dispensed. Manufacturers' profitability in unbranded generic products is less than half that of branded generics and therefore increasing penetration of unbranded generics is a concern," said the brokerage firm.

This impacts patent expirations of non-biologics and growth. Structural negatives are still concerning like concentrated channels, potential negative surprise from FDA inspections, a large ANDA backlog and high penetration. The market is focused on the price erosion cycle for mature molecules, but they account for only 20 per cent of US profits, said UBS.

It has initiated will a 'sell' ratings on Dr Reddys', Lupin Zydus Lifesciences and Auro Pharma with target price of Rs 5,700, Rs 2,250, Rs 850 and Rs 1,333, respectively, suggesting a downside of up to 20 per cent in these drugmakers.

On the other hand, UBS prefers Sun Pharma where it expects patented molecules to double in revenues over four years and margins to expand by 650 bps for overall EPS CAGR of 19 per cent. It also likes Cipla where US upside from injectable and respiratory portfolios is not yet fully factored in. It has buy rating on these stocks with target prices of Rs 2,450 and Rs 2,060, respectively.