UBS fears slowdown in India, US pharma markets; gives 'Sell' on 4 stocks

As per UBS, the Indian pharma market is slowing down due to a sharp increase in unbranded generics

Global brokerage UBS has raised concerns about weakening trends in the Indian and the US pharmaceutical markets. In its recent coverage initiation report, UBS said the pace of a decline in the US generic market is likely to worsen, while the growth of 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. The balance sheets are healthy to invest for new growth drivers but growth normalisation may take time," UBS said in its report titled 'India Pharmaceutical Sector: Trends weakening in India, US'.

UBS on India, US Pharma market

As per analysts at UBS, the Street is under-appreciating growth slowdown in both India and the US. The Indian pharmaceutical market is slowing down due to a sharp increase in unbranded generics. The increase is caused because of the scale-up of the government's Jan Aushadhi (JA) drug stores (5 per cent of the market) and trade generics (over 20 per cent of the market).

"Manufacturers' profitability in unbranded generic products is less than half that of branded generics and therefore increasing penetration of unbranded generics is a concern," UBS said.

Additionally, a sharp increase in JA stores could impact 1-2 per cent of the annual growth of the Indian market on a base of 8 per cent CAGR.

Meanwhile, some structural negatives in the US markets that are causing concerns are concentrated channels, potential negative surprises from Food and Drugs Administration (FDA) inspections, a large abbreviated new drug application (ANDA) backlog of 5 times annual filings, and high penetration (92% of prescriptions are generics).

"The market is focused on the price erosion cycle for mature molecules, but they account for only 20 per cent of US profits and the more important trend is ANDA approval rate," UBS said.

UBS Buy, Sell calls on Indian pharma stocks

The global brokerage has initiated coverage on Zydus Lifesciences and Dr Reddy's Laboratories with a 'Sell' call due to street overestimating core margins.

For Zydus Lifesciences the target is set at Rs 850 and for Dr Reddy's Labs at Rs 5,700 per share.

Likewise, UBS has given a 'Sell' call on Aurobindo Pharma with targets of Rs 1,333 per share. Analysts reckon the valuations are high despite low growth and low Return on Capital Employed (RoCE).

For Lupin too, the brokerage has given a 'Sell' call with a target of Rs 2,250 per share owing to the company already pricing one-off benefits in FY25 and FY26.

Conversely, It has given a 'Buy' rating on Sun Pharma and Cipla with a target of Rs 2,450 and Rs 2,060 respectively.

For Sun Pharma, UBS expects patented molecules to double in revenues over 4 years and margins to expand by 650 basis points (bps) for an overall earnings per share (EPS) compound annual growth rate (CAGR) of 19 per cent.

Similarly, the brokerage likes Cipla as the US upside from the injectable and respiratory portfolio is not yet fully factored in.