UBS Issues Buy Rating For Sun Pharma, Cipla; Sell For Zydus, Dr. Reddy's Amid Generic Drug Market Concerns

UBS, the brokerage firm, has begun coverage of Sun Pharmaceutical Industries Ltd. and Cipla Ltd. with a "buy" rating while assigning a "sell" rating to Zydus Lifesciences Ltd. and Dr Reddy's Laboratories Ltd. This decision reflects a slowdown in the growth of the US and Indian generic drugs markets.

"The growth of the India pharma market has been slowing, and recent trends of sharp increase in unbranded generics is a concern," UBS said in a note.

While the balance sheets of these companies are healthy for investment in new growth drivers, normalisation of growth may take time, it said, adding that the US and Indian markets together account for 70–80% of the sector's profits, indicating lower growth prospects.

UBS favours Sun Pharma, anticipating that the company’s patented molecules will double in revenues over the next four years, with margins expanding by 650 basis points, leading to an overall earnings per share compound annual growth rate of 19%. Similarly, UBS sees potential growth for Cipla in the US market, particularly from its injectable medications and respiratory products, which the firm believes have not been fully factored into current valuations.

Conversely, UBS recommends a "sell" on Zydus Lifesciences Ltd. and Dr Reddy's Laboratories, believing the market has overestimated these firms' core profit margins. Aurobindo Pharma Ltd. is also rated "sell" due to its high valuations compared to its slow growth and low return on capital employed. Additionally, Lupin Ltd. receives a "sell" rating, as investors may be overvaluing its future profits based on one-off benefits.

UBS expressed concerns about the profitability of Indian manufacturers in unbranded generics, which earn less than half of what branded generics do, and that the trend is influenced by the government's Jan Aushadhi drug stores, which make up 5% of the market and trade generics, accounting for 20%.

The government aims to double the number of these stores within the next two years, supported by relaxed loan approval processes and incentives for capital expenditures related to new stores, UBS noted. "The result is a sharp increase in JA stores that could impact 1–2% of annual growth of the market on a base of 8% CAGR," the report said.

According to the report, more than 50% of the US market for branded pharmaceuticals has transitioned to biologics.

"This impacts patent expirations of non-biologics (where Indian firms are present) and hence growth," the report stated.

It also noted that there were still serious concerns in the market, including concentrated distribution channels, potential unexpected issues from FDA inspections, which haven't fully normalized since Covid, a large backlog of Abbreviated New Drug Applications that is five times the annual filings, and a high level of generic prescriptions (92%).

While the market is mainly focused on the price decline of older drugs, these mature molecules only make up 20% of US profits. A more important trend to watch is the approval rate for ANDA applications, according to the report.

The report assigns Sun Pharma a "buy" rating based on its innovative portfolio in the US, which is generating over $1 billion in revenues, with expectations for these revenues to more than double over the next four years. UBS also expresses optimism for Cipla, stating that the best of its portfolio in the US respiratory segment will be visible in the fiscal 2027 and is not yet reflected in the stock price.