Top Pharma Stock Picks: Biocon, Dr. Reddy’s, Sun Pharma – Potential Upside of Up to 22%

Phillip Capital has provided positive insights into the Indian pharmaceutical industry, projecting gains from the ongoing benefits of gRevlimid, softening input costs, and a depreciating rupee amid the moderating domestic formulations.

Key takeaways:

• Phillip Capital estimates a 12% YoY earnings growth for pharma companies in its coverage, driven by a 40 bps expansion in EBITDA margins and a 15% increase in sales in Q2.
• The US generic price pressure is easing, with incremental benefits from key launches and a 4% INR depreciation YoY contributing to the growth in US generics.
• The industry continues to experience moderate growth, with therapies like Cardiac, Derma, and pain management seeing over 6% YoY growth. However, respiratory therapies have weakened after a period of strong growth.

Phillip Capital’s buy recommendations for pharma stocks include:

1. Biocon: The brokerage expects Biocon’s sales to grow by 58%, led by the integration of acquired biosimilars operations and improving Fulphila/Semglee penetration in the US. They foresee a 350 bps margin expansion to 23.8%, driven by the integration advantage and improved margins in research services.
2. Zydus LifeSciences: Phillip Capital anticipates strong Q2 earnings for the company, with a 44% YoY growth. Improved margins, expected to increase by 740 bps YoY, are driven by continued benefits from gRevlimid.
3. Dr. Reddy’s Laboratories: Despite a 5% rise in revenue, Phillip Capital predicts a 440 bps correction in margins, mainly due to lower gRevlimid sales and product mix.
4. Sun Pharmaceutical Industries: The company is expected to report a 10% sales growth due to continued gRevlimid sales and sustained growth in the US specialty and domestic formulations. Margin correction is projected to be 240 bps QoQ.

Phillip Capital has given “Buy” ratings to these pharma stocks, with corresponding target prices:

• Biocon: Target price of ₹310, implying a 21% upside from the closing price.
• Zydus LifeSciences: Target price of ₹725, indicating a 22% upside from the closing price.
• Dr. Reddy’s Laboratories: Target price of ₹6,200, with nearly a 13% upside.
• Sun Pharmaceutical Industries: Target price of ₹1,250, offering a 10% upside.