Best Stocks To Buy In 2009 From Pharmaceutical Sector

Buying stocks for year 2009 has been a nightmare for investors in current stock market. Investors are constantly searching for stocks to buy from good sectors in economy which probably could buck the trend in show growth in 2009.

Core generics remain defensive; alternative themes to suffer:
The developed market generics business will be the most resilient to global slowdown, as governments running large deficits will aggressively promote generics to rein in healthcare costs. Other areas in the pharma industry are not as well-placed: the CRAMS business faces inventory reductions by customers, falling prices of end-products and idle capacities; growth in the emerging markets will likely cool off owing to financial pressures; and the drug discovery business continues to face tight credit conditions.

More growth drivers:
The Democrat regime’s proposal to bring 47m more Americans under health insurance could increase the size of the generics market by 15%. The recently expanded PEPFAR (President’s Emergency Plan for AIDS Relief) and para IV patent challenge opportunities are other growth drivers. Opening up of the regulated biosimilars market represents another medium to long term growth opportunity.

Top picks:
Sun Pharma, Cipla and Dr Reddy’s are the best plays on the continuing growth in developed markets. We expect all three to register 20%-plus revenue CAGR over FY08-11. Ranbaxy and Glenmark too will benefit in the long term, though in the medium term, their prospects will likely be hampered by drug quality issues with US FDA and emerging market pressures, respectively. Cipla will be the key beneficiary of the expanded PEPFAR programme. Biocon and Dr Reddy’s hold promise in the regulated bio-similars market.

Our top picks
At current market prices, Sun Pharma, Cipla and Dr Reddy’s offer the biggest potential upsides from growth in the generics business, in our view. These companies are well positioned to exploit the large opportunity in the US and other developed markets, and we do not see any major risk to their businesses. Ranbaxy and Glenmark also stand to gain from increasing market share in these geographies, but are likely to underperform in the near term. Cipla would be among the prime beneficiaries of the expanded PEPFAR programme: the company has been one of the biggest suppliers to the programme over last five years and has a large number of products specially approved by the US FDA under the scheme. Dr Reddy’s and Biocon hold promise in the regulated biosimilars market, as both companies have multiple biologicals registered and sold in the semi-regulated markets and are on course to developing them for the regulated markets.

Sun Pharma
We rate Sun Pharma as one of the best plays on the Indian pharma industry, as we expect its revenue growth to outpace that of the domestic and international pharmaceutical markets over the next 2-3 years. Sun’s product portfolio, which is dominated by drugs to treat lifestyle diseases, should help it maintain higher growth rates than the overall market, while a tight control on costs keeps profitability robust. A negotiated deal on the Taro acquisition could be a near-term catalyst for the stock. Sun has about US$500m cash in hand and a debt-free balance sheet. These attributes position it to be a prime beneficiary of any consolidation drive in the US and other developed markets. We believe there are also potential acquisition-led upsides in the near term, other than Taro. BUY.

We expect Cipla’s core earnings to register a CAGR of 36% over FY08- 11, significantly aided by rupee depreciation and consequent margin expansion, apart from accelerated growth in volumes. Recent capacity expansion through new plants in Indore and Sikkim will contribute to volume growth. Industry reports indicate the return of growth momentum in the domestic pharma market, where Cipla has one of the strongest franchises, especially in respiratory medicine. Cipla’s unique business model of registering products in other countries and partnering with other companies to market them makes it the best counter-cyclical play in the Indian pharma space. We maintain our BUY rating.

Dr Reddy’s Labs
We believe that the market’s concerns over various businesses of Dr Reddy’s are overdone, given the potential for sustained overall earnings growth at over 20% a year. The downside in the German market, from the costly acquisition of Betapharm and subsequent changes in the market, have already been priced in the stock, in our view. The stock is trading at a P/E of 10xFY10ii core earnings, at a 20-35% discount to peers; we expect the gap to close over the next 12 months. In the medium term, there could be more upside from the company’s biosimilars portfolio and acquisitions in the developed markets. BUY with a target price of Rs511.

The depreciated rupee and falling raw-material prices have put Biocon back on the growth track, with gross margin expanding 900bps and EBITDA margin expanding 770bps QoQ in 3QFY09. We believe that the expanded margins will start accruing to bottomline from 1QFY10 onwards, after hedges at higher rupee rates have expired. Additional growth triggers in the near to medium term include the single AOK contract won by Axicorp in Germany, the pipeline of generic products for the US market and the launch of insulin glargine in the domestic market, biosimilar insulin in Europe and oral insulin in India. Buy with target price of Rs154.

Opto Circuits
We believe India’s cost advantage and technical expertise can make the country a global hub for medical devices over the next 10 years. Opto Circuits, being the only large Indian medical-devices company, would be a key beneficiary of the industry’s growth. Excluding the effect of acquisitions, the company’s revenues registered 36% CAGR over FY04- 08ii, but in our view, it has barely scratched the surface; there’s a huge opportunity yet to be tapped. We expect organic annual growth above 40% over FY08-11. Completion of the acquisition of Criticare presents another platform to stabilise and expand the sales front-end in the US. Other growth drivers are its subsidiaries Eurocor, Ormed and Devon. Buy with price target of Rs156.