Macquarie initiates outperform rating on 4 Indian pharma stocks, sees 19-35% upside. Here’s why

Indian pharma stocks: Macquarie Equity Research has initiated outperform ratings for Divi’s Labs, Suven Pharma, Bluejet Healthcare, and Syngene. Among the 11 companies covered in the brokerage’s regional Contract Development and Manufacturing Organisation (CDMO) analysis, Macquarie favours Indian and Korean CDMOs, highlighting Divi’s Labs and Samsung Bio as their preferred choices.

According to Macquarie Equity Research, the contract research, development, and manufacturing (CRDMO) sector in India is experiencing growth driven by long-term trends and supportive regulatory changes.

According to the brokerage analysis, Indian CDMOs are establishing themselves as frontrunners in the development of small molecules, providing competitively priced solutions and demonstrating robust regulatory compliance, with a notable increase in requests for proposals (RFPs).

“We expect our covered CDMO companies, Divi’s Labs, Suven, Bluejet, and Syngene to outperform industry growth due to their superior scale, reliability and long-standing customer relationships,” the brokerage said.

In the large molecule CDMO sector, South Korea, spearheaded by Samsung Biologics, takes the lead, especially in the area of monoclonal antibodies, with aspirations to significantly enhance its bioreactor capacity by 2032.

Chinese CDMOs, which were once favoured for their quick turnaround and reliable track record, are facing obstacles due to the US Biosecure Act, resulting in a shift of projects to alternative suppliers and hindering their growth.

Secular and regulatory growth tailwinds

The report highlights a significant shift in the India CRDMO (Contract Research, Development, and Manufacturing Organization) sector. This change is largely fueled by heightened pharmaceutical outsourcing in response to drug pricing pressures and various geopolitical factors, which are leading to a global reevaluation of the pharmaceutical supply chain.

Currently valued at approximately US$7 billion, the Indian CRDMO industry is anticipated to experience substantial growth. The consultancy predicts a compound annual growth rate (CAGR) of around 14%, projecting the industry to reach approximately US$14 billion by 2028. This growth reflects the increasing reliance on outsourcing for drug development and manufacturing, positioning India as a crucial player in the global pharmaceutical landscape.

“Furthermore, we believe that regulatory tailwinds, such as the US Biosecure Act, could accelerate this growth to a high-teens CAGR, suggesting an industry size of ~US$22bn by 2030E,” the brokerage said.

Preference for product-led high-tech CDMOs

According to the brokerage report, Divi’s Laboratories and Suven Pharma are highlighted as prominent product-led CDMOs within the Indian market. These companies are concentrating on advanced technologies, including antibody-drug conjugates (ADCs), peptides, and oligonucleotides. The brokerage forecasts that these product-led CDMOs may achieve a significantly faster compound annual growth rate (CAGR) of 20-25%, in contrast to the mid-teens CAGR projected for services-led firms like Syngene.

Valuations

“India CDMO companies trade at an average 2-year forward EV/EBITDA of 20x, compared to 16x for regional and 15x for global peers. We believe India CDMOs’ premium valuation is justified due as they offer a ~2x EBITDA growth CAGR (next three years) and ~2x ROIC as compared to global and regional peers. Our relative preference is Divi’s Labs > Suven Pharma > Blue Jet Healthcare > Syngene,” said Macquarie.

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