It expects price erosion to stay in the double digit zone for the next three years.
During the period when the Street witnessed a one-way rally, pharmaceutical sector went through severe stress, with stocks getting beaten down to record low valuations.
Concerns over regulatory hurdles, pricing pressure in the US and domestic policy front strained these stocks.
But a recovery in the past few months after the market entered a consolidation mode has made sure that the sector cut some of its losses. Between January 2, 2017 and October 10, 2017, the sector has seen a fall of 5-7 percent.
Having said that, Credit Suisse believes that the worst has not yet played out and the returns should decline sharply. In fact, the price erosion will stay in the double digit zone for the next three years.
In such a scenario, the research firm prefers stocks with low price erosion risk or business model shift beyond generics.
Among stocks, it prefers Sun Pharma and Cipla. The former’s outperform rating is based on the transition to specialty resulting in 20 percent CAGR from FY19-22. Meanwhile, it has an outperform rating on Cipla as well as it is a beneficiary of faster approvals in the US.On the downside, it believes Dr Reddy’s Laboratories has the highest price erosion risk at 12 percent each over the next 2-3 years. The company is also witnessing high product concentration and is nearing overvalued territory.