Jefferies predicts that 2025 will be a year of reckoning for Contract Development and Manufacturing Organization (CDMO) stocks, where actual earnings performance will determine the sector’s winners and laggards. While CDMO stocks saw remarkable returns in 2024, ranging from 20% to 80%, the brokerage points out that earnings were mixed, with some companies seeing upgrades, while others experienced sharp downgrades. Despite this, investor confidence remains strong, driven by long-term optimism fueled by factors like "China + 1" tailwinds and better growth prospects in innovator-led CDMO segments.

Jefferies remains selective in its picks, with Piramal Pharma as its top choice. The firm also upgraded Syngene International Ltd. to a 'hold' but downgraded Gland Pharma Ltd. to 'underperform.' The brokerage notes that any earnings misses against heightened expectations could pose downside risks, given the sector's steep valuations. The upcoming year will have multiple triggers to watch, such as new US policies, trends in biotech funding, and the conversion of request-for-quotes (RFQs) into firm orders, which will influence the industry’s trajectory.

In terms of growth, Jefferies sees strong potential for the sector in FY26, driven by increased capacity and better biotech funding. However, with valuations already high, the firm warns that CDMO stocks are "priced to perfection," meaning that any underperformance could lead to significant stock price declines. Given these factors, Jefferies is particularly optimistic about Piramal Pharma, expecting continued momentum in 2025, along with margin expansion driven by operating leverage.